Karachi: Impressive performance to continue in CY12
Arif Habib Limited revises Arif Habib Limited’s Dec-12 Target Price for United Bank Limited (UBL) to PKR 84.6/share from PKR 69.9/share post incorporating CY11 annual accounts.
According to Arif Habib Limited recommends BUY at current levels, as the stock is offering upside potential of 14.4% to Arif Habib Limited’s target price and a prospective dividend yield of 10%. Though the NIMs are expected witness a contraction in CY12, Arif Habib Limited believes that the bank with its prudent management will be able to compensate it with high yielding earnings assets, which are anticipated to grow by 10% YoY.
Net Interest income grows by 15% YoY
UBL has shown a remarkable growth of 15%YoY in Net interest income (NII). This growth is primarily driven by high interest rates (6M KIBOR up by 67bps YOY to 13.3%), higher investments and improved CASA. During CY11, the bank’s advances witnessed a contraction of 0.6% YoY to PKR 366bn, a situation witnessed by all the major banks, ADR declined to 60% (CY10: 67%). UBL’s main focus remained towards risk free investments which augmented by 30% YoY to PKR 300bn. This caused investment income to jump by 69% YoY, with its contribution to the topline rising to 43% from 30% last year. UBL deposits in CY11 grew by 11% YoY, with the management simultaneously improving its low cost deposits (CASA) from 66% to 68%. Arif Habib Limited expects banks average earnings assets improve by 10% YoY in CY12 while focus to remain towards investments.
Non Funded income (NFI) grows by a staggering 26% YoY
UBL’s non-funded income in CY11 grew by a staggering 26%YoY to PKR 12.7bn. This mainly emanated from higher derivative income, which jumped by 3.1times, causing the other income to grow by 77% YoY to PKR 2.4bn. The bank’s fee and commission income, with 69% contribution to NFI, rose by 10% YoY whereas dealing in foreign currencies jumped from PKR 1.65bn in CY10 to PKR 2.0bn in CY11. Arif Habib Limited expects Non funded income to grow by 3% YoY in CY12.
Non-performing loans & provisioning
UBL’s infected loans increased by 5% YoY to PKR 51bn during CY11. This consequently resulted in bank’s infection ratio to rise from 13.2% in CY10 to 13.95%. During the period, the bank realized provisioning against classified advances to the tune of PKR 6.2bn, depicting a decline of 9% YoY. The expense is mainly on account of aging effect on infected loans. Hence banks coverage ratio by end of CY11 jumped to 80% from 72%. In addition to this the bank’s booked provisions against FI and Investment of PKR 756mn and write off of PKR 340mn. Going forward, in the absence of any major accretion in NPLs, Arif Habib Limited expects the bank to maintain coverage ratio at current levels while improvement could be witnessed in infection ratio.
|UBL Financial Highlights||CY10A||CY11A||CY12E|
|Net mark-up/ Interest Income||34,281||39,425||40,858|
|Provision against non-performing advances||8,005||7,291||6,320|
|Interest Income after provisions||26,276||32,134||34,538|
|Total Non Mark-up/ Interest Income||10,090||12,718||13,111|
|Profit before Tax||17,743||24,223||25,871|
|Profit after Taxation||11,160||15,500||17,013|
|Source: Company Accounts, AHL Research|
Administrative cost increases by 11% YoY
The bank’s administrative cost rose by 11% YoY in CY11 to PKR 19.78bn. The primary reason for this is salaries expense which witnessed an increase of 10% YoY. The bank in CY11 has increased its branch network by 94 branches to 1218.
Acquisition of further stake in Khushali Bank
UBL, through a consortium is increasing its stake in Khushali Bank, a micro credit bank. UBL had a stake of 11.7% in the target bank, which after acquisition will increase to around 30% while consortium shareholding would be around 80%. The management of UBL believes through their OMNI product they can bring in the required cost efficiencies, which would be beneficial for both UBL and Khushali bank in the longer run.