United Bank Limited (UBL) Earnings Call Transcript & Summary

[Audio Gap] results Conference Call. My name is Murad Ansari from EFG Hermes, and I'm the host for this call today. We have the pleasure of having with us Mr. Shazad Dada, President and CEO, UBL; Mr. Aameer Karachiwalla, Group CFO, UBL; Mr. Arif Saifie, Financial Controller and Head of Investor Relations at UBL. We also have Mr. Imran Sarwar, Chief Risk Officer at UBL on the call with us. We'll start today's call with opening remarks from the CEO, Mr. Shazad Dada, on the performance of the bank during 2020, latest developments and future outlook of the bank and the sector. This will be followed by a presentation by Mr. Arif Saifie, Head of Investor Relations, discussing the financial results for the year ended 2020. At the end of the presentation, we will take questions for participants on the call. I would just like to remind that UBL's 2020 annual financial results and presentations are available on the Investor Relations section of UBL's website. Arif will also be using this presentation on the call today. With that, I ask Mr. Shazad Dada to take the call and share his thoughts on the performance of the bank during 2020.

Thank you, Murad, for the introduction. Hello, everybody, I'm delighted to be here to be speaking with all of you regarding our 2020 results and a bit about our future strategy and direction as well. First of all, a big thank you for all your support throughout the year in helping us and guiding us in order to deliver, once again, a very strong year. And more importantly, it's a year where we have really laid the foundation for 2021 and beyond. Before I talk a bit in detail about our franchise and strategy, let me just sort of give you an overall outlook on the Pakistan macro outlook while most of you don't need any outlook views, but I thought it would be -- it would put things in context. As we all know,2020 was a very challenging year,a destructive year, not just for Pakistan, but for the entire world. And I think Pakistan has come out of this very well. And this is also evident in the fact that our economy has been able to withstand the crisis quite well. The LSM growth industrial sector reflects a sharp recovery. And this was again something that people were doubting the middle of the year, whether this is going to be V-recovery, a U-recovery or a long drawn-out recovery. So far, that's a good sign. And with that, I think it gives a lot of confidence to the entire economy. And as you know, banks are the leading drivers of the economy, and we are feeling very comfortable. The external account position is also comfortable so far. Rates market is stable. And despite the challenges -- and this is again, been partially helped because of the COVID, because of the movements in the exports -- suppliers markets, as well as the fact that we had a very benign oil market, which again, is showing some sort of rebound, which in a way is not good for us. I think the medium-term progress of a reformed agenda will also be beneficial in the resolution of such [indiscernible], in particular is welcomed by the financial sector. Also, the tax reform, albeit slow, but actually heading in the right direction. UBL has also been a participant in several of the Government of Pakistan, State Bank of Pakistan [indiscernible]. And most recently, we will recognize this as the #1 bank in terms of number of accounts. And obviously, with our franchise and our network, we hope to continue and maintain that position, and bring in many more hard currency into the country. The Naya Pakistan Housing Scheme led by the Prime Minister's initiative, is also showing good progress. However, on the ground momentum is early days and I think there's a lot of work being done at the State Bank and at [ CASA ]. And I think with the banks part of it, I think -- I hope that in the coming years, that should also help. Looking ahead, I think from an increasing impact, again, different people have different views. But given the inflationary impact on utility and adjustments, we see rates stepping up around 100 to 150 basis points. But frankly, nobody knows the answer, it will be dependent on how the inflation is tracking and based on that. On the currency, I think 2021 remittance numbers, so far for the fiscal year, have been showing good progress. We are clocking in around PKR 2.2 billion. While -- but having said that, clearly, with the opening up of the economies and borders, we expect some of that also, especially with the imports. I think that will put some flesh on us. And that is something we are watching very closely. Lastly, I think the RDA momentum development in Naya Pakistan, hopefully play a very critical role in helping the economy head in the right direction. The good news is LSM growth has been in double digits, which is a very promising sign. And it can be -- most of the customers we talk to are showing a lot of promise and a lot of hope. And we're seeing that in their numbers and results as most of you have seen. So that's the macro outlook. Happy to take any questions at the end of the call, and discuss in detail of the basis of our assumptions. Now going a bit into our UBL and our franchise, let's take it piecemeal. Let's first look at our liability franchise and how we are tracking vis-à-vis relative market players and also [indiscernible]. Along with that, we have been able to show a lot of resilience and able to really grow our customer base because at the end of the day, we are a customer-centric organization. And we also realize that in order to make sure that we have the momentum, we need to offer nothing but the best customer service. But I think we've been recognized in multiple occasions for that. Our customer base is growing today at have realized about 10 million customers, all channels, the branch network and sales force is improving the service quality of promise. I shared with you when we did our review midyear that, that's an area where we think we can do better, and me and my management team are firm believers, if you offer the best service, business will come to you. And clearly, there are areas of improvement and we are working on, whether it's network upgradation, whether it's network positioning, and that sort of approach into the flagship branches across our network where we are making sure that we are properly staffed, we have proper technology solutions, we have proper product expertise and proper positioning in the marketplace or location wise. And for that if we have to do a network optimization, relocation, we are also embarking on that in fact that whole strategy is well in play. And also trying to make sure that urban approach, mix, is the right one, and we are also capturing the new emerging areas, the new emerging cities to take full advantage of it. I think the good news for UBL is we are across the entire country. And I think that puts us in a very good pole position to really capture the growth, especially in the agri economy that is seen because of higher commodity prices. Our focus is, like I said, very much on branch service levels. We have put in KPIs and metrics where we are getting much more vantage to that. And I'm hopeful that with that, we see good progress. Our financial inclusion remains close to our heart, and we have, again, with our presence across Pakistan and with product suites from SME, agri and corporate, we can really link up everything quite well. At the same time, if you look at our market share, it's been established. Deposit market share has been maintained around 8.1%. Average deposit growth for the year 2020 was a circa 15%, clocking in at [ PKR 1.4 trillion ]. And last year, Islamic banking showed a lot of momentum. We now have over -- we have 100 branches. And we have seen 37% growth in the Islamic deposit market, and advances are also growing over 2x. So again, that's a promising area for us, and we are continuing to invest in that. So a very solid liability franchise, well positioned, making the necessary investments, whether it's in human capital, whether it's in technology or whether it's in products and solutions, and it's going well. And if you look at it quarter-to-quarter occasion, a lot of good momentum. Hence, I said, we are looking at making some good foundations, really excited about 2021. Advances is -- if you look at our advances, I think it's a lower domestic APR. But -- and that is, I think, is probably of all large banks. We are trying to, obviously, find proper profitable deployment opportunities with acceptable counterparties. Some of that was sort of tempered because of the demand in the first half, wasn't there. But what we are seeing is confidence in refining and we're seeing demand coming in. And we definitely want to gain an important growth. Focus is mainly on the public sector. Advances have grown nicely. Domestic advanced book has also -- if you look at it, has gone down by [ 15% ] over '19 -- December '19. And this is not by any measures our pulling back, but instead giving the right opportunities in the marketplace where we can make acceptable returns, and at the same time, ensure that we do not enter into any provisioning issue. We are obviously witnessing a lot of trade, and you will see the bank playing an important role on that. Whether it's trade or in different sectors. But the whole idea is that we want to focus on the growing export trade business on the backs of a very small relationship with some of the largest exporters in the country and also [ employ ] I think there will be more opportunities with volume. Cash management, which plays an important role as a cost debt is a business that we have we been really focusing on, longer trade volumes, profits towards our banking channels have been over PKR 3 trillion, and we are focusing on an impressive first sale with NFI income, both in our retail business and in our corporate business going to play an important role. This is further augmented by our investment banking franchise, which really has been recognized in multiple locations. And again, whether it's GOP infrastructure project financing or synergizing with our international effort, and especially now with renewed interest in Pakistan, we can also play a very important-- a player role in driving international entities as they look to Pakistan and providing the locals knowhow -- either directly involved through partners. More to come on this. Lastly, on the asset side, we mentioned to you, [indiscernible] wholesale's part of our strategy on international. And feedback we got from most of you is we want to make sure that we are making the right calls in international. We've had some bad run-ins. We have been derisking very carefully our international. We have also been making sure we're taking the right level of provisioning. I think that you can see that momentum is in the right direction, and I think we will see more of that. So just leading into that, our international business, balance sheet compression has happened. We've worked on a couple of facts. One, we are clearly trying to ensure that our international businesses are self-sustained. We are making sure that whatever deal is coming through is happening. We are also making sure wherever the book requires the relevant provisioning. But the good news is, some of the markets where we are in, are showing a rebound, partly because of oil prices, partly because of the vaccine. And I think that should bode well for us. But early days, we'll follow that out. So there are more to come on that. We have reduced our book to around $600 million, down almost 30%, to be exact 38%. But again, this was a strategic decision, and we have excluded quite well, if I may say so myself. Optimizing our international RWAs will reduce by almost $400 million since December '19. There has been a lot of proactive NPL management and pressure recovery that we have been to point. We're obviously, in some markets, subject to the deferred recovery, obviously it's by the Central Bank, similar to Pakistan. So we'll see how that comes out and all those markets have opened up. But we have been also investing in vigilance -- strong vigilance, both on the compliance side and at the risk side, while investing in digital, and I'll talk about that in a minute. And looking over also some of our markets where we have not been able to justify or get the relevant returns from an ROE picture. So we will keep you posted on that. But clearly, I think the international business is a focus to us we are working. On the digital bank side and the digital transformation, I can you tell that we are very proud of where we have so far landed and where we are going. It's very much part of our transform UBL into the bank of the future. For that, we have been recognized by many stakeholders, whether it's Asiamoney, whether it's iBB as we're hitting the best bank award. We've been launching some of the -- sort of groundbreaking products and solutions, to name a few. We have just aggressively been promoting some of them. And digital onboarding in all branches in banking outlets is happening in migration traffic from branches to self-service channel. The whole idea there is because the cost to serve is much cheaper. And most importantly, our customers are demanding, they want service. And they want banking products, any time, any place in where we are really trying to cater to that need. Recently we launched Tap & Pay. Your phone becomes a debit card, and we have seen amazing reception on that. [ Vibing ] has spoke from digital payments. We are aggressively promoting e-wallet, and obviously trying to fastest growing up right now with over 1.5 [ million ] logistic users. Last thing, we're also optimizing United look, our omni network is developing a sustainable business model, more to come on that. So I think the digital story is an important one, and you will see us stepping -- keep on stepping forward in that and leading the way. RDA is another good example where I think the bank really outweighed its competition on that. On the treasury side, I know there will be questions. So Arif will talk about it. Again there, we have been very-- we recognize the interest rate markets. We have been trying to monitor those and take the right course. And I think the early results of that have been good, and we'll continue to monitor that, especially with the rates outlook that I shared with you. And generally, in some cases, we have a catch-up to do. But in other cases -- and we'll work on that to make sure that we are very well poised to take full advantage during the trade cycles. Lastly, 2 points more on the awards and recognition, I touched upon it. We were fortunate to have won the Bank of the Year for Pakistan by the Bankers Award, a very prestigious award, which is The Banker, which is in an affiliate of The Financial Times. And Best Digital Bank by Asiamoney, an associate of Euromoney. And most of all, we were also recognized by a [ booking outlet ], Pakistan Banking awards is the prestigious of that. And I think that just sums up the focus we have and the strategy that we are focusing on. Lastly, I think you have already seen in the dividend announcement and the earning performance, but I can tell you from a capital requirement point, we are in a very profitable position. We have been able to get an optimal level around 24.5% by end year, at the bottom of 11.9% over the regulatory requirement. So we will be well poised to take advantage of opportunities as they come. The ratio is still sitting at 17%, dividend payouts have shown a healthy 17%, one of the highest in the industries in the last few years. And our ROEs hovering around 14% and targeting to take it up to a much higher value in the years to come. And I think optimal capital levels are being maintained as part of that. So with that, I would just say, once again, a big thank you for all your support, and happy to take questions at the end. But now I will hand over to Arif for a more detailed presentation on numbers.

Thank you so much. Let me just run through some of the numbers from the presentation. Murad, if I request you to just go to Slide 4, where I'll just take a look at the market overall. This is more so for the international investors as well. So there's been a strong growth in the pipeline domestic market in terms of deposits, 22% growth. A little aberration towards here at UBL has grown by 17% this year at a period-end level. Currency and circulation remains high. Product that is, again, essentially an opportunity to bring that back -- cash back into the system through our 1,400 branches. In terms of the inflation, our inflation is of course lower in recent times and has looking to be monetary easing. But since the last quarter, we do see this inching back up by 40 basis points or so, which, of course, will impact the overall earnings profile of the bank in 2021. The key numbers we've already discussed. I'd just like to highlight the fact that despite the COVID situation, the domestic bank has earned PKR 44 billion in PBT, which is a growth of 26% in 2020. We can just move on to the next slide. This is a snapshot of the balance sheet. Overall, the balance sheet has grown by 8%. Of course, our strategy remains centric in our deposits and current accounts. So this year, we've had our highest average domestic deposit growth of about [ PKR 167 billion ] versus 13% growth in the portfolio. We maintained a very strong contract over the quarter, it's around about 42%, which we hope to increase further in coming years, while the CASA ratio grew at 85.4% during 2020. Overall, the cost and deposits has come down 4.5% for the full year, but down to 3.5% in the last quarter with a cost opportunity for further reduction next year as we build on current accounts. In terms of advances, we'll discuss the fact that the book has [indiscernible] to some extent, but we remain or maintain the asset quality at around 6%, and we have not taken very significant provisions in the domestic [indiscernible] which is an encouraging sign from the quality side of the group. International, I think we mentioned that we reduced the book, and we also reduced RWAs by over PKR 461 million in this year alone, hence, very strong card position for the bank. And we support [indiscernible] design and it's under the biggest impact of that. Lastly, on the investment portfolio, we have a significantly higher fixed income book, 1/3 of the portfolio at the start of the year, and that really gave us a strong NIM during the second and the third quarters as well. So our PI portfolio is yielding 9.6%, while our total book, which also had maturity in August, also gave back a very strong yield pickup, yielding 7.6% towards the end of the year, again, higher than the average PE portfolio of 7.1% And that, of course, is 55 basis points yield pickup which will continue. Lastly, of course the [ TV ] portfolio, 345 million, [indiscernible] hence, reasonable diversification within the book for UBL, and we hope that, that will support us going forward in 2021 with the maturities that we have and the auction [indiscernible]. In terms of revenue, Murad, we can go to the next slide. Murad, we can just shift to the next slide. Okay. So the domestic net interest income for the bank, which is 73% of the bank's revenue is up 27%, which has been a very strong performance. Of course, supported by deposits [indiscernible] by an active trading strategy. NIMs have been very strong at 4.7% and with a -- or, let's say, with the expansion or a rate reversal that can only go up further because of the very strong current accounts that we have. These are down 20% year-on-year, but they are picking up quite well in Q4. In fact, all of our fee-based revenue lines are now close to pre-COVID levels towards the end of 2020. Apart from that, our FX income around PKR 3.7 billion, which is also one of the highest within the Pakistan market. And last year, we had strong dividends of PKR 1.3 billion, which are up 17% and ably supported by our subsidiaries locally and [indiscernible]. Administrative expenses, we've reduced our cost-to-income ratio from 47% to 42% despite almost 600 basis point reduction in interest rate. This is something-- an area where we feel that there is still more synergies that we can deliver in operational efficiencies. But the cost base has remained flat this year which is PKR 40 billion. In terms of provisions, the largest component of [ first ] having the international book, which is approximately PKR 14.9 billion. And this includes the IFRS 9 general provision about PKR 3.6 billion. The important thing on the coverage is that we have with FSV close to a 95.5% coverage and without FSV also discovery, is close to 86% which is the highest that we've had in the last many years. Our domestic CASA was PKR 1.9 billion, actually lower than the PKR 2.2 billion charge that we had in 2019]. And again, as I mentioned earlier, domestic asset quality has moved to 5.3% to 6.3%. So this sort of sums up the overall performance for the bank at PKR 17 per share of earnings. I hope this has been useful for all participants, just as a warm up for us to take a few more questions. So with that, I'd like to hand the call back to Murad, and we can start with the formal Q&A where we have [ Aameer ], our CFO; and Shazad Dada, CEO, and also Mr. Imran Sarwar, to take your question. Thank you.

[Operator Instructions] We have our first question from Sohail Tai.

My first question is regarding your international provision. Now it's gone up about more than 2x year-on-year, and it has been a COVID year. So any guidance if you can provide for 2021? And related to this, your domestic book, you haven't taken any general provisions unlike some of your peers. So this clearly shows your confidence in the quality of this book. So if you could talk a little bit about this and any guidance you can provide on that front as well, please?

Aameer?

If you take that internationally -- so asset provision basically this year, we've taken -- and we mentioned last time in the previous earnings call as well that we had a couple of named international [ UAEs ] as a fraud case that industry -- value industry. So that's part of the PKR 46 million was taken on that account. And then there was another IFRS 9 charge at the end of the day. So that accounted for about 70%, 80% of the charge we take it from that. So that's [indiscernible]. Right now, our coverage is well over 87%. So unless some more names or the economy going to first and where we are today, we don't expect a major charge to be taken in [ last ]. Obviously, it all depends on how the economy fairs. But our management of the cash on books is very close, we'll be monitoring it, and we are watching, and we're careful about who we lend to as well. So hence, we are not in an expansion there, therefore, again whatever loans and advances we have. On domestic, we've not taken our general provision by design because our expectation was IFRS 9 will come in. It's already been implemented -- not implemented but the State Bank policy circular is valid. However, they've not given guidelines how and when they plan to implement it. So as a result of that, we've taken our look at our balance sheet. Overall, we looked at the IFRS performance and the way the workings are coming up, our expectation of expected credit loss based on IFRS 9 is around PKR 3 billion, PKR 4 billion. So it's well within our parameters and acceptable [ 5 years ]. We don't see any major deterioration coming up as a result of the performance we may have given you about our portfolio. So based on that, there wasn't a need to take any decision

If I can just jump in on the international. Look, it's a fluid situation. We have -- and have also like [indiscernible]. We have a portfolio, which really, I think, because of this central time COVID programs and [indiscernible], while we have been very actively monitoring and doing the necessary things with the portfolio. It's a bit early to call out whether all is behind us. I think the economy [indiscernible]. So we have been monitoring that. But I can assure you that the management team, both here and international, are very focused on it. It's one of our key focus areas, and we hope that with the passage of time and with some external positive, it will help us navigate through this. But it's early to tell whether it's [ organic ]. Imran, do you want to add something?

I just want to add what you and Aameer have been saying. I mean we've been giving guidance that it is our desired intention to keep -- to continue to keep up -- keep building the provision levels and also the coverage levels. So last year, you probably saw -- you saw a very high number of provisions that went into international. And it was partly because our NPL book is going through its own cycle. And also because we have the intention of improving the coverage. I can, however, tell you that we are cautiously optimistic about this particular aspect on the international. And we feel that if situation continues the way it is, macro situation, then this is probably the peak of provisions we have seen in our international business.

My second question is again related to your international book. On a pretax level, you lost about PKR 10 billion. In your past call, you've highlighted that you want to -- this to be a value proposition going forward, like it has been historically for you. You've even shared some ROA and ROE targets. When do you expect -- when should we expect to see some of those targets coming through?

Well, Sohail, I'll also give you a high-level view on this. Look, it's an important area. There are certain markets where, clearly, we feel that those targets will be very difficult to achieve. So we are looking at strategic alternatives around those. In certain markets, it's a business model thing and also sort of derisking while also downsizing internship on the liability side because cost of capital has to be managed. So my simple answer to you would be, we are hopeful that what happens in 2021 will be critical. If we can see some of the macro stabilizing. I think we will be in a good position in the next 1 or 2 years. And we ultimately deploy our business and we deliver in the right space. But it won't be -- will be in all those markets in the same manner that we have today. So obviously.

We have our next question from Syed Fawad Basir.

Sir, my question is pertaining to your loan book, not the international loan book. And I think you provide plenty of clarity on that front and your strategy on it going forward. On the local front, some of the peer banks are targeting about 14% to 16% of loan growth next year. Do you feel the same? And we've also seen in the fourth quarter an uptick in the loan books of some of the peer banks. We haven't seen that for UBL right now. But do you expect that going forward? And again, relating to this, your deposit growth target for next year, if you could?

You want to jump in, then Imran can also come in.

Yes. I think historically, UBL has been there in terms of lending costs and major public sector projects. And we will have that participation in 2021 as well. I think it's always very difficult to give you a specific guidance number, but I think a minimum of 6% to 8% loan growth is definitely happening. And obviously, there is financing within the [ turf ] as well where we will participate in the [indiscernible ] and also on the project finance space. And apart from that, of course, as the trade is due to pick up, we will also encourage our customers to grow on those lines where we have got quality credits. So you can -- rest assured that we will definitely expand the loan book. But like we mentioned earlier, we will maintain the quality of the portfolio.

Imran, do you want to add something?

See the thing is, 2020, we were cautious. We held back our loan book across all segments. I'm talking about domestic. But as we speak right now, we are practically open for business in any segment, except that we are now focusing a lot more on the risk and reward equation. We are looking at how the returns pan out, and not just growing the book for the sake of growing the book. But you will see that our profit book, in particular, will be growing perhaps in the early double digits as we move along. We've lost some assets during last year but there is no dramatic loss there. That was primarily driven by risk and reward equation, where we felt that transactions did not make sense, we did not participate in those. And primarily, these are commodity transactions where some competitor banks chose to offer rock bottom prices, which we did not.

Yes. And I'll just to wrap this up, look, I think that I've been saying this on this platform and previous platforms if you've been following me. I think we are as -- sometimes as a banking community, we are not pricing for -- pricing for liquidity. And I think it's very important that discipline should be there across the banks. And I think we are really going to be adhering to that. And as an investor, we should support that because it's -- as Imran said, it's not growing for the sake of going up. Plus, there are some very exciting things happening at the State Bank front on some of these under-penetrated areas, namely SME, agri. And we are again, well positioned because of our presence and because of our legacy and history -- positive history in some cases and then the housing sector. Like I said, that will also be sort of -- it's a delayed reaction because these units will take a couple of years to come, but I think that will also open up, especially now that the legal impediments to a large degree have been preserved. So next few years should be interesting from a bank's perspective on the asset side. But we will remain risk prudent.

We'll take our next question from Ameet Doulat.

First of all, congratulations on a good set of results. My first question is, of course, like everyone on the NPL side. So I just have a question on the domestic side that many of your peer banks, and even some smaller banks as well, have taken a loan loss, NPL and provisioning as well, on the oil and gas sector. And we all know the name of the company as well. But I couldn't see any provisioning from-- or NPL in the oil and gas sector for UBL in the sectoral advances and NPL breakup. So would it be fair to assume that UBL didn't lend to that player? Or is it something that you are still hopeful on that player so that's why you haven't recorded any NPL on that?

Can I take this? It's a -- thank you for this question. It actually gives us an opportunity to pat ourselves on the back. We actually had quite a significant exposure on this name. Going back about 2 years, we started derisking this. And we brought down our exposure from the peak by -- to about 1/3 of the peak. At that level, obviously, we got caught, just like the rest of the market. And we have taken a part provision of that name. But the number probably is not large enough for it to show up so that -- if you compare it to other competitor banks, we are significantly higher. We are actually in 6 figures. So we have taken the provision for the name that you're referring to, but the overall number may not be as large for it to stand out.

Understood. Excellent. My second question is again on the coverage bit of -- the NPL bit. So I still see that there's -- in terms of your NPL and your provisioning there is still around PKR 12 billion of gap. And of course, like you mentioned in our Director's report that the FSV benefit, if you include that, the coverage is around 95% of international book. So in the upcoming years, let's say, in this year and in the next year as well, should we expect this $12 billion of difference to converge with the slow and gradual provisioning? Or how would that work? If you could provide some clarity on that.

I think...

I will -- let me -- Arif, let me take this one. So I would divide that domestic and international. In domestic book, we are very clear. I mean, it's fine. In the international book, yes, we've had a difference between our provision and the NPL number. And for the last 3 years, we've been giving you this guidance. Our intention is to make it close to 100 as possible. We are taking advantage of about 4 or 5 borrowers where we think we have very, very good assets, and we take advantage of their FSVs. But to answer your question, we are slowly moving towards taking their advantage away, and you will see a significant number this year going away.

And if I may just add to that, Ameet, to your question. So some of the collateral, it also includes some cash collateral as well on the borrower. And the other thing is that -- so we've got close to $350 million NPL across GCC, $250 million [indiscernible] alone. And some of the changes at the bank is meaning there's a much more active [indiscernible] provision controlled by the head office. So like Imran mentioned, yes, there will be pressure to sort of unwind some of this cash benefit, not only it will be a voluntary unwind, it will also have an equal push to foreclosure and recover that back into cash. But with the restructuring of SAM, we do believe that there are some several cash positive deals, but there are some opportunities for reversal in these large provisions that we've taken in earlier years. And we will push for those while we will build coverage as absolutely necessary. So I think the entire [ PKR 12 billion ] number will probably not fall into the P&L. And I hope that sounds a little bit better. But the objective is to make sure we can ramp up our SAM units in the UAEs and do our best in terms of recoveries. We did not have this opportunity in the last couple of years, of course, not with COVID. But with a little bit of an improvement, as Shazad mentioned at the start of the call, that opportunity is there and we have to deliver on it. So I think that would be the general [ steps ] that we would like to give you with on [ the gain ].

Great. Last question on the loan front is that I can see in an exposure perspective that around -- out of [ PKR 610 billion ] of total loans, there's [ PKR 155 billion ] in the production and transmission of energy. And I'm assuming majority would be the power sector. Now considering what's happening on the circular debt front and on the payments, I just wanted to get a sense of how are banks looking at it with -- because some banks have debt exposure, some banks have a debt and equity exposure as well. So how should we look at it going forward? And how will this pan out in terms of the power sector and UBL's exposure on the power sector?

Look, I think -- I'll take a stab and then anybody else [indiscernible]. Look, I think what's happening in this whole reorganization or restructuring, I think it bodes well, right? Because one of the biggest impediments or hurdles for the economy has been circular debt. And I think a favorable resolution of that will unlock a lot of liquidity and will also give a lot of prospective view or positive views because we expect that effectively other than what banks have already done has been sort of closed out. So I look at it in a very positive sense, but there will be deleveraging happening at the power sector companies. There will be, depending on -- we have all heard about the mix they're getting, we have all heard about the terms. But as they say, we are waiting to see it in black and white. And then what these companies will do? And what will they do with this, the paper that they have when they come to the banks with discounting, that could be a business opportunity for the banks. There could also be a question about would they use this liquidity to do further expansion overall supply demand, where will they be going into other segments within the power sectors? So I look at this as unlocking an area that has pretty much been untouchable for the last few years because of uncertainty. And I think what market and what banks like is certainty and knowing what they're getting into. So overall, I think it will be good for, not just UBL, but for all the banks. And obviously, we have a large-- as you pointed out, we have over 25% exposure in this segment. But more to come on that, details will be very important. But so far, we see good [ rates ].

We've got a few questions on the window. I think one of the questions that's pretty common across some is a view on interest rates, and where do you see them heading? And what -- any expectations on when this cycle will start rising? Is it second half? Is it second quarter? So if you could comment on that.

So let me, first of all, to all the people who are asking if anyone of us across the call, knew the answer, we would not be sitting on a Friday 4'o clock time frame. We will be setting some very nice -- some beach resort, sipping whatever you choose to sip. For some of us, coffee, and for some of us, something else. So nobody knows the answer. But look, we can take a calculated guess. I think inflation will drive this thing. I think there's been some good guidance by the State Bank. We will -- also will have to be following some of the key metrics expected inflation. And obviously, the program itself that is restarted. So we have, as I said in my comments, we are looking at somewhere around 100 to 150 basis points in the second half time frame, but it could very well be less than that, only because I think it will be driven by what happens on the inflationary gains. Numbers came down, which was expected. But now they expect it to again go back up. And clearly, I think before one wants to be able to take a call, I strongly urge to see the monitory policy statement that came out of the last MPS meeting and the governance [ promised all that ].

Again on -- related to that outlook, how do you see NIMs evolving during 2021? Do you see further compression in first quarter? Or have the asset booked largely repriced?

Yes?

So basically, on our book, last quarter was where the entire asset advances focus [ would be ] priced. So we're now looking at very steady NIMs going forward. We actually have NIM of 5%, overall. And we expect that to continue until the rates are moving north, I guess, from where we are right now. So the -- our expectation is that the spread that we're currently enjoying, obviously, last year, 2020 was a good year because the best spreads were enjoyed in the second quarter when the cost of deposits went down, but the pricing -- the lag pricing [indiscernible] kicked in. And so the second quarter and the third quarter of the year, good quarters. I believe 5% is something that or thereabouts is what we'll enjoy for the next couple of quarters.

So related to that, on the investment book, there are a couple of questions on the yield of the -- on the fixed PIB book average yield and duration profile? And if you see any sizable maturities coming through in 2021?

So basically, our fixed PIB was 1/3 of our total investment book or slightly less, and it's at 9.5% right now. So basically, we did sell off some of our low-yielding bonds into last year, and that's why some of the gains that we made on equities and/or the bond trading is eroded to that loss. But [indiscernible]up last quarter. And as a result, now we see a [ 9.5% ], this will mature- [ PKR 70 billion ], [ PKR 80 billion] will mature next year. But the duration is very short now, as [indiscernible] duration, or less than that. So we will wait for the news to start picking up when we start building up our fixed PIB book again. But we are quite satisfied with our [indiscernible] and we disclose that in our accounts as well, the total PIBs are yielding about [indiscernible], like Arif mentioned, [indiscernible] and then that will be growing for a while.

There's another specific question on the investment book, which [ Muhammad Ahmad ] is asking, how much return is the bank yielding on the [indiscernible] pool?

On the [indiscernible] pool?

I don't know, it's...

So on the returns, the [ one ] on the Islamic is generally 25 basis points below the benchmark [ TV ] rate. So that is where it hovers. Of course, the advantage of building Islamic assets, we are all very much aware of because there's no set in stone as such. So the returns could be a little bit lower, but obviously, I still think that, looking at our portfolio right now, I don't think we really got into the Islamic business according to the real size potential that we have. And then when we have major positions, then we can analyze investment Islamic asset to the bank a little bit better.

So to add to your question, the [indiscernible] talking about, we don't have any liquidity or deposits on the Islamic side which will not be adequately deployed. We've had a very successful sort of collaboration with our corporate, where we deploy to corporate as well as Islamic, it's own sort of structured Islamic rate. And that has payed very well, so served us very well over the last year, year and a half. And I think we're not having any unutilized [indiscernible] right now.

There's a question around the IFRS. Obviously, there's the time line that's still to be clarified on implementation by the Central Bank. So if you have any thoughts around that, you can share in? On the international business, there's a question, again, on IFRS 9, that you've taken a charge of [ PKR 3.6 billion ] on the international book. Is that something of a recurring charge to expect?

So what happened -- let me take the international part first. So usually when the COVID happened, the Central Bank -- the [indiscernible] Central Bank actually allowed banks to -- not to reflect the current economic indicators in the IFRS 9 model and calculation. As a result, no charge was taken to the second and third quarter. We maintained it flat, as is. They didn't want to shock the banking sector with a negative growth rate that is projected by a higher net [indiscernible]. So that was, of course, what happened in the second and third quarter. The fourth quarter, they reversed that decision and they said apply the current economic indicators, which actually did show a downturn, about minus 2%, 3%. And as a result, the IFRS 9 charge, because of that, increased substantially. We took something like [indiscernible] in overall in between [indiscernible]. These are 3 major franchises that we have. But that's what [indiscernible]. That, in my view, will probably -- some may be reversed because now with the oil price going up. So it's all a function of the economic growth rates that they project and get built into the -- what it's called, the [ LIC ] model, the loan model that generates the IFRS side. It's sort of a black box really because of everybody has been deploying that model and that program. There's lot of assumptions we put in, the assumptions that we control are the best case, worst case and some scenarios in there. And based on all of these factors, it generates the exponential loss for the portfolio. So we see that the worst is over right now, which is the Middle East and East countries where we think it will be all right. I believe that, that kind of a charge is unlikely going forward.

Shazad, I would have taken the opportunity of asking one question for me. So when we first had you on the call, you started off by identifying some key priority areas for -- that you thought were imperative for the banks, in terms of your strategy. So one was that you really wanted to strengthen the liability franchise that the bank has. You saw a lot of opportunity over there to build that out further. So a question on that was that-- and you were talking about branch sheet modeling at a more attractive offering to customers. Are we looking at-- is branch expansion something that you still see is something that is something that you're looking at? I would believe that the digital push is obviously going to be much stronger, but how do you see the branch strategy for the business? And secondly, one thing that you also highlighted in your first call was the Islamic banking business where you saw there was huge opportunity for UBL. So maybe if you could comment some bit on that as to how you see that evolving?

Yes. Thank you, Murad. Let me just -- I'll answer your question. But as I said in the first call that we were sort of evaluating all the various assets of the business and really doing a deep dive in terms of the -- what -- where we are strong at, what we want to do. And I just wondered if I could just take a step back and sort of tell you, where we have landed as a bank. And I was going to use this in my concluding remarks. But for us, 3 key pillars for us. First of all, customers are at the center of everything. This is something I'm sure in many calls our investors here. But here, we mainly are giving that at the core of everything. A very customer-centric organization, the cross-cutting theme is going to be digital, not just digital to our customers digital internally and how can we optimize and use technology. Because clearly, what we are seeing in some of more developed markets, that's becoming a very important element. But 3 key pillars of our strategy are, first is people [indiscernible] any financial services company, that's -- so moving towards technology, it's the people, people and people. And I think we really need to continue to invest in that. We will need to continue to create a culture that's collaborative, and we really need to make a place that is the best place to work. And for that we are doing a lot of investment, a lot of retooling, product retraining, transforming their mindset and the [indiscernible] more about. It's hard to quantify that, but I think you will see it in the results, and you will see a customer centric organization. So I'm very passionate about that, and so is my management team, and that's been the core of what we're doing. The second thing, I touched upon it and it sort of relates to your network, but is operational efficiency and good growth. It's important we have very strong good growth and we have operational efficiencies. We do not-- and we use technology as a [ trend ] to really deliver the organization and find opportunities where we can find cost optimization and make our things simpler, better, faster. Something that we have been talking about internally for us, it's very important. And I think we have found some very good examples of it. Perhaps in my next call, I can probably share with you how we have used technology, how we have used our processes [indiscernible] engineering and how we are using that to really make this organization more efficient on all of those fronts. And lastly, I think that's something that, as an investor, I'm sure you want-- would like to see. But for us, it's a performance culture, right? We need to become a performance-driven organization to excel at whatever we do. While we are a large, large bank, and we would like to excel in everything we do and try to do everything that can be offered. But there may be certain things that we are not good at, or we are maybe a bit too late and the market cannot [indiscernible] and cannot come in, and it's going to be too prohibitive. And that's the global model that can't be all things to one people. But there are ways to play the markets where you see a outcome, and we are going to be really pushing ourselves internally and ultimately, to all of you by showing how is our relative performance. And I can again see the good seeds have been sown for that, whether it's through our own measurements and then external measures. So those are the 3 things that within those 3 pillars are 5 focus areas. The first one is exactly what you ask. It's our network. Bring our liability back. We have a large liability base, as I said, [ PKR 1.4 trillion ] and we'll continue to invest in our infrastructure, the brick-and-mortar, but we complement that with a very sophisticated state-of-the-art digital platform and app, so that we can really complement that. So we can really offer a hybrid model where we have people who would like to go to a branch. They can go to a branch they can feel comfortable, if you get the right level of service. But if they choose to do banking, while they are sitting at home at 3 o'clock in the night, they have a state-of-the-art app that can really deliver most of the things, it's not everything, that they choose to have. And we are also very much focusing on very data-driven organization. We are using a large database, the big data that we have on our customers are really working towards them, especially our most valuable customers that we have identified, and we are going to make sure that they get a lot of care, and a lot of love. While we are doing that, we're also going to -- so it's going to continue to remain-- it's going to continue to remain an important part of our core strategy. And we will-- we're not shying. We'll definitely grow our network where we see opportunities. We have the votes of confidence and support on that. So if we see new emerging areas in emerging cities, we will go there, and we'll invest in it because that model pays. But we'll obviously find the branches where we can see profitability in a limited time period that we identify. We cannot have branches that don't remain profitable for 5-plus years. I think that's not going to pay the relevant ROE and ROA that we would like to achieve. So branch profitability with gross synergies will be there. And if we see branches that are not delivering, despite putting in the right resources and putting in the right people, we will not be shy on closing those branches. In fact, we have identified several of those, and we are relocating or closing them. But again, making sure that we take those resources and redeploy them into areas and into markets where we can do better. But they're both, like I said, it's a hybrid strategy. It's not one or the other. Luckily we are fortunate enough, we are big enough, and we have a head start, and we can do both and do it smart. But overall global trends are in front of everybody so we also are cognizant of that. And having seen that in some of the international markets, I am talking personally, we will be-- not be-- we will not ignore them at all. So that creates to the whole digital strategy that-- so I think that's a big focus area. The other is-- obviously, for us is NFI. I think you've heard some of that. And in that lies Islamic banking. Islamic Banking, obviously, the 500 branches. But effectively, what I want to think about is the leveraged model, both of our corporate and our branch banking and digital. It's an offering, it's a mini [ option ], where if some or many of customers choose to go for Islamic Banking, we should be able to deliver that as part and parcel of our offering between Shariah compliance and non-Shariah compliance. So that's an important area. I mean, it's no secret that Islamic banking growth, in terms of deposit growth has outpaced a non-Shariah growth, and we are no exception to that, that we are investing in it, both at the branch level and at the head office level, we'll continue to do that. Luckily, we don't have an asset liability mismatch like some other banks. So that's going to be important. I can go on, but I think that's [indiscernible].

We'll take one question on the line, which is from Farhan Rizvi.

Congratulations on the results. I had just one question, sort of on the international business. Clearly, you've been deleveraging. There has been a focus. I would probably like to know a little more, if you could articulate your strategy on the international business. This is an area where I'm sure Arif and Ameer will tell you, is something that investors have continuously been mentioning, how is your value position in those markets? And how can you compete with sizable other players. So maybe if you could articulate a little bit in terms of your strategy now you're into [indiscernible] for a while? And how do you see the business evolving in the next 3 to 5 years?

Farhan, this is -- thank you very much. Look, first of all, I just wanted to confirm that for us, our presence in some of these key international markets, is a big asset that we want to continue to leverage and benefit from. But I would be -- if I look back, we clearly, in some markets play from an asset deployment point of view, we made some [ bad growth ] which have hurt us and hurt the investors. And we are doing everything now to make sure the lessons learned from that are not repeated. And we're also making sure that we take full advantage of the real synergies that we can offer between our home market and our international markets. And therefore, we have done a deep dive on the markets we are in. Obviously, in the past, we have exited from some of them, namely USA and [indiscernible]. But we also are right now looking actively and doing a similar exercise with some of the other markets. As and when we have something material to share with you, we will share with you. And in some of the other markets, we definitely want to capitalize. RDA is a very good example. I think the fact that we have a presence in some of these important remittance markets we can leverage RDA by bringing in resources and really add value to our overall franchise here to drive things for Government of Pakistan and State Bank of Pakistan. And along the way, help us build new customers who we can cross-sell opportunities in Pakistan, such as consumer products and many others. Similarly, we can always -- we want to pay from the [indiscernible]. We understand Pakistan is better than most banks in the region because we are at Pakistani level. So I think there is a lot of [indiscernible] opportunities where we can take an important role. The corridor strategy that I talked to you about, where clearly Pakistani does work [indiscernible] whether inwards or outwards. I think with the FX regime opening up 5 State Banks, a lot of Pakistani companies will be going into some of these markets that we are present to. We can help them, we can navigate them. But at the same time, we also have to be very cognizant of the fact that we cannot compete with the high-speed banks there in some of those markets that investment in technology, the investment in compliance, is far outweighed the returns that we can hit. So where we maybe cannot offer certain things, we'll not be shy of saying, this is not an area that we want to be in. And accordingly, will man up teams and our exposure based on that. So it's, again, a very niche strategy in those markets, but one that's profitable, and that plays to the overall synergy of the mother ship, which is obviously looking at Pakistan. So I'm pretty excited about some of the markets we are in. And hopefully, over the years to come, we will be able to knit it much more tightly and be able to take advantage. And while that's happening, also some of the economic downturns that some of these markets have faced, we will be benefiting. So I think at this point, I'm happy to stop here. And if you have any follow-up questions, and that's our strategy, and that's how we are going about it. And early results are good.

Shazad, we've crossed a little over an hour, cognizant of that. We've got a few questions, if that's okay. We can try to ramp it up in the next 5, 7 minutes.

Yeah, sure.

All right. So some specific questions on loans deferred under State Bank scheme.

Yes. Imran, do you want to touch upon that?

Murad, what's the question?

Sorry, Imran, the question is if you could give an indication of how many loans were deferred under the State Bank team. I think you -- in the earlier calls, you mentioned about 5% to 6% of the portfolio maximum?

Yes. So -- that's right. So since then, the number has gone up slightly. It is instead of 6%, it's about 8% of the portfolio. I can give you a number, but that number is heavily skewed with the consumer number. It's close to 2000, but more than 75% of that is actually consumer, a large number. Other than that, it would be around -- on the corporate SME side would be about 125 names. But I will also tell you that our -- that whole program has been very successful. The amount that was due in the normal courts by December end, we actually got repaid twice that much, voluntarily on 31st December.

And just a follow-up on asset quality, if you could -- a number of questions around this is how do you see that in 2021? I mean, provisioning levels, any guidance that you could give around NPLs, asset quality, stresses on the book? And what to expect on provisioning in '21?

Sure. So see, on the domestic book, when you look at the numbers in the presentation that Arif has put up, there is a bit of an arithmetic element because our book size also dropped. So the percentage wise, our NPL started to look a little worse than what it really is. But if you look at our NPLs, there is very large, one large energy sector NPL, which is probably, I can call it, industry issue we are not the only one. Other than that, there have been 4 or 5 small names, primarily due to COVID. So that was the domestic book. And I think this year, it will normalize. Our rebound after COVID has been exceptionally good. It has been a very sharp upwards growth. So we are not worried about our domestic book. Whatever we have now is a normalized banking book. On the international side, as I mentioned earlier, we did have a very large provision number last year. It was a combination of 2 things. One, it was the historical aspects of our NPL names which are working their way through our system from various levels of provisioning and they are going up. Secondly, COVID did impact those economies significantly, but what I can say is that because of vaccine and because -- and there is general -- there is some positive mood in those economies on the macro level, so we are cautiously optimistic. We don't think -- we think that is probably the peak of provisions in international. We will have more this year, but certainly not close to the level that we had last year.

Some specific questions on deposit and growth -- deposit growth and OpEx targets?

So I think on deposit growth, Murad, as you can see this year, we've had close to 15% average deposit growth. I think even historically, even when [indiscernible] growth was high, UBL was around the same level. I think with the kind of investment and focus that we're bringing back into the estate, all across the 18 regions that we have, that's how we divide the bank. I think we should hopefully be able to maintain the 2020 performance, if not better, that would be a conservative estimate for this year. And in terms of OpEx growth, of course, a lot of things that we have been on hold during the year of COVID will, of course, come back and we are looking to improve the overall look and feel of our branch network, more to the flagship branch, before there was about-- over 200 branches. And in terms of deposit, that's about 45% of the [indiscernible]. So OpEx growth will obviously come back with a little bit of inflationary pressure as well. So maybe 78% cost growth this year can be expected but again, that is also essentially focused on rebuilding our team across a branch network, in terms of relationship managers, supporting our compliance for that. And of course, making sure we have enough people in operations to improve our service level.

I think we should now try to end this call over here. I would like to pass the call to...

Murad, I think on the NPO report, it is a moving story, and we will give our views on that as we move along. But I think Q4 has been a good quarter for the bank.

Shazad, closing remarks for you. If you can, please.

No. Thank you. Like I said, very focused on the 3 pillars that we have with the customer centric focus and we have seen early results of that. Again, 2021 will be all about implementation, getting that right. We're certainly ensuring that the journeys that we're on--with the [indiscernible] journeys [indiscernible] and the cross-sell journey, we are able to implement it while we are also capitalizing estate that we have. And while we do that, international and [indiscernible] are 2 areas where we have a good amount of work that we have done. There's a lot more work that we need to do going forward. But I would just conclude by saying, first of all, I would like to just say that to all my investors, a big thank you. You have been very supportive. You've seen us put some challenging times, but you have stayed steadfast. I think the team and the Board really appreciates all your support. We are very committed to delivering results and show the momentum. The way we are going to do this, we are going to improve the branch profitability with cost synergies that are available, we're going to be deepening and entering new market segments with quality credits. But it's going to be important that we don't compromise on the quality. And that's something that we take very seriously. Building on the digital strategy and aiming at a payment system, paying the whole ecosystem, which is something we think we are better positioned than some of the other banks. Create a more sustainable business with international, I touched upon that, a very strong compliance on that whole environment because, again, we take this matter very seriously, in all our markets, not just Pakistan, but international. Use data, because that's the way organizations are going to proceed further and really cap on that as it becomes a data driven organization. So we can really do very targeted cross-sell across the bank. And also for us internally how to prioritize this. And lastly, upscaling became a quality challenge. So these will be our priorities, have already identified the 5 focus areas of it, network, NFI, treasury, international and technology/physical. We also have pretty much internally come up with how we are going to do it as a team. We want to make sure that we prioritize because we can't do everything in 1 year. It's going to be all about prioritizing and there are key metrics, how we are going to prioritize. We are going to again spend a lot of time on becoming agile. Agility will be a very big focus for me and [indiscernible]. And there's a lot of good feeling that we're investing in, in our people. We'll continue to collaborate. And lastly, we'll continue to [indiscernible] because that's the most efficient way of getting the most out of people. And if I could take those 5 key elements of the how part and calling it [ PACE ], P for proactive, prioritized, A for agile, C for collaborate and E for empower. So ensure that we will keep on updating you in the quarterly meetings and how we are excluding in [indiscernible] and looking forward on many more such sessions. Thank you once again.

Thank you so much for your time. I really appreciate all the time that you've spent with us on explaining the strategy and the performance of the bank. With that, we end the call today, thank you, everyone, for your participation. We conclude the call now. You can leave the call now. Thank you.

Thank you, Murad.

Thank you, Murad. Thank you.

Thank you.