United Commercial Bank Ltd. Fair Value Estimate in Dec 2015: BDT per share [15.7% upside] Rating: Market Perform, Sector: Banking

Transcription

1 City Bank Capital - Company Insight United Commercial Bank Ltd Fair Value Estimate in Dec 2015: BDT per share [15.7% upside] Rating: Market Perform, Sector: Banking Company Insight UCBL:BD Market Perform 52-week Price Range BDT YTD % 2.4 Price, 08 Feb 2015 BDT month Target Price (Dec 2015) BDT 34.7 Upside/Downside (Price return) % 15.7 Year of Listing 1986 Financial Year End December Market Cap BDT mn 25,098 Market Cap USD mn Free Float % M Avg. Turnover USD' Number of shares on issue mn Investment Fundamentals Year end 31 Dec 2013A 2014e 2015e 2016e Assets USD mn 2,901 3,349 3,776 4,278 Assets BDT mn 225, , , ,758 Loan and advances BDT mn 148, , , ,033 Deposits BDT mn 183, , , ,660 Investments BDT mn 36,091 40,506 42,531 44,703 Equity BDT mn 20,505 22,984 25,305 28,293 Net interest income BDT mn 8,757 10,658 11,414 13,529 Non interest income BDT mn 3,655 4,330 4,032 4,420 Operating income BDT mn 12,412 14,989 15,446 17,949 Profit before provision BDT mn 7,132 8,336 8,394 10,262 Profit After Tax (PAT) BDT mn 3,069 3,316 3,158 3,825 PAT growth, YoY % 93.6% 8.0% -4.8% 21.1% Restated EPS BDT PE Ratio X DPS BDT Dividend Yield % ROA % ROE % Tangible BV BDT P/TBV X Selective banks loan market share (% of industry loan), Sep 14 UCBL relative price performance with DSEX (DSE market) Valuation of We initiate this short note on United Commercial Bank Ltd (UCBL) with an Market Perform rating and December 2015 fair value estimate of BDT [expected price return of 15.7%]. The stock is trading at a 2015e ROE of 14.6% (~15% sustainable ROE), Tangible P/B of 1.1x, P/E of 7.9x and dividend yield of 3.3%. The fair value derivation is based on both absolute valuation methods. United Commercial Bank Limited (UCBL) is one of the 1st generation non primary dealer (non-pd) banks, incorporated in Bangladesh in With over 30-years of banking services, UCBL has been emerging as a strong brand name in the private sector banking arena. Formed by a group of entrepreneurs and industrialists, it is presently the fifth largest private commercial bank (PCB), holding about 3.4 % of the banking sector loan market share. UCBL has a corporate and SME focused loan portfolio that fared well throughout the recent credit cycles. Back in 2013, the senior management of the bank has been restructured and the new leadership has proven track record of delivering better business performance in challenging times. So the bank has solved most of the issues after being identified as a problem bank by the central bank years back. The bank is operating with 148 branches, 101 ATMs and about 3,500 human capital. We include UCBL in our top picks (among banks) and followings are the key investment thesis: UCBL has gone through a modernization scheme and has rebranded itself quite well in recent years. Fairly diversified lending portfolio with substantial focus on SME helps it to attain decent yields while limiting provision costs to decent levels. UCBL is the fifth largest PCB as of Sep 2014 with total asset size of BDT bn (USD 3.2 bn). The bank registered a 5-year CAGR of 23.1% in loan book and 20.8% in deposits over the period against the private sector credit growth of average 21.5% in the same period. UCBL is well suited to grow with the next credit cycle given its industry-position and strengths. The recent monetary policy seems growth supportive and so we expect UCBL is one of the few banks which has better footing to reap benefits from it. We assume 17.5% and 16.5% growth in loan book for 2014 and 2015 respectively. The bank has also avoided exposure to some of the problem sectors like ship building & ship-breaking which harmed other banks in recent past. The largest loan book exposure is in Textile & RMG sector (8.9% of its loan book as of Dec 2013). Furthermore, the bank has moderate exposure of 5.9% in real estate and only 0.3% in ship breaking industries. UCBL is fairly compliant with the new loan provisioning and rescheduling guidelines introduced in Dec 2012 (by the Central Bank). The one-off adjustment due to compliant with the guidelines is partially done but needs more time to clean its book. The bank has taken steps to regularize its non-performing loans and so this will lower its NPL ratio going forward. However, we project 4.8% and 5.1% gross NPL in 2014 and 2015 respectively from 4.0% of Such uptick in NPL projection is due for UCBL since they took advantage of the relaxed loan provisioning (allowed by Bangladesh Bank in December 2013 and till June 2014, on the backdrop of political instability in second half of 2013). UCBL is also in compliance with the recent capital market exposure ceiling set by Bangladesh Bank (BB) which is 50% of banks consolidated core capital. As a result, capital market volatility will not significantly hurt the bank in coming years. UCBL has started its capital market operations in recent years and thus has relatively low overall exposure through capital market investment. Other than a * Disclosures: A section at the end of the report is furnished for important required disclosures, including potential conflict of interests.

2 Loan growth 5 year CAGR (%) ( ) Deposit growth 5 year CAGR (%) ( ) Gross NPL of selective banks (%), as of Dec 2013 prop book of about BDT 3.7 bn it does not have much additional exposure. The bank is out of any additional pressure since it does not hold any negative equity portfolio (margin loan provided for stock broking). However, UCBL holds about 0.8% of its loan book (BDT 1.2 bn as of Dec 2013) in margin lending to other capital market intermediaries. UCBL is in the process of implementing a core banking solution that should help in cost control. Being a non-primary dealer bank, UCBL has less pressure in deploying additional fund in rise of government borrowing demand from PCBs. The outlook for external sector in 2015 looks reversing and so the fee based income of UCBL to experience a moderate growth. The bank is trading at an attractive 2015 P/TBV of 1.1x Key risk and challenges: The private sector credit growth in 2014 was 13.5% YoY (Jan-Dec 2014 period) while UCBL s growth was 14.8% (Jan-Sep 2014) and we assume the 2014 YoY growth to be about 17.5%. However, given the recent political instability, the loan growth in 2015 may remain subdued and some cases lower than the 2014-number. So, there is a risk that loan growth could suffer if political instability is not resolved shortly. UCBL took the benefit of central bank s relaxed rescheduling guidelines and can thus the loan book of the bank seems not cleaned yet and as a result the bank will require to book additional provisioning in the days ahead.. Overall NPL pressures can continue longer than expected, particularly in real estate segment of the portfolio. Imposition of cap on agri-lending rate to 11% (from 13%) by BB will squeeze the spread to some extent since UCBL has about 1.5% loan exposure in agri sector. Though government borrowings from banking sector saw a large cut (more than 50% in July-Nov Fy period), any large shortfall in financing including tax revenues, foreign financing and selling of savings certificates can push govt. for bank borrowing further. This can cause the banks to earn suboptimal returns on their funds invested in govt. bills and bonds. Overview of United Commercial Bank Shareholding Structure of UCBL (as per DSE data) United Commercial Bank Limited (UCBL), one of the first generation private commercial banks, was incorporated in 1983 and commenced its operations in the same year. The bank primarily offers services for all commercial banking needs of the customers, which includes deposit banking, loans and advances, export import financing, inland and international remittance facility, SME banking etc. The bank got listed in the bourse in It has 148 branches and 101 ATMs at present across the country to cater its services. Through over 30 years of banking journey, the bank has successfully positioned itself among the large tier banks with total assets of BDT bn as of September It is presently the fifth largest PCB in Bangladesh and holding about 3.4 % of the banking sector loan market share. Even with such large asset size in balance sheet, UCBL has been enjoying healthy growths in its L&A and deposits. Its 5-year CAGR in L&A and deposits are 23.1% and 20.8% respectively during period. Its product portfolio has about 40 different offerings including credit cards, money transfer facility with Western Union. It has one offshore banking unit located in Dhaka. The bank has two fully owned subsidiary companies namely UCB Securities Limited and UCB Investment Limited - dedicated for capital market operations. The subsidiaries have started their operations very recently (since 2012), so fortunately they were out of the stock market debacle effect. UCB is holding about 2%-3% market share in mobile banking and the mobile banking division is very active in recent time; so part of the fees income is expected to generate from this segment. Moreover, the mobile banking segment will also help in improving CASA ratios. 2

3 Shareholders UCBL has relatively a large board (no of board members excluding the CEO & MD) With paid-up capital of BDT 8.4 bn (USD mn), UCBL is the seventh largest among the 30 PCBs and over four-times of the regulatory required paid-up capital of two billion. The sponsors and directors shareholding is also in compliance with the BSEC directive of minimum 30.0% share holding cumulatively. At present, UCBL has 19 directors (excluding the CEO&MD) in its board. Sponsor and directors hold 37.2% ownership while institution and general public holding stands at 11.4% and 50.6% respectively. UCBL also has government ownership of 0.8%. Its free float stands at 63.0%. Board and management Source : Company Report and CBCRL Research, Feb Year avg ROE of selective banks, %( ) UCBL board comprises of 19 members. Mr. M. A. Hashem is the Chairman of the Board of Directors of the bank. Mr. Hashem is a prominent business tycoon of the country and a former Member of Parliament. He is the founder of Partex Group, one of the largest conglomerates in the private sector manufacturing and service based enterprises in Bangladesh. He is also the founder and member of Trusty Board of North South University, and member of Board of Trustees of the IBAIS University. The present management team of UCBL is led by Mr. Muhammed Ali, an Economics graduate, having over 35 years of experience in banking arena. Mr. Ali joined UCBL back in Nov 2012 and prior to joining UCBL he served in the position of CEO in two other banks, namely Social Islami Bank and Shahjalal Islami Bank. He has proven track record in leading various teams in different banks contributing in business policy formulation and strategic management. Source : Bangladesh Bank and CBCRL Research, Feb Year avg ROA of selective banks, %( ) In addition, one of the UCBL s Additional Managing Director (AMD) is Mr. A. E. Abdul Muhaimen, who earlier worked as CEO& MD of BRAC Bank (a leading SME focused bank). He also held senior management positions in ANZ Grindlays Bank, Standard Chartered Bank. He has about 30 years of banking experience and joined UCBL in July Mr. Muhaimen has a post graduate degree in MBA from Institute of Business Administration (IBA), Univerist of Dhaka. He has trained at INSEAD in Singapore, Mount Eliza of Monash University, Australia and Harvard University, USA. The other members of top level management have an average experience of above 25 years. Source : Bangladesh Bank and CBCRL Research, Feb 2015 Gross NPL- Private Commercial Bank (% of loan) Source : Bangladesh Bank and CBCRL Research, Feb 2015 Outlook for United Commercial Bank The banking industry since 2012 has been facing challenges both from macro front and regulator - Bangladesh Bank (BB). The schedule banks operating in Bangladesh were directed to implement the stringent loan classification and provisioning guidelines (in late December 2012) to bring the sector in line with international best practice. Moreover, industry wide few loan scams (with government and few private sector banks) and at the same time political turmoil during second half of 2013 (pre-election period, general election held on 5th January 2014), put the banking sector as one of the poor-performers in recent history. The private sector credit growth hit its 13-year low in Feb 2013 and banks faced excess pile of loanable fund owing to slower credit demand and asset quality fear by banks. Now though the private sector credit growth revived to 13.5% YoY in Dec 2014, the recent political tension may hamper the banking sector growth further. As such even the well-managed banks may need to charge additional provisioning. Given the macro and regulatory challenges we expect UCBL to perform better among the banks. The recent restructure helped the bank to be poised as one of the key emerging banks in Bangladesh. UCBL is one of the few bank that had sensed much earlier to cut the high cost deposits and avoided excess pile of liquidity. The recent better asset liability management (ALM) by UCBL is expected to improve its performance in the upcoming years. However, UCBL will need additional capital support to grow its loan book further since the capital adequacy ratio (CAR) of the bank seems not that high (CAR was 11.3% as of December 2013). In addition to this, there will be additional capital need for UCBL since the Basel III implementation is already in place from January Given such pressure (for additional capital requirement), we see very little room for UCB in distributing healthy cash dividend for the coming years. 3

4 Key Ratios and Growth Indicators % 2011A 2012A 2013A 2014e 2015e 2016e 2017e MRKET SHARE Loan and advances (as % of Industry) Loan and advances (as % of PCBs) FRANCHISE VALUE Employees 2,982 3,374 3, Branches ATMs GROWTH, YoY Growth in Net Interest Income (BD standard) Growth in Net Interest Income (Int. standard) Growth in Operating Income Growth in Operating Expenses Growth in Pre Provision Profit 26.3 (3.5) Growth in Net Profit 35.1 (46.2) (4.8) Growth in Investments Growth in Assets Growth in Shareholders' Equity (adjusted) ASSET ANALYSIS Net Interest Income / average assets (Int. standard) Earning assets / Total assets Return on average earning assets LOAN & DEPOSIT ANALYSIS Loan growth Deposits growth CASA Ratio LIQUIDITY ANALYSIS Gross LDR Loans / Assets Earning Assets to Customer Deposits Statutory Liquidity Ratio (required 19.5%) Cash Reserve Ratio(required 6%-6.5%) ASSET QUALITY Gross NPL (% of L&A) LLP or Cost of Risk (% of L&A) NPL Coverage Provision to Assets CAPITAL ADEQUACY Capital Adequacy Ratio (CAR) Core Capital (Tier I) Avg. Adjusted Equity to Avg. Assets SPREAD ANALYSIS Net Interest Margin (Int. standard) Loan-Deposit Spread Interest rate received on interest earning assets Interest rate paid on interest bearing liabilities OTHER GROWTH ANALYSIS Growth in Non Interest Income (Int. standard) (4.4) (22.4) (6.9) Fees to non interest income (Int. standard) Fees to total income OPERATING EFFICIENCY Cost to Income Ratio Cost to Assets Int. bearing Liabilities / Total Liabilities PROFITABILITY ROA ROE Pre-Provision ROE Pre-Provision ROA Dividend Yield Dividend Payout Ratio Restated EPS Restated BVPS Restated Tangible BVPS Dividend Per Share VALUATIONS PE Ratio, X PB Ratio, X P/TBV Ratio, X Deposit to Mkt Cap, X MARKET DATA Market Cap (yearly average), BDT mn 40,026 22,759 16,748 22,464 24, Market Cap (yearly average), USD mn Turnover (yearly average), BDT mn Turnover (yearly average), USD' 000 1, Adj. Market Price (yearly average), BDT per share *Turnover and Market Cap data for 2015 is for January to 08 Feb 2015 period only (YTD basis). 4

5 Loan book of UCBL as of Dec 13 Loan book with growth trend of UCBL Loan book of UCBL is fairly diversified and mostly tilted towards SME and corporate sector... The nature of aggressive growth in loan book is eased recently and most importantly the average growth is targeted to the private sector credit growth. Deposit book of UCBL as of Sep 14 Deposit book with growth trend of UCBL UCBL historically sourced its financing from fixed term deposits, however the CASA ratio is improving... The bank avoided high cost deposits to cut the excess liquidity piling off; in fact it also helped in improving low cost CASA ratio. Liability book composition as of Sep 14 Gross advance to deposit ratio and CASA ratio trend The liability book of UCBL is mostly sourced from deposits taking and this is in line with industry norms... UCB is eyeing on improving its gross advance deposit ratio (ADR) and we expect stability in recent political turmoil will help in rising ADR. 5

6 Asset book of UCBL as of Sep 14 Capital adequacy is in line wit h minimum regulatory threshold Asset book of UCBL is well diversified and a reasonable amount is tied in the form of risk free assets and cash... Weight of Gross NPL for UCBL as of Dec 2013 UCBL came out from the legacy of a bank with capital shortage and now it is fairly capitalized; nevertheless the bank will need additional capital to support its loan book growth and to implement the BASEL III, which is already in place from Jan Capital adequacy ratio (CAR) is above of minimum 10% threshold, but not enough % of L&A Dec'13 Sub-standard 0.4% Doubtful 0.3% Bad/loss 3.4% Gross NPL 4.0% The bad/loss portion of Gross NPL is dominating the pie and its clearly indicating why required provision should be going up in days ahead.. Gross non performing loan (NPL) - PCBs and UCBL Capital adequacy ratio (CAR) of both UCBL and private commercial bank suffered on pressure from piling up of delinquent assets... Gross non performing loan (NPL) - for UCBL to go up in coming years Gross NPL of UCBL is below that of the PCBs, but loan rescheduling in recent quarters will push the number for future periods, so our estimate for gross NPL is a bit high and which is realistic. It is worth mentioning here that UCBL took the advantage of Central Bank s relaxed loan provisioning facility (for Dec 2013 to June 2014 period). So, NPL number for UCBL should go up and so required provision in the process... 6

7 Combination of Operating Income (3-Y average, ) Interest spread is at higher end for SME and corporate focused loan portfolio Net interest income is the dominant field of operating income, so any fluctuation in interest rate spread will affect the operating income. Composition of Commission, and Fees Income, 2013 The rate of falling in deposit cost is relatively higher than that of lending rate, so some improvement in spread for UCBL is expected and it should persist since the loan book is highly exposed to SME lending (which requires high yield for offsetting risk)... Operating income composition with historical trend 19% of the operating income is coming form commission and fees and this is largely dependent on external sector outlook. Composition of Operating expenses, 2013 Fee based income (mainly investment income) squeezed on sluggish capital market performance and suboptimal yield in gov. bill/bonds. However, fee based income should go up on improved outlook in external sector (export, import and remittances).. Cost to Income and Cost to Asset Ratio - trend is up tick Both cost to income and cost to assets are on increasing trend since the operating income sources are affected easily (due to many external factors) but cost (like salary, rent and deprecation) is usually not downward trending...only higher efficiency can reign such ratio to expected level. Our view is that the recent restructuring of UCB will yield better efficiency in the medium-to-long run; and so some improvement in cost ratios. 7

8 Composition of provision (3-year average, ) Provision and cost of risk not sufficient to cover stressed assets The average cost of risk (~1.2%) for UCBL is relatively higher compared to the top tier banks (~1%). Such cost can be lowered through stringent loan approval policy. However UCBL s cost is also in higher end for its SME focused loan book... Exposure composition (BDT 4.94 bn as of Dec 13) Capital market exposure is within the regulatory limit UCBL s capital market operations is in the regulatory limit and so any unpredictable volatility in stock market should have tolerable impact in its book (lower required provision). So far, UCB holds no negative equity portfolio and this a great relief - thanks that it started its capital market subsidiary operation after the stock market bubble burst and debacle. Moreover, UCBL holds a proprietary investment book of BDT 3.7 bn as of Dec Per share basis earning (restated).. PAT and growth trend (one of provision impact is already reflected) Both cost to income and cost to assets are on increasing trend since the operating income sources are affected easily (due to many external factors) but cost (like salary, rent and deprecation) is usually not downward trending...only higher efficiency can reign such ratio to expected level. Our view is that the recent restructuring of UCB will yield better efficiency in the medium-to-long run; and so some improvement in cost ratios. 8

9 Interest margin improved on deposit rate cut Average ROE for UCBL is well above of PCBs number The Return on Equity (ROE) in recent years suffered mainly due to higher provision charge and sluggish performance of both capital market and external sector. However, UCBL s ROE number is comparatively higher than that of the private commercial banks (PCBs) number. We expect the ROE of UCBL to rebound from 2014 and onward and should continue at around 15% (sustainable basis). UCBL is one of the few banks that cut the deposits rate at first hand and it helped to realize some improvement in margin (though we expect such transitional improvement in spread is not persist in long-run)... Pre provision ROE and ROA Average ROA for UCBL is well above of PCBs number Efficient loan book management can accelerate the return numbers for long term. UCBL s stock performance will highly be dependent on the ROE number which is now close to the cost of capital (not less than 14%). We expect better balance sheet management for UCBL is not much challenging since its management team is well-equipped with seasoned bankers of the country. Adjusted price and turnover trend (till 08 Feb 2015) Source : Company Report, DSE and CBCRL Research, Feb

10 Income Statement (Consolidated basis) Consolidated Income Statement and Balance Sheet United Commercial Bank Limited MM BDT 2010A 2011A 2012A 2013A 2014E 2015E 2016E Interest Income 9,468 15,352 21,319 23,006 23,874 27,624 31,587 Interest paid 5,633 10,203 14,705 15,924 15,977 19,175 21,171 Net Interest Income 3,835 5,148 6,614 7,082 7,897 8,449 10,416 Fee Based Income 4,020 4,146 3,564 5,330 7,091 6,997 7,533 Income from investment 1,973 1,834 1,419 2,666 3,896 3,411 3,583 Commission & Brokerage 1,360 1,554 1,429 1,899 2,392 2,751 3,081 Other Income Total Operating Income 7,856 9,294 10,178 12,412 14,989 15,446 17,949 Operating Expenses 3,125 3,322 4,416 5,280 6,653 7,052 7,687 Profit Before Provision 4,730 5,972 5,761 7,132 8,336 8,394 10,262 Provision 1, ,023 1,239 1,910 2,003 2,286 Pre-Tax Profit 3,630 5,172 3,738 5,893 6,425 6,391 7,976 Tax 1,450 2,227 2,153 2,824 3,109 3,232 4,150 Minority interest Profit After Tax (PAT) 2,180 2,945 1,585 3,069 3,316 3,158 3,825 Restated EPS Balance Sheet (Consolidated basis) MM BDT 2010A 2011A 2012A 2013A 2014E 2015E 2016E Cash 10, , , , , , ,525.2 Balance with other Bank & FIs 1, , , , , , ,850.8 Money at call 1, , , , , , ,125.1 Investment 15,171 19,507 26,605 36,091 40,506 42,531 44,703.1 Loan & Advance 93, , , , , , ,033 Fixed Assets 1,966 3,288 5,223 7,958 8,515 8,941 9,388.1 Other Assets 6,102 8,543 11,261 9,020 11,005 11,555 12,132.7 Total Assets 129, , , , , , ,758 Borrowing from other FIs - - 1,200 1,617 16,171 16,980 17,828.9 Deposits 112, , , , , , ,660 Subordinated Bond ,000 2,000 2,000 2,000 Other Liability 8,989 13,441 17,547 17,492 20,640 21,879 22,972.7 Total Liabilities 121, , , , , , ,461 Paid-up Capital 2,910 7,275 8,366 8,366 8,366 8,366 8,366 Retained Earnings & others 4,905 8,688 9,801 12,139 14,619 16,941 19,931 Shareholder's Equity 7,815 15,963 18,167 20,505 22,985 25,307 28,297 Total Liabilities & Equities 129, , , , , , ,758 Restated BVPS Restated Tangible BVPS Dividend and Right on Paid up Cap: Bonus Share 25.0% 15.0% 0.0% 0.0% Cash Dividend 0.0% 12.0% 10.0% 20.0% 10% 10% 10% Right Share issue 0.0% 100.0% 0.0% 0.0%

11 Disclaimer This Document/Report has been prepared and issued by City Bank Capital Resources Limited (CBCRL) on the basis of the public information available in the market, internally developed data and other sources believed to be reliable. Whilst all reasonable care has been taken to ensure that the facts and information stated in the Documents are accurate as on the date mentioned herein. Neither CBCRL nor any of its director, shareholder, member of the management or employee in the research team or employee represents or warrants expressly or impliedly that the information or data of the sources used in the document are genuine, accurate, complete, authentic, and correct. Moreover, none of the director, shareholder, member of the management or employee in the research team or employee represents in any way be responsible about the completeness, authenticity and correctness of the sources that are publicly available to prepare the Document. It does not solicit any action based on the materials contained herein and should not be construed as an offer or solicitation to BUY or SELL or SUBSCRIBE to any security. If any person takes any action relying on this Document, shall be responsible solely by himself/herself/themselves for the consequences thereof any claim or demand for such consequences shall be rejected outright by CBCRL or by any court of law. Analyst Name Contact Mehedee Hasan Moinul Amin