Friday, 4 October 2013

United Bank Limited on their way back to glory

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.

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