United Bank Limited (UBL) Earnings Call Transcript & Summary

Good day, and welcome to the United Bank Limited Second Quarter 2020 Results Call. As a reminder, today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Murad Ansari. Please go ahead, sir.

Good day, everyone, and welcome to UBL's Second Quarter 2020 Results Conference Call. We have the pleasure of having Mr. Shazad Dada, the new incoming CEO of UBL, on the call with us today. Also joining us is Mr. Aameer Karachiwalla, CFO, UBL; and Mr. Arif Saifie, who is the Financial Controller and Head of IR. I would like to start the call with Mr. Shazad Dada, who's just joined in 3 weeks ago as CEO and President of UBL. Mr. Shazad comes in after a very successful 5-year stint -- a little over 5-year stint with Standard Chartered Pakistan, which is the largest foreign bank operating in Pakistan. So Shazad has just joined the bank 3 [ years ] ago. So I'll pass on to Mr. Shazad to start with his opening remarks and a brief overview on his plans. Thank you. Over to you, Mr. Shazad.

Thank you, Murad, and thank you for arranging this call. Really it's fine. It's indeed my real pleasure to be on this call and joining UBL. As you may have heard I started with UBL as incoming President and CEO on July 16, and honestly, till yet, it's been amazing 3 weeks because during this period, not only did -- we also had a board meetings and in that [indiscernible] we have very solid results, which is the purpose of today's call, to share with you our results and answering all of your questions. Myself, I'm joined by Aameer Karachiwalla, our CFO; and Arif Saifie. So both will be with me in answering any of your questions. Just to start off and kick start. Again, for me, it's really having spent 30 years in banking coming to UBL and seeing the strength and breadth of this franchise has been very, very -- it's been real pleasure to see the quality of the people, the quality of the franchise and what the potential of the franchise is going forward. I'm -- have been very impressed with the team and the kind of results that we have been able to deliver during some rather challenging times. And starting with that, I think, we all know that Pakistan, like rest of the world, has been impacted by COVID. But [Foreign Language] we have been quite resilient as a nation. The results are showing a recovery that's better than expected. I wouldn't declare a victory at this stage because we don't know how [ very well ] -- whether it's going to be a sharp recovery, or whether it's going to be a dragged out recovery. But clearly, the early indications are positive. But needless to say, the last 3, 4 months are more challenging for the economy, and you could see that in the data. Along with the fact that it also had an impact on the banks. At this time, I would like to acknowledge that the State Bank, along the Ministry of Finance, worked very jointly with all of us and working, keeping in mind the challenges that our customers were facing, came up with some regulations, and policies and directives, which reports of greater ease some of the [indiscernible] some of our customers. And in doing that, we played a pivotal role mainly around 20 billion of deferrals. We were able to provide to various customers of ours in different segments so that they would not be burdened with a big debt repayment [ loan ] in the months while they were challenged. I think the economy itself has been -- obviously, you've seen the numbers and the growth rates. And like any industry, the economy is shrinking, that has an impact on the bank. But luckily for us, we were -- we showed a lot of resilience and full credit to the team and the previous management [ who'll be ] executing our strategy to make sure that the impact could be limited. I think on the backs of that, we are seeing early signs of recovery. And I think we'll be relatively [indiscernible] to take advantage of that, and we will be sharing more of that in the later updates that will be given to you in quarter 3, quarter 4. Once I've also had a chance to do a detailed review with my team as we see the economy opening up. I think the key highlights, Aameer is going to talk about it. But when I say solid results, our profit before tax of around PKR 19 billion, return on equity of 16.7 with a [ PAT ] is 21.1%, I think, puts us in a very solid position. It was on the biggest quarter that we crossed at 1.5 trillion deposit mark, which was again quite ably supported by domestic growth of around 11% and our CASA deposits [ are ] allowing us to maintain and growing our market share, [indiscernible] the market share is around 8.3%. I think, we were also very prudent in our asset lending. We have continuously remained very agile and trying to make sure that our cost base is in check during these times to [ maintain is very challenging ]. The other 3 areas of focus for me going forward, along with the fact, how do we position ourselves well, and how do we become more prevalent to our domestic client base, which is again, we're 1 of the few banks that have a very good mix because it's 45% of our launches are in [ rural ], Pakistan, which is currently experiencing a lot of strong momentum on the backs of the stimulus package that's been offered by the government itself. But I think that as we position and secure our franchise, looking at how we can think digital in every part of our banking delivery funds. And there, you can see, we've already seen a big uplift and COVID has frankly been -- a big way -- it has really supercharge that initiative and we've seen a pickup. If you just look at transactions, customers [ turn up ] has gone up by 62% from January, and the adoption has also gone up. So clearly, we've got a big boost on digital and we are going to continue to maintain market leadership position on that by continuing to invest in that and driving traffic from our branches to the digital platforms, while ensuring that we can be available to our customers anytime, anyplace, anywhere with our digital solutions. On the treasury, I think, we had shown a lot of -- [ an improved ] positioned of portfolio. And being able to really redeploy it. So I think the position we're at [indiscernible] current outlook on interest rates, which obviously with the cut in interest rates almost [ at June 25 to 7% ]. And so a 6.5% drop in the last few months has had an impact on our [indiscernible] line and income too. So you will see the true impact of that in the coming months and quarters. But clearly, I think, we have positioned ourselves well. We are able to deliver -- position ourselves with the big investments that we are doing. And the team has worked well on that. Lastly, I would just give you the [indiscernible] that I'm looking actually [indiscernible] international, if you can -- we have a good international presence. We are reviewing our international strategy and how we want to position ourselves globally. We have taken some strategic decisions last year, mainly in Tanzania and the U.S. Our U.S. action was earlier this year, and we will continue to see how best we position and take full advantage of our network, our position and our brand. So we can further strengthen our strategy around digital because the -- because of the economy and because of the challenges we have hit [indiscernible] unexpected, not unexpected -- some, I guess, unexpected provision in international markets. And we are -- the team is working very hard in trying to ensure that we address challenges that we haven't positioned ourselves then with that environment. So let me pause here. I will be available for answers in -- for question and answers. And again, I can assure you that your investments and [ programs ], and we work very hard to give you above market returns. And I think we'll continue to work on finding ways and means on how we can adapt to the changing environment in the banking space. And really ensure that we put our customers at the heart of everything we do because clearly, for us, that's the trust of what we are here for in ensuring that we can deliver superior solutions and products to our clients on a timely basis. Thank you, and over to you, Murad.

Thank you, Shazad, for the opening remarks and your broad view on the bank and the economy. We can now move on to Mr. Aameer Karachiwalla and Arif sahab to run us through the second quarter performance and the results.

But I can just go through the numbers. I just wanted to say that Mr. Imran Sarwar, our Chief Risk Officer, has also joined us, and he'll be part of the call. Before Arif will run through the highlights and then then we can take the question and answers after that.

Okay, thank you, Aameer sahab. I would like to once again welcome all the participants of the call today. Moving on in terms of an overview of the performance. In terms of the earnings, in the larger numbers, profit after tax is up 19% to PKR 11.4 billion. And let me just mention that this is a 25% quarter-on-quarter growth at the bank level. In terms of the largest contribution to profitability, we'd like to highlight the domestic bank reported a PBT of PKR 24.9 billion in the half year ended June '20, which is 42% above the corresponding period last year. And the most important component of that is core revenue and domestic NII, which is about 70% of the bank's revenue is up 38% year-on-year. Other highlights of the performance is the administrative expenses, which remained at PKR 19.2 billion in this half year, essentially remaining flat versus the corresponding period. And the cost-to-income ratio is now below 14% at 39.9% versus 45.6% last year. The overall CAR for the bank has improved to 31.1% at the end of June, and this is an improvement from the 18.9% that we had in December and essentially 8.6% above the minimum regulatory requirements. Moving onto the balance sheet performance. I think you mentioned our strong deposit performance, which is, again, led by the branch banking group. Which was 11% year-on-year average deposit growth, which is approximately PKR 123 billion of incremental volume mobilization. Like always, our focus remains on current accounts, which were up 7%. And alongside that, savings accounts were also up at 12%. We maintained a very strong CASA ratio close to 86% as has been the case historically, while maintaining one of the strongest current to total ratios of 42% in this half year. Cost of deposits stood at 5.5% for this half year, while it was 4.8% last year. But while I mention that the first quarter cost of deposits in 2020 was 6.4, which has improved to 4.7% in the second quarter. In terms of advances, we remain prudent. Our overall domestic book remained at PKR 462 billion, while the international advances have decreased by 24% in this half year to $626 million as part of a very clear derisking strategy that we have. In terms of the investment portfolio mix, we remain quite well diversified in terms of our tenure and our investment profile. We have fixed income PIBs of PKR 299 billion at 9.3%, which includes an element of held-to-maturity securities as well, which are at close to about 10.2%. So well in the money at this point. We have a sizable floater book at [ PKR 197 billion ]; gearing 13.4%, priced at around about 70 basis points above the benchmark 6-month [indiscernible] rate, which, of course, will continue and complement our earnings profile along with our loan book. And in terms of T-bills, our current T-bill portfolio is PKR 328 billion, yielding 10.2%. In terms of the P&L for the current year, the overall interest-earning assets averaged PKR 1.4 trillion and are up 16% year-on-year, largely led by deposit growth. And actually a reduction in average borrowing. The NIMs continue to remain strong at 5% in the half year of '20, improving by 70 basis points versus the corresponding period last year. Fee income at this point is PKR 5.2 billion for this half year, down 27%, largely because of the impact that COVID has had in all our existing business segments and profit segment lines since March until May. And we have seen some improvement in the month of June, which, of course, will impact and improve the fee base going forward. In terms of FX income, we earned PKR 1.7 billion in this half year, marginally lower than and close to PKR 2 billion that we had had in the corresponding period. And domestic FX income remained at PKR 2 billion at the same level as it was last year. We've had capital gain of PKR 76 million in this half year versus PKR 104 million last year, mainly on our government securities portfolio and also an element on our international bond portfolio. We maintain our diversification in terms of investments in equity, where we bought a dividend of PKR 793 million, which are up 3% year-on-year. Moving to the asset quality side and the provisions. So we've had a net provision charge of PKR 9.4 billion in this half year, which is higher than the PKR 4.4 billion we had in the corresponding period. NPLs are now at PKR 87.4 billion with asset quality at 13% with overall coverage at 80%. I'd like to mention the overall provision charge, essentially in the domestic bank is PKR 1.1 billion of specific provisions and the international charge was PKR 8.3 billion on basically building up our coverage across UAE and [ Skardu ]. Domestic asset quality still remains strong at 5.6% with the adequate coverage of 86% overall. International NPLs now stand at $353 million and up from the $319 million we had in December. In terms of expenses, the overall expense base remains flat, while employee compensation expense is up by 10% and we continue to build our teams across the network and, of course, within the core segments. Property expenses are down by 5%, while our IT expenses are up by 17% which is very much in line with our digital and innovation agenda, while we will continue to invest and build our product suite. Other costs are down by 13%. So this concludes the overall expense commentary and this also completes the initial analysis to the market on the performance of the Bank for this half year. Murad, I'll hand the call back to you, and we are now ready for Q&A.

Yes, thank you, Arif, for the presentation. [indiscernible], can we please open the floor for Q&A?

[Operator Instructions] We'll now take our first question from Sohail Tai from Amin Tai Private Limited.

Sir, in the recent times, the elephant in the room has been your international book. So I just have a question on that. We've seen international NPLs go up about $20 million on a quarter-on-quarter basis. Significant tails are down, which is a welcome line. Any guidance you can give us on the international book in the near future? And any comments regarding the target coverage ratio in the international book?

Yes. I'll take that question. This is Imran, [indiscernible] the Chief Risk Officer. So yes, you're right. We have increased our provision for our international book. But I think to explain that, we have to look at what was going on in 2019, pre-COVID, where we had accounts classified as nonperforming as a result of the normal economic cycles. And we were on a trajectory to raise our provision levels, and we have been giving guidance consistently that our endeavor is to take the -- our provisioning levels as close to 100% as possible. And we were well on course for that. And then when COVID happened, a few other names popped up. And in addition to that, there are 2 very large systemic names in the UAE that have become nonperforming. And one of them was actually literally unexpected and bolt from the blue. So those have again caused us to add our provisioning levels. But we took a couple of steps forward, but we had to take one step back. So because of those, our NPL numbers increased and our provisioning levels have also gone up. Now going forward, our guidance remains the same. Our endeavors will continue to provide our nonperforming book and take it as close to 100%. But I think it needs appreciation that COVID situation is not over yet. We have given concessions under various inter-bank schemes in the GCC and those range between 6 to 12 months. And once that time arrives, then there will be accumulated debt to all these companies, which will come due for payment. Coupled with that, the fact that GCC economies still continue to struggle. Oil prices are where they are. So we do foresee that there might be some more issues coming up. We are tracking the portfolio very, very closely. Our strategy on the portfolio remains exactly what we've been telling you. On the corporate book side, we are pursuing selective and aggressive derisking where we feel that is required. And we are focusing for business on FI and our treasury business. So I think if you ask me, you can expect that this provisioning level will go up later this year. And then after that, we will assess what would happen next year.

Our next question comes from Fawad Basir from Topline Securities.

This is Sohail from Topline. I'm here with my analyst Fawad. So I have some basic broad questions from the new CEO, Mr. Shazad Dada, who has recently joined and few more on the results. So I was just wondering maybe, Shazad, if you can highlight about the strategy because we have seen you in different roles in the last 10 years, so can we expect a similar sort of strategy here at UBL that is focusing more on the digital, focusing more on cost rationalization or the existing UBL policy will continue? So this is a broader strategy question. And the second question is on the treasury book. The fixed PIB portfolio that is generating 9.3%, if you can just highlight what kind of duration it holds. And maybe if you can tell us, if currently, we have seen interest rate in secondary markets coming up. So UBL is still sitting on any kind of unrealized capital gain on the bond book. And lastly with interest rate coming down, we have seen UBL along with other banks, has been aggressive on the auto financing and mortgage financing. So what's the strategy on these 2 trends.

Sure. Sohail, I'll answer all those questions. I'll try to answer them and have risk [indiscernible] on Aameer and Arif [indiscernible]. But listen, first of all, I think UBL strategy, we can come back to you with a lot more details in the coming quarters, probably end of the -- close to end of the year. And it's all about -- there's no -- what I've done in the past, I'll apply here, I can be a rest assured. The idea is playing to the strengths. And planning to be ahead of a lot of [indiscernible] advantages and a lot of different products and solutions that were not available in previous organizations and vice versa. So one has to really look at what we have. And I think what I have been very encouraged and happy at least that is the potential that this franchise has on multiple factors, and especially keeping in mind some of the backdrop economic opportunities that are coming up. So -- digital, [ we will be ] a big theme where we have been leading the digital space. And I think that's where the banking sector is going. So you'll see more on that. How we do it. And the speed in which we do it will be something that we'll update you. It will also mean getting our technology platform up to par in concert with that sort of aspiration and what does that mean in terms of investments and so forth. But clearly, that's going to be a big part because I think to the earlier question and even to your question on international, we need to get that very well-articulated and [indiscernible]. So to conclude what happened. While our strategy has been pretty much on track as demand was also same. We had recognized some of the stress that was coming there, but unfortunately, we [ recovered ]. And with some of the markets where we are present, COVID has had a much deeper impact given that the sort of [indiscernible] of the whole strategy in those countries. COVID has really had an impact in those markets for [ problems ], for example, in Pakistan. So we are going to come back to you on that. I think on treasury side and where the economy is going and what we can do. And as far as operational efficiency, absolutely. I think that's something we'll always be looking at. We are going to try to continue to be as efficient an organization as possible and find the bad cost that's sitting in our infrastructure, that's sitting in our bank so we can redeploy it most efficiently into areas of the future and really be able to do it in the most cost-effective manner. So you have to wait. You have to constantly watch your cost. And we're going to continue to watch our cost and see whatever operational efficiencies are. So in broad terms, that will definitely be [ on the year ]. In terms of the other things that will be filling through our strategy will be our -- most importantly our customers because we will definitely be making sure and focusing on our target customers, and we'll try to make sure that we are able to address their need across the platform. And I think the deal is quite unique because we can really do the NTM from pattern also up to multinational corporations. I think, we have had the products, we have the [indiscernible] we have everything we can offer to our retail clients. We are small and media enterprise clients, to agri clients, but we obviously have to play to our strengths, which are not try to do everything for everybody. Playing to our strengths that means, basically, as a means to get there. As far as question on the interest rate, absolutely, I think we are seeing some -- the inverted curve has changed. We have seen that in the option [indiscernible] also. And I think that gives hope because after seeing a 600-plus points unit reduction which has impacted all banks, and we're going to see that in the results. But we do see an opportunity there as rates are going to move. And what we -- our treasury team has done well to repositioned ourselves. Arif can give you the numbers, but we have been focusing on in our disclosures also. We have been looking at short-term [ flow throughs ] and company-based floaters, which is really our deep focus, which has been introduced by the Ministry of Finance, which are also giving us above-average -- above season returns. And again, we have done it very successfully in building up that growth. We do see a small point where ERBs will become more attractive because at the current forecast levels. They are not something that we have -- we think there's more potential. And I think we are monitoring that [indiscernible] carefully in our relevant committees. And we then have a view on that, and we can take advantage of that to when the time is right. What was the other question? And that was a low interest rates, how we are going to do on the consumer side with auto and mortgages? Look, I think, on that one, auto is an area that we have been growing. It slowed down because car sales were down, and we saw that factor is impacted by COVID. July numbers are good. So it's clearly restarting that engine, and we'll get up their share of it. We want to see how we can get more than our fairer share. And for that, we are going invest into our product teams and try to see how we can build this better alliances, and how we can take on that business. Mortgages, I think, it's something that's right now being pursued very in a very focused manner right from the top from the Prime Minister and the State Bank and the State Bank [indiscernible]. We are part of Member Bank Committee on the housing finance. And clearly, I think, the senior directors that have come out from the State Bank also. So we welcome that. One of the key rating items for that has always been the foreclosure loss and we are hopeful that those foreclosure loss, there will be a resolution to that which will encourage all banks, not just UBL [ we will take home ] because, clearly, the country outside and with the population, having left the 0.5% of mortgages to GDP ratio, it's pathetically low. And I think there's huge opportunities for banks to take advantage of that. Arif or Aameer, do you want to give the detail on some other questions that do you find anything else?

You got it covered?

We already gave you some details on the PIB, basically be about just around PKR 300 billion of fixed rate PIB, which is yielding about 9.3% that Arif mentioned, with a duration of 2 years. And the last part of it of that PIB is in debt to maturities. So there's not much of mark-to-market gain we can recognize. The rest actually was -- our strategy was to build a floating rate PIB and that we've done successfully. We are down about PKR 200 million-odd worth of floating rate PIB with about over 12% yield. And that will work itself. So even while we have some ASS PIB, but I don't believe that we want to sell that real life. I just let it flow through because of duration is only 2 years. So we think our current strategy of maintaining short-term and waiting for the yield curve to start improving before we go back into the PIBs.

This question comes from Yusra Beg from Intermarket Securities.

And sir, I just wanted to circle back on the overseas book. I do understand that you said that there are 2 new accounts which were unforeseen, one of which was completely unprecedented. But my question is that we keep seeing NPL formation on the overseas book. So would you consider perhaps a complete booking it up in one go, given that you do have the balance sheet strength and also the capital to support this? And [ do you mean ] to cost possible absorb the loss. So my question is that if the overseas book is kind of taking away the attention from other positive headline numbers, so will you take this into consideration? Would this be something that you could perhaps look at? And the second question is regarding the -- there's been sort of an incrementally substandard category. And I just wanted to get a sense of where this is coming from. Any particular [indiscernible] you can find? And in general this sector is facing the most stress right now? Are there still the same textile, hospitality, et cetera. Have you seen anything different on ground?

Okay, so to your question, the first question, international has been in the highlights. That's true. But again, I will refer to what I said earlier, we have to look at what is happening on the ground in these countries. And all of this started in 2015, which was on the back of the oil price and how it is behaving. So we have been taking requisite action as and when required. We've been increasing provisioning. Now to your question, why don't we clean up the book all in 1 go. Now the fact of the matter is that there are -- the accounts or the NPLs that we are catering for, they're not done and dusted yet. These are mostly developing stories. And we keep looking at them and assessing them because some of them repay us. Some of them ask us for restructuring and so on and so forth. So while we can take everything in 1 go and be done with it, very humbly, I would say that we have a very simplistic way of handling things. We are -- we've got people on the ground, in the country, we've got very good people sitting in the head office, and we are all in touch with each other in trying to assess the situation on a monthly and quarterly basis. And I can assure you that we will do whatever is required. Considering the situation on the ground by each entity and counterparty. And if there is a full provision required, we will do that. And you will see in later part of this year, there are some entities where if the hope is not there, we will exactly do that. So while I appreciate your, I guess, frustration that every quarter, we have the same discussion, but I can also offer this to you that almost all banks in the GCC are faced with the exact same conundrum, we are not the only one. The only issue is we are relatively smaller in those countries compared to some of the larger banks. But I can also tell you that in some cases, we are more aggressive in taking provisions than even some of the larger banks. So what was the...

Second one, I'll take.

Second one Aameer bhai take.

Yes, this is about [ the substandard increase of substandard ]. It has to do with 1 of the small IPPs, which a lot of banks have had an exposure on. And there's been restructuring done on that, and it's a fairly longish restructuring, but that resulted in a substandard category classification. So that's the increase that you're seeing in substandard category.

And it is a system-wide named hierarchy. There's a very large number of banks involved in that.

We'll now take our next question from Farhan Rizvi from Crédit Suisse.

A couple of questions. Firstly, for Shazad. In terms of, obviously, you have answered a little bit in terms of your strategy, but a couple of things that I would just like to sort of get your perspective on -- in terms of the key parts of your strategy. Obviously, international is something that's a problem. And if you could sort of shed a little bit more, though your strategy is going to come out later in terms of how do you, from your perspective, look at that business as a whole? And secondly, on the regional part, some of your competitor banks have been more aggressive. UBL has had a good built of franchise. And in terms of your view on the important regionals, and if you would like to sort of maybe highlight your top 3 things that you would want to priorities at UBL from a strategic level, that would be good. And I have one more question for Imran, so I can probably raise it later.

Sure, the second part of your question, the third part was related to Imran. The second part was how are we stacking up with the domestic competition. I know the first part is around the international and strategy. What was the second part? Sorry, I didn't hear that.

So basically -- so the second one was in terms of your digital, right? I mean, some of your competitors have been -- appear to be more aggressive on the little space? I mean, UBL has a good franchise and a footprint, and you've been one of the early players in Pakistan in this segment. But in terms of, obviously, your experience at Standard Chartered, which has one of the really good digital franchises globally. And so how do you sort of look in terms of your views on digital? And third part was obviously on -- probably when you're sort of looking at strategy, what are the top 3 things in terms of your focus areas broadly for the bank?

Look. No, thank you. Look, clearly, I think just, again, I was debating whether I should come on this call or not because of COVID-19 because strategy is something, which if you don't go with a preconceived notion there's a lot of evaluation and assessment and all that, and I'm literally, been [ on for job there ]. So -- but clearly, there are some early obvious ones that you guys, as investors have also seen and what the team is also observing, and it's partly making sure that we execute what we have already set in a flawless manner. So we can get the results of that. I think anybody who had a strategy last year, it got paused and got impact. And COVID has -- while we've got a lot of learning from it, I think, it's also [indiscernible] for a lot of institutions globally. I mean, UBL is no different. How we look at our profiting strategy, how do we look at our people, how we look at work from home versus work from -- work on-site, all those things. And I think those will all go into part and parcel into our thinking as we are going to come back to the end. I can assure you, we will come back to you and share with you, and we will hold ourselves accountable to that strategy. I think generally, international, [indiscernible] it's [indiscernible] has talked to us. There's been a disproportionate amount of discussion around international. So clearly, that has been a pain point for us. But no surprise to us, as Imran was also saying, that this was something that we had sort of envisioned, but, clearly, that it happened in our [indiscernible] can sort of predicted that. And I think it's again highlighted the fact that we really need to play to our strengths and figure out how -- what's really -- how we're going to play that market with the presence and the size we have in some of those markets? And strategically, what are the products [indiscernible] because we can't do all things to all people in that market because we are not relevant enough in that. But in certain markets, we are very relevant. For example, our remittance business, I think, the corridor is really Pakistan corridor after all [indiscernible] Pakistan. Some of these corridors are quite healthy. And I think we have remittance products, they account for over quarter of the total remittance for this country. So it's a very sizable amount. And we have, again, with digital, how can we make it even better and faster and really leave that [indiscernible] in that market, which , very few other have, [ is final ] other than digital. We are the only bank to have a branches banking license because we have been able to do it some. And how do we take that? Because the natural journey here, touch points. I think that these are branches -- and it's how many touch points we have. And I think that are the omni agents that are present in all over Pakistan. With our retail presence, which is again, evenly distributed between rural and urban. How do you take those touch points of market coupled with ATMs and many other touch points that we or have or planning to have. I think we can really, we will look at penetration, we can really take advantage to a country which is heavily under banked. And I hope we play to that strength. So I think that will also be very much on our agenda on that front. So international, how do we really take this relevant to us and how does it connect well with our domestic business. Digital, yes, the other banks are also doing it. I've been part of the digital journey in my previous organization, and I'm a converter to the fact that digital is what the future will look, the speed in which the digital, how our population will move to that, the timing of that because clearly, we will need to have brick-and-mortar. And we will have to have digital solutions. So certainly declaring that brick-and-mortar is not going to be the need of the hour, but how do you really play to that? And how do you make it, that journey seamless. There are lots of things that people will want to go to branches for. If I want to activate my card, or if I want my balance inquiry, or if I want to do any of that, there's no need for them to come see a branch because it's costly for us. It's inconvenient for them. And therefore, it's important that we provide those solutions to them on the -- the digital are already using it because you guys are mostly all converts, quite frankly. It's how do we take it up this customer growth and [indiscernible] can let that because it's a win-win for everybody. It's convenient, better service, reduces our cost, improves our controls. So I can [indiscernible] that's not even around this line worth having a discussion with them. So I think that's going to be very much different, but we also need to make sure that we have the technology to be at the backbone to make the core banking in line to keep up the pace because last thing we want to do is to get the front line growing and we don't have the back end well built up because that will just create more inconvenience and more usage value and that would be also, we have to be very cognizant of the fact that today, cybersecurity is an important element. How do we make sure and we have been very vigilant on that. So that will again be something we have to do it at full reach. I do like that, I'm quite hopeful that with the interest -- coming interest rate environment, with economy turning, with the global world looking at diversifying the supplier base, Pakistanis at least should be able to take advantage of that. I think there, which is taking our corporate banks and make it more -- doing more with those guys using both our domestic and international [ network ]. I'm sorry, I'm sort of not giving an answer. So those are the 3 things that, I think, that there's lots more we can talk about ourselves. There are other people on the call with questions, and we can take it off-line. So the vision my priorities and how we're going to do work. But we will come back to you with a very clear, but I think, international, digital and again, taking advantage of our domestic footprint, how do we ensure that we can really address the customers' needs both on the consumer side and on the corporate side and provide them with seamless solutions.

Sure. I'm also cognizant of the time. Just one question for you, Imran. Can you share in [indiscernible] refunding portfolio as a percentage of [indiscernible] portfolio in the international operations? And what are you sort of expecting, and whether it's kind of trended in line with what you were expecting at the start of COVID. Has it sort of changed in the last few months from your expectation?

Okay, so you're talking about international, Farhan?

Yes, yes. International. So basically, your portfolio that's restructured internationally, and I mean, how do you see the outlook? And also, more importantly, I'm sure, at the time of start of COVID, you would have expectations for the probably restructuring portfolio. And given how things have moved in the last few months has it kind of changed from your earlier expectations? If you could maybe quickly give a view on that.

Yes. So before COVID, if we go, let's say, about 1.5 years, so our corporate portfolio was roughly 1/3 of the balance sheet size. So it was corporate portfolio, treasury, FI and a little bit of consumer here and there. So that's only 1/3. That is now contracted to about late '20. Part of it is by design because we went on to a derisking exercise, started a couple of years ago. And then when COVID happened, it kind of automatically became a little bit more stringent. And for the time being, we are looking at keeping the same course. So we are not going to look at corporate lending in the near future until things stabilize. Because you need to understand that UAE is our largest market. We have, in the past, done exceedingly well in that market. So at times, if things turn bad, then we can always revisit our strategy. So that part is there. Going forward, the Dubai portfolio seems relatively stable. I mean, I'm not saying that there are no problems. But what I'm saying is we don't see new NPLs coming up from Dubai. We do see some slippages that have happened in Abu Dhabi in the last couple of quarters. So that is our area of concern and our area of focus. And what was the second part of your question?

[indiscernible]

No, [indiscernible] portfolio be structured in the international operations? And what do you expect...

The restructured part, roughly, hasn't changed. The restructured part of the international portfolio, in rupee terms about PKR 6.7 billion, and that hasn't really moved. So that part is in performing restructured as part of the accounts. That didn't move. If you're talking as a relief from the UAE Central bank, that's not much because none of our -- recently when the COVID happened, the Central Bank came on regulations, allowing further restructuring for those loans, which are impacted by COVID. None of our facilities actually were impacted by COVID...

But I can readjust. No. No. We did some restructurings due to COVID under the respective Central Bank teams. In Bahrain, it was not really a decision for the Bank. The Central Bank came and told all banks to just defer everything for 6 months. So that was decided by them. In Qatar and UAE, we had options, but the Central Bank very strongly told us that you need to do that. So in all, in international book, we restructured about $145 million, $150 million worth of portfolio in all 3 countries. Bulk of it, as you would expect about $130 million was in the UAE.

Most of these names, Farhan, were already part of the restructuring. So very small portion came from the good book.

And Farhan, just to add over there as well in terms of derisking, we've cut down the -- so essentially, we've actually had to about $200 million of loans is actually been paid down as well. So our strategy has been derisking, rerisking and compressing the loans portfolio. And apart from restructuring, we've actually been looking to deploy this back into treasuries and reduce the ADR in the UAE book in order to contain our risk. So apart from restructuring, I think, to the credit of executing the plan, we've actually reduced our loan portfolio by an average of 26% versus last year.

We'll now take our next questions from [ Ammar Atique ] from [indiscernible] Partners.

I just had 3 brief questions on the domestic business. You mentioned domestic [indiscernible] are flat. I wanted to know, if there are any signs or indications of a pickup in domestic volumes in 3Q. And what should be your domestic loan growth outlook for FY '20 and which sector is sort of you think will be contributing to that growth? I know auto as you mentioned, but if there are any other sectors? Secondly, on the referrals, I just wanted to know what percentage, on a domestic basis only, what percentage of the domestic book has been deferred or restructured. And what kind of timeframe are those? Do those moratoriums have, i.e., 3 months or 6 months? And then lastly, on domestic cost of risk, how do you see that trending now? I mean, what level do you think that would allocate to?

So I think the first part of the question was in terms of the loan book outlook and the guidance in terms of our portfolio. So there have been some seasonal repayments in the second quarter as well, which is why you are seeing our loan book to come down. But what it is, it is obviously going to hold itself up for the remaining part of the year. And I think your other question regarding the outlook on cost of risk. Well, you see, I think, we've had PKR 1 billion of provisioning on our portfolio of PKR 450 billion. So I think even when -- with a little bit more stress coming in, in coming months, we'll still probably see something like a 30 to 50 basis points cost of risk, including coverage and building up coverage as well. In terms of the deference on the loans, I'll let Imran update you.

Yes. I'll just -- what Arif mentioned, let me just add to that a little bit. During this COVID season, we were tracking our portfolio very, very closely. In fact, on a weekly basis, and our corporate book, so I'll run you down very quickly on the segmental basis. Our corporate book showed tremendous resilience. Where we didn't see anything coming out of concern out of this book. Our mid-market book is the one that is most impacted, and there's a host of reasons. Then we have our SE, small enterprise. It was impacted in the initial lockdown periods of the COVID. But as soon as the lockdown eased, it showed a very, very steep V recovery. So our SE recovery is now, in fact, better than last year's, which is pre COVID. Agri book, again, exact same statistics, it did not show as severe signs of concern, but the lockdown and hampering of the logistics did have an impact. As soon as those were opened, things have improved. Our consumer book predominantly which is cars, also the same story because people were not able to move around very freely. Our NPS went up. But as soon as these have opened up in June, we are now looking at a declining trend. So overall, if you ask me, our portfolio, by and large, has performed fairly well, except for our mid-market portfolio, which we are watching very closely. And for the time being, we are not pursuing that aggressively.

All right. So it would be fair to say for the domestic business, sort of, flattish loan growth is the fairer outlook all in all?

Yes. I mean, our risk appetite is aligned with how the market situation is. But having said that, other than the mid-market business, nothing is closed. We are -- the shop is open. And if there are good transactions, we will look at that.

Yes. I mean, I eminent, which Shazad also mentioned about the corporate banking.

I mean, on the corporate side, I mean, we have all of the large names, all the top names of the country are banking with us. So we're going to see more deeply, if we can. But, I think, substantial growth is expected. I mean, so we will probably inch up our ADRs now from 39 now to 40s, early 40s, but that's about where our target is going to be.

We'll now take our next question from Ameet Doulat from Universal Investments.

On your adequacy, I just want to break that into 2 parts, like you mentioned, has been the theme of the call regarding the deleveraging and the advances. ADR being close to, I think, it's probably from the data I'm looking at, it's at the lowest levels from the last 7, 8 or probably 10 years. And you're not really looking to increase the ADR above 40%. Taking that into account and given your adequacy right now, what is the outlook that 1 can have on payout? Because in the last 2 years, of course, the payout has been north of 85%. It was that because of the earnings and the provisioning issue. But when this thing normalizes, what is the payout ratio that 1 should look at? And whether if you look at the payout percentage or 1 should look at probably the amount of payout like PKR 13 was the high 2, 3 years ago, now you're back to PKR 12. So if you can give some color on that.

Yes, Mr. Ameet, yes, basically, our dividends payout strategy has been consistent, and we've been looking at north of 60% to 70% payout on our profits. At the same time, also managing about [indiscernible] absolute terms. So you're right, PKR 13 is the max we paid. And the Board actually generally wants quarterly payout plus consistent payout. So in good times and bad times, we won't sort of do volatile dividend payout policy, except obviously, odd circumstances. So right now, the 2 quarters because of the State Bank's restriction on dividend, we had to miss the 2 dividends. We'll miss the second one as well, most likely. But we expect to catch up in the fourth quarter with -- depending on how much profit we make within that range of well, PKR 12, PKR 13 is a historic high, PKR 13. And 60%, 70% and going up to 80% payout depending on what pay situation is forward-looking profitability as well. So both keeping everything in consideration, that's how our dividend payout policy has been, and we hope to stick to it.

My second question is regarding the NIM. Of course, the NIMs have sky rocketed, and this is probably the highest NIMs for the... [Technical Difficulty]

Ameet? Ameet, can you hear us?

Yes, I can hear you. I think we got dropped out.

Okay, so we'll wait. We’ll wait. Maybe the operator can call him back or whatever...

I'll let you know our next question comes from Faizan from BMA Capital Management.

This is Faizan Ahmed from BMA Capital Management. I just wanted some clarity on the strategy which you are pursuing as far as the fee income is concerned or the noninterest income is concerned. I think you have covered pretty much covered up all the other questions in the previous answers. So this is the only thing which is probably left to answer.

So I think the fee income, obviously, is in relation to the business and the business growth. This quarter, we probably had a little sort of all in our sort of fee and commission income due to the lockdown and the COVID related. But that appears to start moving back up again. In June, we had a much better [ bank CAR ]. We had a much better home remittance fees coming in. The area that, obviously, will be a problem will be the omni related branches banking because we lost one of the mandates related to GDP payments. And that will not recover. However, all the other lines of business will pick up as we start increasing traffic in our branches and the volume as the economy starts coming back. So you will see a rebound in our revenues on the fee income side next quarter.

So just a follow-up question on this. How much is the relevant cross-selling as far as income condition is concerned, so do you target fee income generation from your existing clients or are you just focused on new business for the bank?

Yes, let me take that question. See, 1 reason why you will see on the businesses side, I'm not adding omni in this, the drop in the import volumes into the country, so that had an impact on our fee income. The other thing -- and we have done a lot of work on this aspect. The other thing is our export volumes were not as high as compared to our exposure on the exporters. So our strategy on the business side is that while the import volumes are now slowly coming up, and they will build up automatically. We are now -- we now need to focus on the export volumes so that we capture the other side of the fee income as well.

And Faizan, also to add to your question on cross-sell. So a lot of the fee income generation is to do with new to bank customers. So we've opened about 230,000 new to bank accounts even in the first half year. And a lot of the fee is still coming from the new banker policies we're writing. So there's a lot of new business, which is actually driving this. And which is exactly why once the lockdown eases, we will actually be building up on our ATM fees, on consumer loans, on the bancassurance fees as well. And also in cash management, where we are actually now -- we've done a throughput of 1.1 trillion in this half year, and that is also picking up. So I think other than omni and trade, I think, which is 2 things where we -- we will need a little bit more of hard work in terms of rebuilding those. The rest are complete flow through businesses where the branches, once they start the activity, the fee income will start coming in. And I hope that -- and I feel that the third quarter will probably reflect that, yes.

We do have Ameet back on the line.

Just continuing on that question, NIM question, so I was saying that, of course, this quarter is the peak for the banking sector ideas because of the sharp decline, and UBL also hit NIM of around 5.3%. So going forward, for the second half of the year and of course, when the repricing happens, what is the kind of NIM that one should look at? Can it drop below 4 point -- let's say, 4.5%, 4%?

Ameet, I think -- so we hit the highest of, say, 5% in the second quarter. There is still a lot of repricing that still needs to happen, obviously, on the T-bill side. While the [ PIPs ] are going to hold up the entire next 2 quarters as well. So there will be some NIM compression, but I don't think it's going to be very drastic.

Right. And like you mentioned on the T-billing front, there's still some repricing that is expected to happen. So will that happen in the second and third quarter or it's even in the later part of this year?

Yes, actually, the 2-part -- 1 part of our book on the floating PIBs and on the T-bills, both will actually reprice. Floating will reprice in August this month or so you'll see -- we will see some compression coming in from the floating PIBs. And the [indiscernible] as well. So while as the fixed rate PIB will not impact our NIMs, but the floaters will. So yes, I think, we've hit the maximum, I believe, last quarter, and now it will be site reduction for the next 2 quarters. But like Arif said, it will not be a substantial reduction. And we expect that it will be in 20, 30 basis points.

And I think also, Ameet, to add to that is that as we write the yield curve, our strategy will be more driven out of the overall earnings base. Which will come to deposits, momentum and current account growth, which we will have to hold up and will and to support the earnings in any rate environment. So our strategy, as always, will be to maintain earnings on the back of the actual underlying engine of deposits.

Understood, sir, understood. Just a final question on the international coverage. So you've mentioned earlier in the call that you are targeting to take the coverage up to 100%. Just want to confirm, do you mean this encloses the FSV or exclusive of that?

Okay. So we've been giving guidance that we want to get as close to 100% as possible. But that, first of all, we are not ascribing a timeline to this. If you were on the call earlier, you would have heard me say that new things keep cropping up and they derail our plans. However, the end result or the end destination remains the same. And when we do talk about full coverage, we do talk about with FSV benefit. And I can tell you that we have looked at FSV available to us in almost each and every account. And we only use 5 accounts, FSV, the rest we have discarded already. But those are the accounts where we feel we have a very, very strong advantage in taking that FSV as part of a security package and coverage.

There are no further questions in the queue at this time. [Operator Instructions]

All right, if you have no more question, I would now ask Mr. Shazad to give his closing remarks on the call.

I think, Murad, we might have been disconnected again. So we can take, if there's any more questions in the queue, while we can have Mr. Shazad back in on the call. So the operator will need to redial him.

All right. [indiscernible], can you please redial Mr. Shazad back. I'll put in a few questions over here. So in terms of I -- sorry. Yes, yes. So in terms of dividends, we've had with State Bank, obviously asking the banks to suspend dividends for 2 quarters. And you're now eligible -- or you can now announce the dividend in -- along with the final results. I mean, any light you can shed on how that is -- are we going to see dividends being maintained at previous year levels, given that capital levels are expected to be even strong.

Certainly, certainly. I mean, I think, I mentioned that earlier as well, that our dividend policy continues, and this is just the 2 quarters that we have to suspend was only because of the State Bank's regulation. Otherwise, we believe in a quarterly dividend payout policy. And other than so very a exogenous factor, we would continue to do that. So I expect that we'll be maintaining the fast track record in terms of dividend payout, both in terms of percentages, even if it is a little higher. But between 70 -- 60% to 70%, that's our payout ratio in the past, and we'll try to achieve that if possible.

And 1 more thing. I mean, in terms of future investment strategy, particularly, I mean, over the course of this year, I mean, Imran has highlighted, and you've also highlighted that in the near term, on the international side, it's clearly a strategy of looking for the right investments and maintaining a prudent risk profile. But in terms of domestic, how do you see that? Is it going to be initially more focused on treasuries and for now?

Yes, it actually looks like it. I mean, I think if you look at the past, like most banks actually feel more comfortable. Treasury is an investment in the last resort. We are not shut for business, we've been actually growing where we can. But obviously, our risk appetite considering what the market factors are and how things pan out, given particularly the COVID and as the results come out, we also see a lot of corporate showing a depressed sales as well. So all that will be taken into account as we expand our book and look for new names, which have to be -- meet our credit criteria and grade standard. So until that starts building up rapidly, or even not rapidly, even growing. The rest of the funds will be back to treasuries.

And lastly, on the deposit side. Domestically, the deposit mix has improved. The current account mix, in particular, has come up quite well in mid-quarter. Obviously, some of that would have probably been possibly or linked to the fact that we had a lockdown and more drawdowns. How much of this deposit base do you think is that has built up over the current account? Is that sustainable? Is there further room for improvement here that you can see coming through over the next 2 quarters?

Yes. So I think our deposits sort of because of our network, obviously, some deposits may be related to transactional deposits where customers deposit for the -- until they use the funds elsewhere. So that goes on everywhere. But by and large, our strategy for acquiring NTB customers and focusing on digital, migrating them from regular accounts and to digital transactions, incentivizing our branches to actually convert and do digital adoption, we see that when the customers are digitally enabled, when we see a lot more sort of loyalty with our customers. And less attrition. So all those factors are -- obviously, we consider in terms of incentivizing our RMs and our sales team to focus them on the kind of customers to acquire. So while we have sort of volatility in our deposits as well, but by and large, we believe that it's consistent. And particularly during the COVID period, we saw a little bit inflow of cash coming in and retention of our customers. So that way, the growth, actually 11% that we see is partly due with COVID as well because people's expenses actually were down too. And therefore, that also resulted in more disposable income coming back to the banks. So overall, positive from a deposit perspective. And going forward, we believe the momentum should continue.

Great. We have Mr. Shazad back on the line. Sir, can you hear us?

Yes. I can...

So we've got no more questions as we've reached the end of the call I would now pass on the call to you to -- for your concluding remarks for today's call.

No, thank you. Just wanted to say to all the investors for their interest in UBL and their support throughout this period. I can assure you that the team is working hard in ensuring that we take full advantage of the great platform that we have. I think something that we did not talk a lot on this call is about our people. I believe, that's a big strength for any financial services are its people. And I think what we have is a very solid group of people and early interactions with them has been good. So work with them, we are going to work with our management team and myself are fully committed in fully exploiting all the avenues and taking advantage of how we can most efficiently growth in more top line, while ensuring that we remain operationally efficient and have the total infatuation with our clients, so we can deliver solutions to them on a timely basis, both through our vast network that we have across Pakistan and international. Then obviously, through our digital solutions that we have. And while also being prudent with our asset portfolio and try to address some of the prevailing issues that we have specifically in our international markets, we are some -- some accounts and some economic challenges. So looking forward on our next discussion. And again, if there are any questions that you have for myself and our team, we stand available and to answer any and all questions that you have. Or any other comments or suggestions you may have, we can become [ if it's ] what we are doing, happy to listen. Thank you.

Thank you very much, Mr. Shazad, and Arif and Aameer, and Imran. Thank you so much for your time for the call today and the discussion on the results. With this, we will conclude today's call. I would like to wish UBL all the best for the remaining half of the year. And special thanks to Mr. Shazad for making himself available on the call today. We conclude the call now. Everybody, thank you everyone.

Thank you, Murad for hosting.

Thank you, Murad for hosting the call. Thank you.

All right. Thank you.

Good bye.

Good afternoon. Goodbye.

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.