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AKD Quotidian about — UBL: Undervalued

Karachi: If any big Pakistani bank delivered a positive earnings surprise in the last result season, it was UBL with a 34%YoY growth in 9MCY11 NPAT to PKR10.6bn (EPS: PKR8.66).

According to AKD Securities, while near-term earnings growth momentum is likely to decelerate in a lower domestic interest rate environment (DR reduced by 150bps in Oct11), AKD Securities believes current below book pricing is unwarranted. AKD Securities projects a CY10-CV16F NPAT CAGR of 12.5% driven by declining credit costs and a rebound in fee income. Upside to AKD Securities’ projections (CV12F-CY16F Tier-I ROE: 18.5%) exists if Middle East operations sustainably turnaround (prospects in Qatar in particular appear exciting) and domestic credit costs tag in lower than expected (consumer portfolio now <5% of book which has itself declined in each of the last 3yrs md. CV11F). UBL trades at a CV12F P/B of 0.75x, PER of 4.72x and D/Y of 7.8%. AKD Securities’ revised target price of PKR70/share (25% weight to DDM and 75% weight to Justified P/B) offers upside of 20.6%. Buy!

Estimates Revision

  (PKR)         CY12F CY13F TP
Revised EPS 11.21 12.29 13.51 70
Old EPS 10.53 11.27 12.89 69

Source: AKD Research

Very strong 9MCY11: UBL posted NPAT of PKR10.6bn (EPS: PKRS.66) in QMCY11, up 34%YoY. 3QCY11 NPAT clocked in at PKR4.2bn (EPS: PKR3.42), up 51%YoY/39%QoQ. Key highlights of QMCY11 results include 1) strong 18%YoY Nil growth, 2) contained 4%YoY increase in total provisions, 3) robust 24%YoY growth in non-interest income primarily due to ft/derivative income and 4) 15%YoY admin expense growth.

Asset quality metrics to improve: NPL stock stood at PKR54Sbn on Sep 3011, up 18%YoY/55%QoQ, with the NPL ratio at 149% and coverage at 75%. While sequential NPL uptick appears swift, AKD Securities believes NPL stock will likely reduce in the near-term considering circular debt exposure (md. classified assets) has successfully been converted into government securities. This should facilitate an improvement in asset quality metrics while a lower interest rate environment should curtail fresh slippage. In addition, extension of the FSV benefit should also reduce chances of negative earnings shocks in the near to medium term.

Outlook: AKD Securities projects a CY10-CY16F NPAT CAGR of 125% and CY12F- CY16F Tier-I ROE of 185% where1 while NIMs should squeeze across the medium-term, earnings growth should be driven by lower credit costs and gradual filling out of the ADR. Core fee income, dragged down by a smaller consumer portfolio over the last 3yrs, should also improve based on higher remittances commission and forays into e-banking. On the overseas front, while Dubai exposure (-10% of book) still poses concerns, this is somewhat balanced by exciting prospects in Qatar where the economy appears to have entered a secular high-growth trajectory.

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