United bank Limited (UBL) reported 1Q2020 result today posting consolidated Profit after Tax (PAT) of PkR4.9bn or EPS of PkR3.98/sh, up 21%Y/Y. Along with this, UBL paid out PkR2.5/sh as dividend. The result is above market consensus of PkR3.74/sh and KASB’s estimate of PkR3.61/sh by 6.5% and 10.3% respectively. We expect the stock to perform on the back of above expectations result driven by higher core income and absence of losses from discontinued operations. However sharp increase in provision and decline in non-core income will remain a source of concern.
Earnings growth was driven by growth in Net Interest Income, which was up 19% Y/Y to PkR17.7bn. We expect NII to decline and NIMs to shrink going forward taking the impact of 425bps cut in the key rate. Moreover, the readjustment of interest rate corridor and early repricing of advances for SME, Agri and consumer will negatively impact the core income of the bank.
Non-interest income on the other hand decline 14%Y/Y to PkR4.9bn. Within non-interest income fee income declined 16%Y/Y to PkR3.5bn, dividend income declined 22%Y/Y to PkR178mn, and income from dealing in foreign currency declined 19% to PkR771mn. Moreover, loss on share of profit of PkR 148mn is partially offset by the gain of PkR458mn on sale of securities.
We think the key factor that market was concerned about was the credit quality. Provisioning expense increased 3.2xY/Y to bn3.7bn. We are modelling UBL’s infection ratio to increase from 10.9% in 2019 to 11.5% in 2020. The management will provide more detail on the numbers ahead on its conference call to be held on Monday, 27th April 2020.
Operating expenses increased by 8%Y/Y to PkR10.7bn. However, the C/I ratio for 1Q2020 came in at 47% compared to 48% in 1Q2019 due to higher core income.
We think the key questions to ask management are: 1) quality of the loan book 2) expected decline in fee income due to lockdown and 3) expected quantum of gains on PIB portfolio.
UBL is currently trading at one year forward P/Bv of 0.63x. We have “Outperform” rating on the stock with TP of PkR148/sh providing an upside of 43%.
