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The Bell about Banks – Elixir Securities Limited

Karachi, October 03, 2012 (PPI-OT): UBL: Fee income to counter lower NIMs

Elixir Securities Limited met with the management at UBL yesterday to discuss the bank’s performance and its strategy in the light of a declining rate environment and slow credit growth.

According to Elixir Securities Limited, highlights of our discussion are presented below.

Aggressive branch expansion in CY11 and CY12
UBL’s deposit growth surpassed that of the sector’s by 2.8% to clock in at 11.8% during 1HCY12, higher than 7.8% in the same period last year. The management revealed that it was brought about by an aggressive expansion strategy during CY11 when UBL added over a 100 branches to its network particularly in the metropolitan cities. The bank plans to add another 70 – 80 branches during the current year and forecasts deposit growth to surpass 13% during CY13.

Islamic banking is another area where the bank is actively looking to expand in near future. Currently UBL operates through 14 Islamic branches which it plans to increase to 22 by the end of CY12.

Exploring options for credit growth but remains cautious
Gross loans declined from PKR 391 billion in Dec-08 to PKR 366 billion in Dec-11, average annual decline of 2.1%. This year seems to be better as loans grew by 9.6% during 1HCY12. However, majority of this growth is derived from public sector loans and not from productive lending to the private sector. Interest rate cut of 350bps over the past 14 months have not been able to bring about a major increase in advances (+7% YoY). Although UBL is exploring options for ramping up credit to the private sector, the bank remains cautious given bitter experiences of large NPL accretion from the last credit up cycle.

Lower interest rates to hurt NIMs
NIMs have declined to 6.4% from 7.2% last year. With further rate cuts in sight, management expects NIMs to further fall to 5.0% in CY13 in case of another 50bps decline in interest rate where as with no further rate cuts, NIMs should settle around 5.3%. Elixir Securities Limited has factored in CY12 NIMs at 6.1%, while Elixir Securities Limited has assumed NIMs to stabilize at 5.1% in CY13.

Branchless banking to bear fruit
Pressure on NIMs and consequent decline in net interest income will be offset by UBL’s non funded income growth. UBL’s focus on branchless banking (O million i) since CY10 is aimed at achieving growth through increasing banking penetration which stands at a meager 10%. O million i has become popular for domestic remittances and government’s aid programs such as Benazir Income Support Program and Watan Card scheme. Furthermore, UBL also provides customized solutions to corporate customers such as Engro Foods for payments/collections in remote locations. The management further highlighted that O million i will record revenues of close to PKR 1.0 billion for the year, contributing 10-15% of total fee income. 60% of O million i revenues comprise fee income. With O million i business capable of exponential growth, fee income is expected to increase at a 5 year CAGR of 20% from CY12-17E.

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