United Bank Limited (UBL) Earnings Call Transcript & Summary

Good day, everyone, and welcome to UBL's First Quarter 2022 Results Conference Call. We have the pleasure of having with us Mr. Aameer Karachiwalla, Group CFO, UBL; Mr. Arif Saifie, Financial Controller and Head of IR; Mr. Imran Sarwar, Chief Risk Officer at UBL; and Mr. Rizwan Malik, Head of Treasury and capital markets at UBL. Before we start the call, I would want to highlight that there is financial results for second quarter and the results presentation are available on UBL's website on the IR section. The format of the call is going to be similar to the ones that we've had before. We're going to have a short presentation on the results by UBL's management team. And after that, we'll open the floor for questions. With that, I would want to transfer the call over to Arif to take us through the results.

Yes, yes. So the investor presentation for the first quarter results is on our website, as mentioned by Murad as well. I'd like to thank everybody for joining this call, and I will like to take you through some of the highlights. And I'd like to also thank the panelists, Aameer [indiscernible], Mr. Imran Sarwar and Rizwan for making it to the call as well. Just a quick overview of the operating environment that the banking sector had in the first quarter. Of course, interest rates are on a rising trend. We do feel that this will impact the economic growth levels in the coming months within Pakistan. Inflation has also been high, and that will have some sort of an impact on the cost of doing business over time. But of course, we'll be keeping a close eye on that. In terms of the investment strategy, we are quite well diversified across floating rate assets, and you will see that impact. In fact, you may have already seen that impact in our first quarter NIMs. And our long-term bonds, of course, remain strong and keep supporting the overall asset base. [ FI ] lending has picked up, but we will be selective in our risk appetite. And overall, GCC environment has improved and that is evident in our international performance. A big picture for 2022, we will maintain our focus across our core segments and ensure that we are well positioned and we are [ UBL ] will be driving our profitability. And you may have noticed that in terms of our performance versus the rest of the market as well. The profit for the year and for the first quarter is up 30% to PKR 15.8 billion. And the key element to note, of course, is the fact that we've had a 23% ROE in the first quarter, and this is essentially the levels that UBL was delivering earlier on, and we are sort of back in that same vicinity of the low 20s to the mid-20s in terms of ROE. Rather I request you to go to Slide 11. I think we're still -- yes, all right. In terms of the big picture on the balance sheet. The balance sheet footing was at PKR 2.3 trillion overall. Domestic deposits stood quite strong at PKR 1.5 trillion, the biggest engine behind our performance, up 8% with additional volume of PKR 110 billion in terms of growth. The most important area of focus has been and will remain our current accounts, which are up 11%. And we have on the highest current total deposit ratio of 45%, while the CASA ratio, which was at a closing number of 89%, actually was at an average was close to 88%. And cost of deposits was up to 4.5% versus 3.4%, which it was last year. This is, of course, well contained despite, of course, the interest rate hike that we've had since September, November, December, and of course, April impact will come in the second quarter. In terms of advances, the gross advances book was at PKR 536 billion versus PKR 544 billion. International advances remained close to $1 billion with a slight increase of 6% versus the December number with a 13% average growth on a year-on-year basis. Of course, there's a lot of FI assets in that. In terms of our investment portfolio, I mentioned, started the call, reason well diversified, our fixed income book is at PKR 334 billion, yielding 9.8% at a portfolio level in the first quarter. Our floating rate assets bond are at PKR 481 billion, yielding 11.2%, with some more repricing to go in the second quarter as well, and you will see that impact come. And of course, the residual liquidity is within treasury bills, yielding 10.6% and a total base of PKR 185 billion. So the overall balance sheet has been more of the same approach, but the whole effort over the last year of building deposits is visible and well positioned. Treasury book is also yielding strong results. Just moving to the next slide we have, which is Slide 12. The overall revenue growth had been strong. And I think the key message is as revenues and profits are actually up by -- revenues are up by 24% versus the fourth quarter. As for NIMs clocked in at 4.3%. There is some more repricing to go. This is 30 basis points higher than what it was last year. And apart from, of course, the deposits in the treasury book, I think the key highlight has been the overall acquisition of customers in the strong NFI base. So banker commissions are up 26%, ATM fees up 35%. And I think the biggest thrust on corporate bank and ancillary business is also coming through very well with a 17% growth in fee base. This is an area that UBL has now got -- sort of got back into the market and it's visible. The highlight of this quarter, the FX income of PKR 1.3 billion. Again, the advantage of big home remittances and corporate relationships coming through and some very good position taken by our treasury desks. We've had PKR 428 million of capital gains on government securities. That too, I think, in the rising rate environment has been a very good performance. And our dividends are up to PKR 904 million, so there's almost PKR 1 billion of dividend in one quarter alone, including a very good performance of PKR 370 million from our UBL Fund subsidiary, which has also been increasing its AUM substantially. In terms of provisions and asset quality, I'll just briefly touch on that. We have taken a charge of PKR 3.1 million in the first quarter within the international portfolio, while our coverage in international remains around 87%. The domestic bank continues to slow back recoveries by our SAM division and our consumer, which had a net reversal of PKR 210 million. In fact, the actual recovery number is about PKR 700 million. This is a net of impairment on equities number that is in here. But I think the recoveries in domestic continue to stand up. Overall, domestic asset quality is at 5%. So I think we're very much back firing on all engines to the pre-COVID levels. This was just a quick summary of the results. And I think I may have covered most of the performance areas. And I'd like to hand the call back to you, Murad, and then our panelists and myself, we can take questions on the performance and the outlook of the bank. Thank you.

Thank you so much, Arif, for your opening presentation and discussion of the results. We'll now go to question and answers. [Operator Instructions] Our first question comes from Anas Motiwala.

I just had a question regarding the deposit growth. I think last year, it was -- I know parent account growth was faster than the overall number. But I think total domestic growth was around 7%. And this year, its only, I think, 1% quarter-over-quarter. So I understand the bank -- I think the industry growth was -- deposit growth overall was around 15%, 16%. So I think this has -- despite an overall great result, I think this has been a bit disappointing. Can the bank guide a bit more about why is the bank is struggling to rally the deposit base? What's your strategy going forward to address this?

Yes. Basically on deposit side, if you look at overall, yes, it may appear that's only 22%. But basically, our strategy this quarter has been more on cost control, cost management. So our cost of deposits came down 4.5%. And with the current account and savings account, that growth has been in 14%, 15%. So only the expensive deposit that we've actually rationalized a little bit, and that's what's really caused the overall deposit [ account ]. So in terms of profitability, it's maintained, but -- and overall, we'll start building that up gradually over time as well. So that's the primary reason. But the core engine, that has grown [ 15% ].

Okay. Fair enough. And then on the investment yield. I think the investment book, I think, for the December quarter, when we annualize it, that came down to, I think, less than 8%. I think it was 7-something-percent. Any reason why the investment yielded so less for the last quarter in December, we would -- any idea on that?

Well, actually, I think the investment yield, you see it was close to about 8.1% for the full year last year. And that was because we were predominantly within floating rate assets with not too much penetration on the bottom book. And I think that decision actually has really paid off because we've actually been able to reprice the entire treasury bill and floating rate book very well in the first quarter. And also, we've got some bonds towards the tail end of the year at a very healthy yield. So I think you actually answered the question that the yield pick up is visible in the first quarter, and that is what is giving us a very solid NIM expansion in the first quarter.

Okay. And one last question. So is there a target ratio that -- is there an idea to convert the floaters into 5-year or 10-year fixed PIBs? Is there a strategy been decided upon it? Like after the next hike, does the bank plan on putting a percentage of the investment book into longer-dated PIBs?

Rizwan, do you want to take that? Or shall I do it?

Thanks, Arif. I'll take this one. Basically, we are looking at the diversification on both ends. We have a good ride, as mentioned by Arif, that we kept most of the same -- most of our investments on the floating rate, like either floating rate bonds, the PIBs or the treasury bill. So obviously, the yields and the policy rate has risen by almost 525 basis points, and we have seen that the Central Bank came up with a jumbo rate hike in April. So from here, we would be keeping a close eye in terms of the developments in terms of basically resumption of IMF program. And we heard -- I think last evening, we heard the good news that it's coming along, probably in a month's time. So we have been -- the discipline that Pakistan follows under the holds of IMF, the inflation and the current account problems and the macro problems, obviously, they've got addressed once we go within the IMF discipline, right? So from that perspective, we will obviously put some part of -- put the focus properly on devising our investment strategy to take advantage in terms of the outlook. And we would be obviously closely watching the global scenario in terms of oil prices and the global commodity markets.

Okay. Okay. Fair enough. So could management give any sort of -- sorry, sorry to cut you off. Please finish your thought.

No, no. I'm done. You go ahead, please.

Can management give any sort of guidance as to what the deposit, I mean, assuming the long-term deposit covering the industry of like, let's say, 12%. Do you have any idea like where UBL would fare, like is there any sort of guidance the management team give about like -- do you see UBL a bit underperforming because idea would be in consolidating it? Like what would you expect the next 2, 3-year deposit growth CAGR to be? Would you be above market, below market? Like if you could give us any sort of guidance on that.

So basically, on our deposit strategy, we will continue with growing. And our strategy is to actually grow faster than the market because we do aspire to increase our market share. So we will be looking towards growing more than the market for the next couple of years. So that's certainly part of our strategy, to increase market share.

Yes. And I think along with that, I think we spoke about this in the last quarter as well. We have a specific flagship branch initiative as well in which we have the top 300 branches, which are actually growing at 3x the rest of the network. Our focus will be very much on those branches and along with our priority [ branch ] banking as well, there are a number of initiatives that we have in the pipeline to improve branch performance. I think in terms of guidance, you can always look at the track record for the last 5 years. We've been growing slightly better than market, even larger as well. And I think that should very much be the situation in 2022 as well.

Thank you, Anas. Next question from Raza Jafri, Raza, can you please unmute yourself and ask your question, please.

Congratulations UBL team. I think it was a fantastic result, certainly better than what we were expecting, certainly better what the market was expecting. So congrats, first up. A couple of questions. First up, I think it's good to see costs come down on a quarter-on-quarter basis. The cost to income is also under control, but that's because of very strong revenue growth. And on an absolute basis, of course, first quarter '22 versus '21, it's still a fairly high increase in terms of percentage, right? And I think in the director's report, I think there is talk of renovating branches, shifting some to more commercially viable places that a stock of -- maybe looking at the pay scales. And so how long does this plan last for? I mean there seems to be a plan in place. Is this in place -- does this going -- is this going to have an impact on costs for a particular period of time?

Okay. So overall, if you look at last -- first quarter, there has been a couple of reasons for the increase. I mean these are all volume-related increases as well. So obviously, personnel cost has gone up because of the inflationary impact and the salary increases. Then we talk about variable expenses. We have had a lot of these new schemes that we have been introducing on sales growth, commission recovery. So all that has actually slightly better than the first quarter, and we -- some of our expenses are front-loaded as well. Some of the schemes for commissions, incentive program that we are planning to launch. Second and third quarter, we actually front-ended some of them. So all these variable factors are there. So the change in accounting policy has also impacted us in our depreciation. So little, small, small things have all added up. And obviously, dollar [ par ] exchange impact is always there in some of our AMCs that came for rollover. So when you add them all up, hopefully, all these have been accounted for now. So a lot of them have been, and we will probably see a slight sort of reduction in the expense growth going forward. But we aim to stay within our inflationary targets for the domestic and see how we perform. But generally, do expect the increase in expenses based on inflation in the country and devaluation and exchange rate. But from our targeted rate, we are pretty close to our budgeting numbers right now. So we do expect some increases.

And would you say that maybe cost to income that you showed in the first quarter, I think the mid-40s, is that something that sticks going forward?

Yes, yes, certainly. I think -- yes, yes. Absolutely. Our cost-to-income ratio target is very much in our visibility all the time. And we do expect to [ impact ] that, that start moving too much, we will have to take some other measures. And so, yes, cost/income ratio is a very important ratio for us to monitor, and we keep track of that.

Yes. And I think absolutely, we were tracking, like Arif said. I think we mentioned this earlier, that this is very much a year of reinvestment for the bank. And I think with the compensation packages that we released for our branch network and generally for the workforce is all aimed at improving branch service levels, improving the level of retention within the bank and of course, having better performing branches and a better performing network overall. So yes, like you said, there is indeed to plan, and there is a whole technology and digital strategy as well where certain investments have been made last year and will be made in 2022 as well because there's a whole digital road map, which we are tracking, and we are tracking quite well. So -- but monitoring of the cost-to-income ratio will be done at a very close level for every business.

Perfect. The second question is on fee, and you've done phenomenally well, but so have other banks. So I mean, what's happening? Is it just a post-COVID normalization on fee? Or are there other things coming into play? And what is the outlook? I mean does this very strong pace of growth sustain? Or does it normalize assuming it's a post-COVID bounce, does it sort of normalize now the growth going forward?

Well, I think on the fees, you see there is both. There's a bit of both. Of course, the post COVID element is there, but I think that was visible from the third and fourth quarter of 2021, but 2 or 3 important things. One is the fact that there is a huge focus on acquiring the right kind of customers with a retail bank. I think earlier on, we had this NTB strategy, which was not exactly below par, but it was at a level where we were not really focusing on the mass approach segment. We've created a most valuable customer segment within the bank, and that obviously is improving deposit retention levels. It's improving the bank's customer base and improving the opportunity for cross-sell. So you may have noticed that banker commissions are up significantly by 26%. Other than that, the impact of post-COVID is within branch banking fees, which is up 39%. So yes, there's a lot of activity in the branches, which is much more than what it was last year. And I mean, the first quarter in 2021 was still pretty much the tough times overall. And apart from that, I think the one differentiating factor for us is that our corporate bank is now really finding in terms of ancillary income, on the cash management side and on the trade and the guarantee side. And that, I think, is a very positive sign. I think that was an area where UBL was not really punching based on its overall ability, which we are right now. So I think for the full year, this trend is probably going to be quite strong, but there is still a lot more that we need to do, especially on the investment banking side as well, which we will, with our participation in the market. But I think we spoke about it, but fee growth and NFI is one of our key focus areas for the bank even in 2022, and you will see results hopefully.

Perfect. My last question is on asset quality. It's great to see, I think, international doing well and long will that continue. But just want to know about the Yemen, and I think memory fails me, but that is still outstanding, right? I mean the branch is still there? And is there any hit that has to be taken potentially? Or is that something that's in the past? I mean...

So Yemen, basically. Sorry, Raza, can I just? So Yemen, basically, we closed our operation in Yemen. And we have -- because of the dysfunction within the Central Bank there, the 2 central banks, nonoperative, that is -- the liquidity has already dried up. So many reasons for us to close down our shop there. We've taken auto provision, we could and basically now no further loss is expected [ until ] there's something [ loss accounting ]

Okay. So whatever you've done, you've taken. All right, perfect. And there are no other markets...

[indiscernible]

It's been fully provided for.

Oh, it's fully provided.

It's fully provided. And there is no potential loss. It's just the hassle of having a physical presence in the country. Financially, there's nothing there.

Perfect. And any other markets that trouble you? I mean, well, worry you? We've seen what's happened with Sri Lanka. Any other markets where you see sovereign risk coming through for you guys, you guys are there abroad?

No. I mean, I mean, Sri Lanka, we've been tracking for about a year now. So yes, I mean, it has unfortunately come true. But other than that, no other market is even close to what Sri Lanka is. So right now, the big news is Sri Lanka, and that is something which we will be watching very closely.

Thank you, Raza. A couple of questions on the chat box and on Sri Lanka. So questions being, could you please share your -- some light on the bank's exposure in Sri Lanka? And how will you be providing for it or any provisions already taken against it?

Yes. So let me tackle the provision part. We do have exposure. I'm not exactly -- I mean Arif can add what not. So listen, we have -- as I was just mentioning, we've been tracking Sri Lanka now for nearly a year based on the issues that the country was having. Two main issues, mainstay has always been tourism and overseas Sri Lankans who've been sending money. Both of these sources have been drying up lately. Tourism got a big hit during COVID and it has not recovered. So the country has actually been hit quite significantly. So in the aftermath of when we anticipated that Sri Lanka is about to default, we have extensively undertaken a lot of similar studies in the world where sovereigns have defaulted, where multi-laterals such as IMF have come in and what has been the after -- how have we tackled it. Based on those case studies, we have evaluated our own portfolio. First thing I want to tell you, in the last 18 months, our portfolio size has come down significantly through normal repayments. This was all sovereign. So now what we have done is we have taken a slight provision on the issue that was due -- that is due for payment in July. We have taken -- the amount of provision we have taken, we benchmarked it to the last 2 or 3 sovereign defaults and how the IMF has come in and how they have basically handled those. So predominantly, it has been an extension of the tenor reduction of interest rate and some moratorium on payment of principal. So we pretty much followed the same principle. And at the moment, we are quite comfortable that what we have done is fine. Sri Lankan government is engaged with IMF. And what they do want to do is put all the debt in one basket and do a proper restructure. So in anticipation of that, we will not take any further action. We are comfortable where we are right now.

Thank you. Question from Raza Inam. Raza, can you please unmute yourself and ask your question.

Okay. Just a few questions. My first question is that we have seen other banks, such as Meezan and HBL, they aggressively agreed the advantage and reduced their fixed deposit to increase their ADR to avoid paying additional taxes. So what is the UBL strategy in this regard? Like will you be targeting to increase your ADR above or are you comfortable to this level?

Well, there are 2 parts to it. So Imran, I'll just take the first part, and then you can give the other one. So as far as the -- our ADR is concerned, we actually were over 40% for last year. Therefore, we had some relief in our tax charge. However, our strategy will be to lend as we think appropriate based on the market and the risk appetite we have. Obviously, when we're close to an ADR that we can achieve, we will try to shed expensive deposit where we can. And that's the little balancing that we do. But otherwise, on a strategy independent. We don't want to restrict our growth just because of the additional taxes. But over to you, Imran, on the [ risk appetite ] [indiscernible].

Yes, sure. So I won't directly comment on the ADR because that is a derivative of how we shape our lending book and our asset writing strategy. So I can tell you that domestic book, we have a very, very strong and robust pipeline. A lot of them are actually in the process. So in the next 2 to 3 months, you will see our lending book go up a little bit. Some of these loans are related to the real estate where the gestation period is slightly longer. So until -- I mean, the approvals may be in place, but until they come on the book, that may take slightly longer, maybe the third quarter. Similarly, on the international side, after the bad 2, 3 years, we have now -- the book has stabilized. The portfolios are looking okay. The macro is in our favor with oil prices trending above $100. So we have formulated -- I mean, for the lack of a better word, a strategy for our international countries as well. And slowly, we will look at growing those portfolios as well. I think you've seen a little bit of growth in those portfolios, as Arif was explaining earlier and similar trend will continue this year as well. So all in all, once all of that is in place, I think our AD ratio will certainly be better than where it is right now.

Okay. Sir, my second question is regarding the Sri Lanka book. Can you tell how much of the amount is in local currency and how much percentage of the bonds are in dollar denominated?

These are all sovereign bonds in dollar denomination.

Okay. Sir, final question is that we have seen that recently, the OMO size has increased quite a bit, and these trends have also increased to abnormal level. So when do you think the OMO amounts will normalize going forward? Or do you think that it's here to stay for a while?

So the question I'm repeating because I can't hear you properly. It's about the OMO size?

Yes, overall banking sector OMO.

So given, obviously, what's happening on the commodity prices side and obviously, policy inaction on the fiscal side for last few months due to the local political situation, obviously, OMO has been growing. It's currently around PKR 3.5 billion. Until we have -- we are going to see a major shift in terms of the fiscal policy or the drop in commodity prices. We won't see any decrease in the OMO at all. So it would be dependent on 2 things. One, the global commodity price thing. And the second is how much -- basically the subsidy withdrawal that's going to be done by the government. That was, I think, the highlight last evening while the government and the authorities were talked into the IMF. So that's, I think, in the pipeline. So that would probably be going to control the OMO.

Okay. Final question regarding -- sorry, I think Sri Lankan Bond again, hypothetically, if you take a haircut on it because the fees have increased quite significantly. So will the impact in your P&L like you will take mark-to-market losses in Sri Lankan bond? And what is the expected amount, if any, we can expect in this year?

I think at this point in time, it will be slightly premature to give you what amount will you take this year. Because don't forget, we actually don't know how the Sri Lankan government and the IMF are going to restructure these bonds. So once we know that, then we'll be in a better position because then we will be able to look at our portfolio in a holistic manner. Currently, we are only looking at what was due in July, and we know that, that is not going to be paid. So we have taken action against that. And the remaining portfolio is down 2 years, 3 years down the road. So we've not done anything about it. So that's how we are taking the whole situation. I will now let Arif explain to you how will this go into the P&L and all.

I'll take that. So basically, on the overall, we've got about $40 million worth of Sri Lanka bonds, that some of them [ HTM ]. But the main thing is that because of the moratorium or sort of default that are declared, we'll probably not be -- we'll be taking further interest income on that. So we'll be reducing our exposure going forward on that. And then we will look at what the restructuring strategies are, like Imran said, based on that, if we need to, we take further [ pains ]. So right now, one may expect some, [ but if I spot him round ] that we haven't taken any decision on that, we'll see the outcome of the restructuring before we take it. But there's always going to be some potential risk that it may reach to a stage where we have to take some further. So -- and can keep a little provision there. On the overall bond book, other than that, I think the only other exposure is Pakistan, we all know. And that all will be determined based on our discussion with the IMF and how the rates move from here onwards.

A couple of questions around the interest rate outlook. So I'll just try to lump them together, which is -- one is your view on interest rates going forward, current yield on fixed rate PIBs and duration of these bonds. Those are the 2 questions.

Imran, maybe you can cover the outlook.

And maybe one more I can add over here is that if you are expecting any hike in the upcoming MPC meeting, which is scheduled for May?

Thank you, Murad. So in terms of the policy rate view, as I mentioned earlier, the Central Bank basically took a jumbo move in the last monetary policy. And they said, we have left nothing on the table. And covering this domestic political uncertainty and the global uncertainty due to Russia/Ukraine. So since then, if I take a view on the global markets, commodity prices have come down because if I see the high on the oil price, that was around $130. Currently, we are hovering around $100. China slowdown, we all know. Obviously, European economy is going to be hard hit due to the war itself. So those are 2 big economic blocks overall on the -- obviously, that's going to impact the global economy. And obviously, we are foreseeing the fed rate hike coming through as early as May, I believe, in the first week. So overall, I believe that the commodity market developments in terms of the global environment. Those are, I think, shaping well in favor of Pakistan. On the second, I think the domestic political, obviously, the situation has in terms of reducing the uncertainty through having the interim government that's there still. And they have been showing a willingness to work very closely with the IMF, and we have seen the last night, obviously, development on the IMF. And we have, as a market, I believe, everybody is going to keep a very close focus on how the things are going to shape up with IMF. Obviously, that would entail -- obviously 180-degree turn on the fiscal side and basically pass on the impact of subsidies -- the withdrawal of the subsidies that would be needed. How fast it's going to be, that would obviously impact how the monetary policy is going to go from there. Because if they are going to be fast on the withdrawal, I think there won't be much needed from the monetary policy. So it would depend how the fiscal and monetary policy coordination would work. So I believe in the short term, probably since they have taken the jumbo move, probably they won't need to do much on the May policy. Still we can't rule out 50 to 100 basis if that's needed due to the fiscal slippages that we have seen so far, PKR 100 million, probably a month of the fiscal slippage due to keeping the oil -- obviously, keeping oil subsidized over here and the electricity subsidized on the [ column ]. So that could be probably a few.

Just repeating one of the follow-up questions on the composition of the book. So yield on the fixed rate PIB. If you can share what's that and duration of these bonds.

Yes. So the yield is just shy of 10% right now. So it's a double-digit yield. And the duration is about 2.2 years roughly. So our bond portfolio is [ tapering ] off. In fact, for your information, there is a PKR 60 billion odd maturity in the second quarter as well. So that is the overall configuration.

Right. If I could stay on that interest rate-related topic and ask a follow-up questions from the chat window, which is on the repricing of the loan book. How much of that has happened already? How soon do you expect the full book to be -- to reprice? And if you could share your NIMs outlook for second quarter after 250 basis points is fully repriced.

So essentially, the loan book is going to take till the end of -- it will take until July to fully replace, assuming that there is no further rate hike in May. So obviously, the impact of April, of course, KIBOR was adjusting in itself before that as well. But we have a close to 120 days average corporate book repricing tenor. So it will take until July for that to come through. So you can typically see the uptick on loan, and we have a very big PKR 500 billion loan book coming through in the third quarter and the fourth quarter. So that is on the loan book. And of course, on the treasuries and the floaters, treasury is fully replaced in the second quarter. And the floaters will have some impact towards the early Q3 for a complete repricing. So typically, third and fourth quarter should be very good in terms of the overall portfolio, repricing to higher rates. So this will, of course, lead to a NIM expansion in the second half of the year.

Thank you, Arif. There are a couple of -- a few questions around the -- on the digital side. So obviously, with the push towards digital, there is obviously -- what we've seen in the market is a lot of concerns around security breaches, et cetera. And in the case of UBL, there was an instance a couple of days ago that came up. I just wanted questions, 3 questions around those asking what is the -- how do you see that in terms of the impact? And what can be done to reduce instances like this? I mean any morality?

Let me take a shot at that, Murad, and then I'll ask Arif. So listen, first of all, let me assure you that what you've been reading around in the social media, that does not tend to amount to any security breaches from the UBL digital infrastructure. What has really happened is that some fraudsters have gotten hold of credit card information. And I'll come to various scenarios on how and where could they possibly do that. And they've gone on the Internet, what we call the unsecured websites. Unsecured website is a site where when you do an online transaction, it does not ask you to verify through an SMS or a text message, what we call the OTP. So basically, what you need is the name, the card number, the expiry date and the CVV, the 3 digits at the back. Using that, you can undertake a transaction. In many cases, these vendors hold very low thresholds. So these guys have gone and done transaction PKR 100, PKR 200 to remain below the OTP transaction thresholds. So that is really what has gone on. The problem is because of the low ticket size, the number of transactions have been high. That's why there has been noise in the market. We have taken action, and that is not going to happen at least for the foreseeable future. But I was reading through those questions. They talk about data breaches. We have done a very quick review of our own processes and wherever this information is produced, generated and stored. It has so far not happened at the UBL end. So it is likely that it could have happened somewhere else where all of us store our credit cards, be it food service, be it any other service or streaming services. We are going to undertake a very, very detailed investigation. But so far, initially, we have not found any data breaches from within UBL. We have taken very quick in response to this. We have shut down all those websites. More than 100 websites we have shut down. What that means is that none of the cards issued by UBL will be able to transact on those websites. But the fraudsters, they keep on reinventing new websites, and they keep on changing their tactics as well. But having said that, I just want to let you guys know and please spread the word. For the next week, 10 days, if you need to use your debit card only, this whole thing happened on debit card, not on the credit card. Please call up our call center and activate your sessions before you actually use them online. So in a nutshell, I would dare to say that the noise in social media was a bit more exaggerated than the situation on the ground. Finally, and most importantly, none of those customers whose cards got used will be out of pocket. We will be refunding them each and every penny.

And replacing. So can I just add, Imran, if you don't mind. So we'll be replacing the cards for your cost. At the same time, this problem is restricted only to e-commerce transactions without the secure OTP. So it's not a post transaction. So we are aware that some of the customers might get inconvenienced. So we -- but there was no choice but to block the card in the service. But this -- so just to add, it's only e-commerce, debit card e-commerce without the OTP transactions.

One question from Alan Campbell. Alan, can you please unmute yourself and ask your question.

Yes. I want to ask a hypothetical question. I mean, there's been quite a lot of speculation in the press recently that we might see the new governor installed in the state bank. Do you have any thoughts on what the new leadership might look like? Would there be a different policy with respect to interest rates and with respect to the exchange rate, in your opinion? And also, if you have any thoughts about the possibility that the independence of the State Bank bill would be reversed. I know there was comments on that. So whatever you're comfortable in at liberty to say would be welcome. And then as a final question, if there's time, any thoughts on the direction of the exchange rate here? How acute are the balance of payments pressures? And how do you think Pakistan will get out of this?

I'll take the first part. Yes. Okay. And then you take the hypothetical.

I don't -- I have no idea about how to answer hypothetical questions.

I didn't want to ask for your direct view because I know you might not be comfortable sharing it. But I'm saying if there were a change, what would you imagine? But yes, I understand.

I thought there was a correction today. I read in the papers that they said that they will not be reversing the State Bank independence.

The finance minister on his way back from Washington said that State Bank's independence has been already done and dusted. So the message that we got is that, that is irreversible.

So in a hypothetical way, the State Bank independence is not challenged, then most likely the governor also gets a free ride. So okay, so these are 2 hypothetical questions. The exchange rate view, I'll leave it for Rizwan. That's the most difficult part of this, unless Rizwan [ wants it to go back ].

Thanks. I thought the first one was more difficult. Okay. Again, coming back to the macro view. The global commodity prices, they are still tough from the Pakistan perspective. Yet they have come down. In terms of the other side of it is the fiscal side that was [ touched ] both by the governor himself in the last monetary policy. And due to the domestic political situation, there was an action on the fiscal side in terms of keeping the fuel prices and the energy prices subsidized for a longer period. And due to that, they obviously, the Central Bank came up with the jumbo rate hike. And so of course, with the new finance minister talking to the IMF, obviously, I believe there is going to be a lot of coordination both on the fiscal and the monetary side. So if the fiscal site is going to tighten through obviously, withdrawing the subsidies, I believe that, that would have an impact in terms of reducing the current account deficit. That's the problem. Obviously, the fiscal impulse from the -- if I go to the academic fiscal impulse, it's more [ forceful ] versus the monetary inputs. 250 basis point rate hike won't do much and terms of changing the behavior versus a fuel price of PKR 250 per liter here. That's all I can say, and the pass-on of the energy prices. So that would have an impact overall up in containing the current account deficit, I believe. So that -- if that coordination is going to the there, we believe current account would be under control. And so as the exchange rate. So I think worst is behind us. So that's working.

And again, some -- a few questions on the Q&A box relating to Sri Lanka, which we can take later. But maybe this one on the MENA lending book. [indiscernible] if you want to address that: Is there any stress on the MENA banks, MENA lending book, can we expect further provisioning on the international book?

Okay. I'll do that. No problem. So listen, at the moment, we seem to be in control of our GCC lending book. We do have a few accounts which are slightly worrisome, and we are tracking them very closely. We have restructured them. These are about 4 or 5. We have restructured them and they are so far adhering to the restructured terms and conditions. So hopefully, if all goes well, we should be okay. I mean the important thing to note is that the macro situation in all 3 GCC economies is good. And I'm referring to UAE, Qatar and Bahrain, where we have our exposures. With oil above $80, these countries, they normally do very well. And now the oil trending above $100. I think the economies are going to be quite robust. So if all goes well, these things will be okay. What we are seeing is, in many cases, accounts which we had fully provided over the last 3 to 4 years. Some of those borrowers have come to us asking for -- let's settle. And obviously, their businesses are now coming back slowly, so they don't want this baggage of a bank default. So we are quite cautiously hopeful for this year that if all goes to plan, we will not have to take incremental provisions, and we might even get some recoveries in.

Thank you. A question on the bank's repo borrowing, which decreased significantly this quarter. The question is, can we expect that to increase going forward?

Thank you, Murad. I think one from the [indiscernible] exactly why has borrowing decreased from PKR 565 million at the end of the calendar year to PKR 212 million in the first -- at the end of the first quarter? So I believe we were obviously foreseeing the rate hike. So that's why we obviously reduced and deleveraged the book. In terms of the repo borrowing overall versus the total system PKR 3.5 billion, we are sitting quite below the average. So whenever we foresee the environment is going to be favorable to leverage, we obviously are going to do that. So -- and the way, I have already given the outlook. So I believe not much to say from here.

A couple of questions, which I think you've already answered, but if you could -- should want to give a quick reply on this on Sri Lanka again. As the banks have suspended markup on Sri Lankan bonds also since they've become unpaid? And how much provision have you taken on the bonds -- on the Sri Lankan bonds this year?

So 2 questions. Market suspension here. I think given that the way they defaulted, it would be obvious that one would have to do that, in July and going forward. And on the provision, like Imran mentioned, we have about $70 million maturing in July and that we've taken about 25%, and then see how it goes after that.

Last question that we have on the chat box is on the digital bank license. So what's the UBL strategy with respect to that and expected investment that you foresee in this business?

So we have applied for digital banking licenses. I think it was sort of -- won't say [ low grade ], but it was an obvious thing we had to do, given that there was so much interest and there was a limited. Now what we plan to do with the digital license if we get it, is to actually leverage our own sort of technology and then manage it. So we do believe that there is a potential, although State Bank under the current digital license framework has not given much of an upside to a digital banking compared to conventional banking. However, there is -- there are certain elements of that, that might be useful in terms of low cost and low transactions. So we have built a model which we think is doable, and we await to see the outcome of the application. If we get it, then we will see how we build on a model that will leverage our strength at the same time, given the unique set of identity that it requires to build on a digital banking proposition.

And just to add, I think [ Rizwan ] has covered that quite well, is the element of agency banking, which also opens up under the license. And we've historically had over the last decade, UBL OMNI which is -- which has penetrated at the grassroots and done a lot of financial inclusion work historically. And we'll actually use the network for some of the [ Naya Pakistan ] loans as well. So I think that agency mining element is also a silver lining in the making, where once we can actually open back accounts through that OMNI network and beyond that, can also add a lot of value to the overall UBL franchise. And I think the one thing that we will definitely do is we will leverage on our learnings on UBL OMNI over the last 10 years or so and actually position that in the direction that the regulator wants us to, and we are probably the best placed bank to actually do that in years to come. So that will probably be another very positive thing that should come out of the digital license.

We've reached the end of the Q&A session. We really don't have any more questions either on the chat box or raised hands. So I would hand it back to you, Arif and Aameer for closing remarks before we conclude the call for today.

Thank you. Just a quick one. So thank you very much for everybody joining us on our earnings call. We really appreciate your support, and we will -- we hope that with your support and sort of commitment and our teamwork that the UBL has sort of demonstrated, we hope to have a very good result for 2022. So keep looking at our results, and we all share in the prosperity.

Thank you so much. Thank you, everyone, from UBL's management team for taking the time for this session. And thanks to all the participants who joined and had questions on the call today. We'll now conclude the call -- this call today. You may now disconnect. Thank you, everyone, for joining.

Yes. Thank you, Murad. Thank you for hosting us. Thank you.

Thank you. Bye. Have a good day.