The State Bank of Pakistan (SBP) announced a 50bps hike in the discount rate to 9.5% in its September 2013 Monetary Policy Statement (MPS) against market expectation of maintaining the status quo. This brings much awaited relief for the banking sector specifically to the large banks which have seen a continuous decline in core earnings due to tighter spreads on the back of monetary easing of up to 300bps since July 2012. Rise in inflation has been intimated by the SBP, we anticipate further rise in discount rate to 150bps by the end of 2014. We hereby revise our estimates incorporating the hike of 50bps in our models.
United Bank Limited (UBL) has the second highest local CASA deposit base after MCB Bank Limited (MCB) and this potentially will result in a healthy 32.3% increase its Non Interest Income (NII) in CY14 due to rising spreads. The bank will be less sensitive to asset quality shocks in the increased interest rate environment because of its prudent lending policies. Bank’s diversification via international operation provides a cushion from potential loss of currency devaluation. We anticipate United Bank Limited (UBL) to report bottom-line of Rs. 20.35bn in CY14 translating into EPS of Rs. 16.62. Please refer to the valuation matrix on the following page for key annual financials.
2QCY13 Result Highlights:
During 2QCY13, Net Interest Income (NII) declined sharply due to lower realized interest rates and provisioning against Non Performing Loan’s (NPLs). Increase in non core earnings about 33% primarily comes from gain on sale of securities. The bank posted earnings of Rs. 3.52/share translating into PAT of Rs. 4.3bn for the quarter. Furthermore, the bank announced an interim cash payout of Rs. 2.0/share.
United Bank Limited (UBL) stock is currently trading at CY14(E) P/Bv of 1.70x yielding significant upside to justified P/Bv multiple of 1.99x. We reiterate Positive stance for the stock with a Dec-14 TP of 166.45/share.