Strong earnings momentum to continue Buy reiterated

Transcription

1 United Bank Limited (UBL PA) Strong earnings momentum to continue Buy reiterated Company Update: BUY Target Price: Rs72 Banks We reiterate our liking for United Bank Limited (UBL) post its impressive earnings release, where it reported a profit growth of 27%YoY in 9M2010 and 18%QoQ in 3Q. In light of this, we raise our full year estimates for by 3-5% and now estimate the bank to report an EPS of Rs9.01 (growth of 20%YoY) and Rs10.88 (growth of 21%YoY) in 2010 and 2011, respectively. Our liking for the scrip is based on, 1) enhanced liability management which has seen cost of funds decline by 112bps to 4.51% in 9M2010, 2) ascending earnings yield post the DR hike which is likely to support NIMs going forward, 3) steady growth in Fee Income on rising home remittance & trade commissions, and 4) controlled admin expenditure in a rising inflationary environment. We opine, these elements will help the earning growth momentum to continue in the coming quarters. Our target price for the stock stands at Rs72, offering an upside of 27% to the current market price. The scrip currently trades at an attractive 2011F PBV and PE of 0.9x and 5.2x respectively, and also offers a dividend yield of 6%. Profits reach Rs8.1bn, up 27% YoY; Cost of funds down 112bps UBL reported impressive 3Q earnings of Rs2.9bn (EPS Rs2.34), up 18%QoQ, lifting the 9M standalone profits to Rs8.1bn (EPS Rs6.58). Key takeaways include; 1) cost of funds down 112bps YoY (flat QoQ) to 4.6%, leading mark-up paid to be lower by 18%YoY 2) 20%YoY decline in loan losses (Rs5.3bn in 9M) albeit resurfacing asset quality risks 3) Non funded income rising by 26%QoQ on growing income from foreign currencies and home remittances 4) Minimal jump in admin expenses (up 4.7%YoY to Rs12.9bn) despite significant inflationary pressures. Our estimate for the 2010E earning estimate stands at Rs11bn (EPS Rs9.01), while for the 4Q2010 alone, we anticipate profits of Rs3.0bn (EPS Rs2.42). Financial Highlights (Rs mn) 9M2010 9M2009 % 3Q2010 2Q2010 % Mark-up interest earned 43,251 46,163-6% 14,771 14,285 3% Mark-up interest paid (18,170) (22,259) -18% (6,204) (5,969) 4% Net interest income 25,081 23,904 5% 8,566 8,316 3% Total Provisions (6,250) (9,395) -33% (2,156) (1,978) 9% 18,831 14,509 30% 6,410 6,338 1% Non interest income 7,294 8,251-12% 2,565 2,367 8% Operating expenditures (13,200) (12,808) 3% (4,616) (4,400) 5% Profit before tax 12,925 9,952 30% 4,359 4,305 1% Taxation (4,865) (3,584) 36% (1,500) (1,888) -21% Profit After Taxation 8,060 6,367 27% 2,860 2,417 18% EPS (Rs) % % Strategic liability management bearing fruits We flag better liability management as UBL s key competitive edge, which has helped earnings growth to remain in double digits. The bank has managed to shed expensive deposits (down by Rs19bn YTD) to take on low cost ones (up by JS Global Capital Limited KATS Code: UBL Bloomberg Code: UBL PA Reuters Code: UBL.KA Market Price: Rs56.51 Market Cap: Rs69.2bn US$808mn 1-yr Avg. Daily Volume: 1.2mn shares Rs69mn US$0.8mn 1-yr High/Low: Rs69.05/50.28 Estimated free float: 306mn shares (25.0%) UBL vs KSE-100 index Jan-10 Feb-10 Mar-10 Source: KSE, JS Research UB L KSE-100 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Mustufa Bilwani mustufa.bilwani@js.com Analyst 92 (21) (ext. 3100) Completed on Nov 05, 2010 Distributed on Nov 05, 2010 All prices are as of Nov 04, 2010 JS Research is available on Bloomberg, Thomson Reuters and CapitalIQ Please refer to the important Disclaimer on the last page

2 United Bank Limited Page 2 Rs18bn YTD), while still maintaining the deposit base at Dec 2009 level (Rs491bn). This exercise has led banks cost of funds to come down by 112bps to 4.51%. CASA ratio resultantly is up 3ppt YoY to 68%. Change in YoY deposit structure Sep-10 Jun-10 Sep-09 (Rs bn) Avg. Avg. Avg. Yield/Cost (Rs bn) Yield/Cost (Rs bn) Yield/Cost Saving Deposits % % % Current deposits % % % Fixed deposits % % % Other deposits % % 9 0.0% Total deposits % % % CASA Source: UBL 68% 68% 65% However, asset quality risks resurface in 3Q Asset quality risks have somewhat resurfaced in 3Q, with Rs4.7bn recorded in new accretions, leading the gross NPL ratio to rise by 147bps QoQ to 12.6%. The Substandard category of loans now accounts for 17.7% of total NPLs (13.5% in June) and therefore we may see provisioning expense remaining high in the next two quarters, at least. However, this may be a temporary spike owing to a few large accounts and NPLs may in reality revert, once developments are made on the recovery front. For 4Q2010, we estimate loan losses at Rs2.0bn, while we see the 2011 figure dropping by 19%YoY to Rs5.8bn in Deposit mix - Sep 2010 (Rs bn) 35% Source: UBL 2% 33% 30% Fixed Current Saving Other Deposits Rs491bn Cost of deposits 3.7% CASA mix 68% Advances to NPL's 6-month KIBOR trend 50,000 40,000 Total NPLs NPL ratio 14% 12% 13.5% 13.2% 12.9% (Rs mn) 30,000 20,000 10% 12.6% 12.3% 12.0% 10,000 8% Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10-6% Source: SBP 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 Loan growth to be limited, focus to remain on Investments Loan growth has remained muted in the period on account of the rising KIBOR along with a cautious lending approach and seasonal retirements. The book size is down by 3.7% (Rs14bn) to Rs368bn in 9M2010, and growth is likely to remain flat in the short term. We believe once retirement from commodity financing (where exposure is up by 220bps YTD to 15.5% of total book) kicks off, the excess liquidity is likely to be directed towards investments, and with an upward adjustment in yields post the interest rate hike, interest income is likely to be northbound.

3 United Bank Limited Page 3 Advances & deposit trend Advances focus (Sep 2010) (Rs mn) Deposits Advances ADR 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 100% 80% 60% 40% 20% 0% 15% 32% 12% 16% 18% 7% Textile Energy Agribusiness Construction Individuals Others Source: UBL Asset / liabilities growth trend 30% Deposits Advances Investments Total Assets 20% 10% 0% -10% 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10-20% Situation improving on the international front Although the international loan book has shrunk 8%YTD, signs of recovery are emerging in the U.A.E (where it has an exposure of 70% of its international loan book) post the government s bailout. This is further validated by the upgrade of growth forecasts by international agencies, most prominent being IMF. Further, the bank has also worked on diversifying its book, and exposure in Dubai alone stands at 49% (of international book) as of Sep 2010 from 53% in Mar Fee income to thrust on Home remittances, trade commissions Fee Income is expected to continue the current positive momentum into next year, with 2010E and 2011F growths to come in at 7.8% and 6.9%, respectively. Rising trade commissions and home remittances are all likely to support this rise. Income breakup (Rs mn) 10,000 8,000 6,000 4,000 2,000 Net interest income Non interest income - 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10E, JS Research

4 United Bank Limited Page 4 Cost efficiencies keep admin expenses in check Increased management focus on cost efficiencies especially via controlling personnel cost (up only 1%YoY) and premises expenses (up by 9%YoY to Rs2.1bn), has led to admin expenses rising by 4.7%YoY in 9M2010, which is significantly lower than peer average. The cost/income ratio resultantly, has inched up slightly to 41%. Tight control over these costs has been a major reason for the earnings momentum. Valuation: TP Rs72, upside of 27% Our valuation for UBL is based on the distributable DDM and comes to Rs72, offering an upside of 27% at current levels and is our top pick in the banking sector. As far as the valuation metrics are concerned, it trades at 2011F PBV and PE and ROE of 0.9x and 5.2x and 18%, respectively. PE and PBV comparison ROE comparison EPS estimates revision (Rs) Old New % 2010E % 2011F % 2012F % Source:JS Research 10.0 PE (x) 25% 8.0 PBV(x) 20% % % 2.0 5% 0.0 MCB HBL UBL ABL NBP 0% ABL MCB HBL UBL NBP Source: JS Research Source: JS Research

5 United Bank Limited Page 5 Financial Highlights Year ended Decem ber (Rs m n) 2008A 2009A 2010E 2011F 2012F Incom e Statem ent Interest Income 52,253 60,857 58,036 58,410 60,752 Interest Expense 24,118 28,164 24,428 22,878 23,120 Net Interest Incom e 28,136 32,693 33,607 35,532 37,632 Fee Income 6,305 5,925 6,389 6,830 7,367 Other Non Interest Income 4,096 5,744 3,616 4,116 4,646 Operating Incom e 38,537 44,363 43,612 46,478 49,644 Operating expense 16,565 17,713 17,896 19,275 20,932 Profit before provision 21,972 26,650 25,716 27,203 28,712 Provision and other expenses 8,097 12,615 8,320 6,823 5,838 PBT 13,874 14,035 17,396 20,380 22,875 PAT 8,333 9,193 11,026 13,323 14,951 Balance Sheet Paid up capital 10,117 11,129 12,242 12,242 12,242 Reserves and Surplus 33,746 49,808 57,703 67,316 77,976 Total Equity 43,863 60,937 69,944 79,558 90,218 Deposits 483, , , , ,676 Borrow ing from FI 44,196 35,145 38,659 42,525 46,777 Other liabilities 33,454 31,626 33,465 35,421 37,504 Total Liabilities 561, , , , ,957 Advances 371, , , , ,014 Investments 116, , , , ,258 Other Earning Assets 100, , , , ,898 Other Assets 17,155 17,242 15,518 14,742 14,005 Total Assets 605, , , , ,175 Ratio Analysis Valuation Earning Per Share Dividend Per Share Book value per share Price to earning ratio (x) Dividend yield 2.2% 5.3% 5.3% 6.2% 7.1% Price to book value (x) Return on assets 1.4% 1.5% 1.7% 2.0% 2.1% Return on equity 19.3% 17.5% 16.8% 17.8% 17.6% NPL / Total Advances 7.1% 10.2% 11.5% 10.1% 9.2% Advances / Deposits 76.8% 72.0% 70.0% 71.0% 71.5% Interest exp / Interest income 46.2% 46.3% 42.1% 39.2% 38.1% Non Interest Income / Total Income 16.6% 16.1% 14.7% 15.8% 16.5% Cost / Income 43.0% 39.9% 41.0% 41.5% 42.2% Net Interest Margin 5.9% 6.4% 6.4% 6.5% 6.5% & JS Research

6 Research Team Muzzammil Aslam Economy & Politics (92-21) (ext. 3035) Umer Bin Ayaz Strategy, E&P, Refinery & Power (92-21) (ext. 3103) Syed Atif Zafar OMCs, Cement, Autos & Chemicals (92-21) (ext. 3118) Mustufa Bilwani Banks & Telecom (92-21) (ext. 3100) Bilal Qamar Fertilizer, Insurance & Textile (92-21) (ext. 3099) Sana Hanif Chemicals (92-21) (ext. 3102) Rabia Tariq Textile & Paper&Board (92-21) (ext. 3119) Angela Yousuf Gas Marketing (92-21) (ext. 3097) Raheel Ashraf Technical Analyst (92-21) (ext. 3098) Adeel Jafri Database Manager (92-21) (ext. 3098) Muhammad Furqan Librarian (92-21) (ext. 3105) Equity Sales Junaid Iqbal (92-21) Atif Malik (92-21) Faiza Naz (92-21) Muzzamil Mussani (92-21) Murtaza Jafar (92-21) M. Jawad Khan (92-21) Ahmed Abdul Rauf (92-21) Asim Ali (92-21) Arsalan Khan (92-21) Abdul Aziz (92-21) Irfan Iqbal (92-21) Irfan Ali (92-21) Mujtaba Barakzai (92-21) Head Office KSE Office Lahore Office Islamabad Office Hyderabad Office 6th Floor, Faysal House 2nd Floor, Room No.75, Ground Floor, Room No.413, 4th Floor Office M-7, Rabbi Center, Main Shahra-e-Faisal Karachi Stock Exchange 307 Upper Mall ISE Towers, 55-B, Jinnah adj. Belair Hospital, Cantt. Karachi, Pakistan Stock Exchange Rd, KHI Lahore, Pakistan Avenue, Islamabad. Saddar, Hyderabad Tel: Tel: Tel: Tel: Tel: Fax: ,66 Fax: Fax: Fax: Fax: Website: JS Global Capital Limited ANALYST CERTIFICATION I, Mustufa Bilwani, author of this report, hereby certify that all of the views expressed in this research report accurately reflect my personal views about any and all of the subject issuer(s) or securities. I also certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. DISCLAIMER This report has been prepared for information purposes by the Research Department of JS Global Capital Limited. The information and data on which this report is based are obtained from sources which we believe to be reliable but we do not guarantee that it is accurate or complete. In particular, the report takes no account of the investment objectives, financial situation and particular needs of investors who should seek further professional advice or rely upon their own judgment and acumen before making any investment. This report should also not be considered as a reflection on the concerned company s management and its performances or ability, or appreciation or criticism, as to the affairs or operations of such company or institution. JS Global does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Warning: This report may not be reproduced, distributed or published by any person for any purpose whatsoever. Action will be taken for unauthorized reproduction, distribution or publication.