United Bank Limited (UBL) Earnings Call Transcript & Summary

It's corporate briefing session and 9 Month 2022 Results Conference Call. I am Murad Ansari from EFG Hermes, and I am the host for the call today. We have the pleasure of having with us Mr. Shazad Dada, President and CEO, UBL; Mr. Arif Saifie, group Chief Financial Officer, UBL; Mr. Imran Sarwar, Chief Risk Officer at UBL; and Ms. Saira Shah, Financial Controller and Head of Investor Relations at UBL. We'll start today's call with opening remarks from the CEO, Mr. Shazad Dada, on the performance of the bank during 9 months 2022, latest developments and future outlook of the bank in the sector. This will be followed by a presentation by Mr. Arif Saifie, CFO, discussing the financial results for the period. At the end of the presentation, we'll take questions from the participants on the call. With that, I would like to hand over the call to Mr. Shazad for his opening remarks. Over to you, sir.

Thank you, Murad. [Foreign Language] and a big welcome to all our stakeholders on the call. Let's with no further delay, let me quickly give you some key messages from where I said, one, I'm very pleased to announce that we have had another excellent quarter. And on the backs of that quarter, which was something the strategy that we had set out for ourselves, we have executed it very well, and we continue to really benefit from some of the key foundations of this bank that we have, including the fact that we have a very rich history of 60 years with a network of over 1,400 branches, if you take all our branches, it's around over 1,400 branches with 11 million customers that are at the center of everything we do. This has been supported, the strategy execution has been supported by one of the best management teams we have on the ground and both locally and globally in helping us execute that such that we are able to deliver on a very consistent basis 20% return on equity for the last few years with very strong dividend yields and trajectory. Also, I think besides being one of the most profitable and largest banks in Pakistan, our international network, which includes UAE bearing Qatar along with extended through a license back in U.K. that continues to help us really grow our business in other markets, which are also showing a lot of promise and supported by some wholly-owned subsidiaries and JVs that we have is in asset management, insurance or micro finance. Lastly, we have continued to lead the digital transformation space, and we continue to be showing a lot of digital innovations in the marketplace, which we think is the future. Along with that, our strong delivery has been validated by multiple awards that we continue to get -- win and the digital team continues to come up with some very innovative solutions. If we have time, we'll share some of those with you to again share what we are doing. And recently, we gained digital bank of the year by Asia Money, our Best Digital Bank by the Pakistan IBP, along with many other awards that we've been winning to support that. And that, again, gives us that comfort and validation that we are on the right track. And today, the digital customer base is growing quite rapidly and the penetration and conversion is at the pace that we had set out for ourselves. In fact, it's outpacing the pace we have set out. And lastly, I would say the remittance business continues to be showing a lot of promise over PKR 6 billion is routed through our counters, which gives us -- along with the fact that our RDA business has really matured and continues to play a very important role in the whole state bank digital Russian digital account initiative with over 700 million routed through the UBL counters. I just wanted to also give you some headline numbers. Give -- Arif is going to go in a lot more details, but our profit before tax is up 29% year-on-year. This is despite some extra provisioning that we have taken and we've talked about that. Profit after tax continues to show promise despite the fact that we -- it's down, but if you look at it on a normalized basis, it's actually up 30% and the unusual events are the tax bill in which there are certain taxes that have been imposed on banks on a retrospective basis. We can talk more about it later on. And that's the reason why our return on equity in actual terms is down. But if you take it on a normalized basis, it's up about 23%, one of the best in the industry. We also have a very strong card at 18.4%, well above the minimum level and that gives us a lot of room to do things that some other competitors may be challenged with, and we continue to ensure that we, based on that, give a very healthy dividend, which we again have repeated again this quarter. Earnings per share is where it is. As we continue to deliver historic results for the year, we are faced with some key challenges in the market and that's not only local, it's also international, whether it's the Fed increasing rates, whether it's the interest rates in the country, regime, given the high inflation that we are facing of 23-plus percent. The pressure on the euro bonds, the taxation measures to restrict consumption, which is slowing down the economy and the banking taxes that are now significantly higher compared to last year, and that's the reason why it affects PAT like that. But like I said, despite those headwinds, we have shown a lot of resilience and a lot of maturity. We continue to focus on strong controls and discipline. And our asset quality is very strong, both locally and globally -- locally and globally, other than a few hotspots which we talk about. We continue to reinvest in GMD securities as we move up the ladder in terms of rates. We have a very strong FX flows, both coming from 2 areas: one, remittance that I touched upon before, but also from our trade business, which has been growing at a very healthy pace by design. This was something that we set out in our strategy and we shared that with you a couple of -- a year ago, and that's really yielding the results because we have really built up that team and really been able to capture new customer flows from that. NPL recoveries has again been a good story, where we have been able to book almost PKR 2.2 billion in any NPL recovery. And in the backdrop of all of this, like I said, our digital-based customer growth has been outstanding. We have 23% growth there to reaching our total customer base at 2.5 million of mobile app users. Our mobile app continues to be rated one of the highest in the market with a very large sort of base to support that validation. And lastly, our cost-to-income ratio is one of the lowest in the industry. We have improved to 14%. This a year ago was 44% in the backdrop of high interest rates, high inflation. We have been able to do that and try to keep it low. But clearly inflationary pressures are on the horizon, and that's something we are being mindful of to see how we do it, but they have been supported by high interest rates and high NII and NFI in terms of revenue have also grown quite nicely, as I said earlier. In terms of -- next slide, Murad, please. Again, I'm not going to read through all of them, but we -- these results have been very well diversified that they've been across all segments. So [Foreign Language], we have been able to deliver on a very sustainable basis, our branch banking business, which is effectively our retail banking and consumer banking leads earning growth with strong deposit growth of approximately 13%. Digital banking I've already talked to you. And this is really something that which payment throughput has crossed PKR 1.7 trillion, one of the highest in the industry. Our CIB business serving a very -- venture maintaining a very strong asset quality. This has also been ably supported by a very strong trade business, and I see a lot more promise there. Treasury well-diversified portfolio, improving yields across investment work. This was an area of weakness for us a few years ago. We have been able to improve upon that and again, our numbers show that international business, as I said, required a repositioning, which we feel we have done, required some realignment in terms of cost and in terms of priorities and that has started to yield results in terms of positive contribution they are doing on the current business that we have. The new business that we have booked, Islamic banking is an area of focus for us, along with digital banking. We continue to build on the strong proposition and wider network. This is something work-in-progress. And I can hope that we should be able to share with you some more positives on that. Our fee-based business revenue streams, again, this has been again demonstrated in our numbers and we'll continue to focus on that especially as we know, the NII income is not going to be permanent given the inflationary outlook, but we will have a very strong fee-based business to complement that during the ups and downs. And lastly, we are embedding a very strong ESG model into our UBL strategy and we'll continue to stay focused on D&I and sustainability, while we continue to ensure that we have strong controls and lead the way on that, whether it's through the [ EY ] transformation work that we did on our compliance and control, AML side or any other areas where we think that becomes our unique selling point in terms of positioning our business with the client. And [Foreign Language], that's all delivered. And with our network that we have, we think we are very well-positioned to continue to grow our customer base and lead the digital proposition that we have. With that, let me just -- next slide. Yes, just I think we have talked about this. Ambition are to continue to be the most progressive and innovative bank. Aggressive customer acquisition continued to diversify with investment strategy and NFI and digital market leadership. And I think on all 3 counts, we have been able to deliver and happy to take any questions. Our strategy will continue to grow on our inspiration, whether it should be the best bank to work and therefore track the best challenge. Our people work in culture of respect and empathy, and this is something it's a structural transformation we are undergoing at UBL and I think it's yielding good results. And these successes clearly help attracting the best talent and retaining the best talent. We also want to be seen in the market based on our delivery as the high standard of compliance, governance and controls and [Foreign Language], whether it's on various fronts, whether it's on compliance, whether it's on information security, whether it's in technology, I think we have been able to show a lot of strength with a very strong control team, whether it's on operations. Clearly, we also want to continue to aid the bank to lead the ESG standards and practices. There's a lot of work going on, on that, and we continue to show progress on that to you and to others. And lastly, I think we're putting sales to customers at the center, which I said in my opening remarks, we want to continue to build up on the -- and become the best service bank. And here, we are competing with nobody else but ourselves. I think we just -- the bar keeps on raising. Customers are becoming more and more -- but there are lots of choices, both on the analog and digital platform. And I think we need to make sure that we are able to serve them anytime, anyplace, anywhere and provide them the best service that they truly deserve because if we don't, they have choices, they'll go away. And I think with that mantra, we will continue to work hard as we move into 2023. So with no further delay, over to Arif to talk about the numbers in detail. Thank you.

Thank you so much, Shazad, for your opening remarks and setting the context of this call today. I'll just quickly run through some of the key numbers. The balance sheet has crossed on total assets of plus PKR 2.7 trillion at the end of September, which is about significantly up versus the last quarter as well. Overall, there's been a strong deposit performance. And of course, we've had a steady buildup in advances. In terms of deposit market share, it's inched up this quarter and versus December, it has gone up from 7.2% to 8.2%. And this translates into an average deposit growth of about PKR 100 billion. And given the rising yields in the current year, it has significantly improved the overall NIM of the bank in the first 9 months. Current accounts have grown by 13%, as earlier mentioned. But the key for us in the rising yield environment and of course, even when the rates are lower in a strong current to total deposit ratio, which is at 44% and is up from 42%, which it was last year. This translates again into a very strong CASA ratio at close to 86%. We would obviously want to take this up further, and that would be the target. The overall cost of deposits for 9 months is at 5.9%. So this is up by 2.2% versus last year despite close to 600 basis points increase in the benchmark rates. In terms of advances, we have been selective, but we built a strong portfolio, which is up 19% year-on-year. This buildup was started in the last quarter of 2021, and it's continued. Overall period-end advances are at 55.6% for the domestic bank. International gross advances are at PKR 911 million, which are down by 13% versus December, or that is in line with our capital allocation and the way we would like to reposition the international business. Overall, international advances have increased at 11% on basis of averages. In terms of the domestic investment portfolio, it is reasonably well-diversified, fixed income bonds are at PKR 483 billion at a yield of 11.3%. Most of the buildup this year has been at close to 13%. Some of these are from the previous year. Floating rate bonds are at PKR 481 billion, yielding 15.8%. And the T-bill portfolio is at PKR 306 billion, is also yielding 15.3% relatively higher in line with the interest rates. We can just run through the P&L, Murad, the next slide, please. Yes. Thank you. So overall, PBT is up 29%. So the largest performance has been the rearview and the fact that we've built up a strong investment book. The NIM for the bank are up by 80 basis points year-on-year, which is a strong increase in the overall bottom line with a growing balance sheet. Very important for us is the customer acquisition. So we've done about 450,000 MTB. And that, of course, translates back into very strong ATM fees, which is up 26%. And like Shazad mentioned, that the focus on the corporate bank is NFI. So the trade fees are up 23% overall. This includes a pickup in business within international as well. More remittances, market share keeps growing every quarter. We're at 21%, trying to build that up further. The fees is up very much in line at 17%. We've had a stable dividend income of PKR 1.5 billion, mostly from our subsidiaries and from the equity book. So this, of course, is a strong revenue performance. Overall revenue is at PKR 95 billion for this year and up by 34%. But I think what I'd like to just mention is revenue is up by 11% quarter-on-quarter, which is with a 17% buildup in NII, and there's a little bit of repricing yet to go. In terms of advanced expenses, overall expense base is up 21% versus last year, essentially driven by inflationary impacts across the network and of course, improved compensation levels which we introduced in March. Our overall cost-to-income ratio is at 14% for this 9 months and well below the 44% that we had last year. In terms of provisions, asset quality levels for the domestic bank continue to improve, have now gone below 5%. We've had strong recoveries overall of PKR 2.2 billion in the bank. Our coverage for the international loan book remains at 87%. I think it's been at that level for a while, but it's made quite strong overall in terms of what we have. Overall provisions within international close to $18 million for these 9 months. So this obviously completes the overall P&L analysis. We'll be happy to take question and answers now. And anything else that you can raise offline as well. Thank you, and Murad, over to you.

Thank you. We'll now open the floor for Q&A. If you have a question, you can either raise your hand and ask your question directly or you can put out questions in a Q&A box, and I can repeat those to the management. We'll start the Q&A session. First question coming in from Raza Inam.

I just have a few questions. My first question is that your ADR ratio is quite low compared to other peer banks or the other peer banks have been aggressively increasing their ADR either by reducing the fixed deposits and by increasing advances. Given you've got next year is quite high at 58% compared to 49% of normal banks, so is there any strategy to work on increasing ADR or will you remain prudent on the lending side?

Okay. And your second question?

My second question is that you built a significant general profit in this quarter. So can we expect this trend to continue going forward or are you comfortable with your overall coverage levels?

Sure. Let me give the first question and then hand it over to Imran, our CRO. And then Arif, if you want to add a few things. Look, ADR strategy, clearly, I think there's now -- it's something -- as a bank, we want to be in the market, we are in the market or we have the liquidity. We would love to do transactions where we can support our client base. Unfortunately, a lot of our pipeline deals that were in the pipeline have been for one reason or the other, given the global economic situation and the local economic situation have been slowed down. I wouldn't say they have come to a halt. That has some of utilization, therefore, a slowdown and we were not able to cross at least the 40% before quarter end. We are hopeful that we should be able to get there relatively easily. Our aspirations are, though we don't know, we would like to get to 50%. And after that, even 60% if we have the right quality assets. One thing we will not do is compromise on the quality of assets because we know how painful that can be, and it is definitely daunting on the bottom line. We are looking for good projects. We are open for business. We are going to continue to work with that and at least being sure that we -- there are 2 hurdles. The first one is 40%. The second one is 50%, like, clearly, that's one side of the numerator and denominator, right? It's the numerator. There's a denominator. I think there, we are very steadfast. We continue to build up quality deposits and where we think it makes sense, we will keep on building it because we think with the network our size, we have a lot more potential with the deposit growth that's out there. But we are not going to get into a deposit war and take deposits for the sake of just showing higher market share. Whatever makes business sense, we'll continue to build on that. So that's our ADR, on ADR on the provisioning, I would ask Imran if you could answer Raza's question.

Yes. Sure. No problem. Thank you Raza. So let me start with the domestic. Our domestic book is adequately covered in terms of our provision coverage, we are about 90%. And we think that is sufficient. We don't need to do anything barring God forbid anything that new happens. So our current portfolio, we are fine. On the international book, which is predominantly GCC, we are now 94% covered, of which Qatar and Bahrain are 100%. Within UAE, we've got some very credible FSV, so that's currently standing at 90%. So blended coverage is 94%. So that's where we are standing in terms of UBL domestic as well as global. Last quarter, we took some provision on Sri Lanka sovereign bonds because of the prevailing economic and political situation in that country. And at the moment, we feel that the way that thing has developed, we are probably okay at the levels where we were. In the current quarter, you're seeing a spike in the provisions. Part of it has been triggered because of the downgrade of -- sovereign downgrade of Pakistan. And our Pakistan bondholding is triggered an IFRS 9 provision. And then the remaining part is something that we have taken more on prudence basis. On the bonds, because once you sit outside Pakistan, government of Pakistan is another counterparty. And we are quite confident internally that as the time progresses and the government has the opportunity to put down the initiatives they're taking, the bond values will improve and this provisioning level will be coming down.

Raza, do you have any follow-up questions?

No.

We've got our next question from [ Fawad Basir ].

My question is just on the breakup of the provision charge that you've taken in the third quarter as and how much of it is pertaining to your investments, your loans and the IFRS, if you can clarify that? And secondly, I think there's a lot of confusion on this and I'll try to get around it. But as per the bank, what is the current tax rate that is being applied to banks right now?

Okay. So I think let me just sort of break up essentially the provision charge, as Imran mentioned. So we've taken about PKR 3.4 billion on Pakistan euro bonds. This is, of course, driven by IFRS 9 and based on our model that we've adopted for the last 2 or 3 years. So that's one. Apart from that, in these 9 months, we've had close to PKR 1 billion charge on our equity book in Pakistan. Again, that's based on our impairment policy on equity in line with the market. Of course, when we sell the security subsequently as the market reverses, these gains will come back to us. So that is obviously the 2 major components of the charge. And of course, this has been offset by some strong recoveries during the course of the year. So that's, I think, color around the overall provisioning that we've had in these 9 months. Apart from that, to answer your specific question on the tax charge, the tax charge has been applied by UBL has been -- is 55% for the current quarter. Of course, the overall blended effective tax rate would be higher at 63%. That is because of our prior year retrospective tax impact of PKR 3.6 billion, which we took in the second quarter. But to answer your question, Fawad, effectively at an ADR of 40% plus, the tax rate would be 55%. And to further clarify the ADR process 50% threshold and the tax rate will be 49%. 39% is your corporate tax rate, 10% is your super tax. But just keep in mind that 10% super tax is for this year only. So next year, it should be 43%. So next year, our expectation is that effective tax charge and obviously, with the upside of positive impact to EPS will be there for all banks.

Okay. Just a follow-up on this. We've seen some of the other banks are not having the same sort of effective tax rate, but just say, compared to UBL, HBL, MCB, some of the mid-tier banks have not followed the same. Maybe it's a proven concept, I don't know. Any color on that, why you think that is or do you just assume the worst recorded there? And if the government changes something, then you guys would be at an advantageous position of reversing it or no?

No, Fawad, I think I'd be happy to clarify. So the midsized banks when the ADRs are north of 50%, 55%, of course, they will apply the tax rate based on the lower slab, right? And obviously, the banks that are with -- have a lower ADR will be required to provide a slightly higher tax rate, which is why I think Shazad also mentioned that we are in the process of building the ADR over time with more admission cost of deposits and one building quality assets because at the end of the day, we have to make sure that the capital allocation that we make to an ADR strategy makes sense from the medium to the long-term. So that is the plan. And obviously, over time, there will be tax efficiencies. But the fundamental model of making sure that we allocate our asset base and our capital and the loans we put on the balance sheet are the same quality that we've had in the past. That is essentially what drives any strategy, tax will come after we build the earnings profile and we build the balance sheet.

Okay. Okay. So -- okay. I think that's pretty much clear. Just one last thing. So it's got nothing to do with the way you look at the tax? It's got to do completely with the ADR right now?

That's right. That's right. Because the tax slabs are across the board is all the same.

Thank you. We've got a few questions on the Q&A box. I'll try to convert some of them are, again, around the investment book provisions, which you've already shared. Just one question on the same. Can you share the breakup of maturities of the Eurobond in your portfolio?

Yes. So essentially, we don't have any major maturities obviously this year. Most of the bond portfolio is stratified out to 2025, 2026, 2027 and some in 2031 as well. Of course, it's also available in the annual accounts. So there has been no major issuances or no purchases during the year. So this is for the Eurobonds that I was mentioning. But if it's related to the PIBs, no further maturities this year. Yes. Yes. Basically, Eurobonds this is what it is. And obviously that helps the bank. You see the balance sheet that buying and doing that we're running obviously these are longer-term bonds, and they've been built up in the ladder.

And while we're at that, the favorite question, what's your weighted average duration for the fixed income portfolio? And where do you see interest rates and yields going forward?

Yes. So I think the weighted average duration is at this point in time, close to 3 years and this was a little bit lower until last year, it was close to 1.5. But obviously, we built up our bond portfolio during the course of the year. And I think we've built it up a pretty healthy years overall. And before we get to the rate question, I think I'll just say that when you have a solid current account like PKR 700 billion which UBL has, of course, you do get into the long-term play, some of the deals are, of course, quite attractive. So that's been the strategy for that. In terms of the rate outlook, do you want to add something?

No, I'll say the same thing every quarter or every 6 months. I think if I had the answer, we would not be sitting here, especially today on Friday afternoon, especially with all this political news coming out at 2:00, I'm sure everybody wants to hear what's next going to happen. So honestly, nobody knows the answer. Look, it all depends what's the outlook on inflation. Global inflation is going to play a very important role. I think there's one side of the story which says that with -- on using just basic mathematical approach year-on-year inflation should come down from a comparison point of view. Secondly, I think the expectation is, again, for us, really, the big question is where will oil be in 3 months, 6 months, 9 months, a year, because that's a big component of our total import bill. And if that comes down, that will also help us on the inflationary, because that sort of hits everything from your [indiscernible]. Even if it doesn't hit, he'll tell you that [Foreign Language], just I'm trying to be a bit light on given Friday afternoon to a major importer of some highly oil-sensitive commodities. So I think -- but I think one would expect that this is -- at these levels, they need to come down. They should be sustainable. I think in the backdrop, all of this is U.S. Treasury, which has taken a real rally. This is something that's not happened in the last time around when we saw rates coming down from 13% to 7% because that was COVID times and each phenomena is different. But I think our direction of travel, we think if we're building up again, you guys are smart people on this phone. If you're building up duration, we have it for you that this is not going to be remain a permanent these levels. Otherwise, one should just stay in T-bills and enjoy the inverted yield curve. Thanks.

Follow-up question on around the Eurobonds, what are the guidelines to reverse the provisions that you have taken on the Pakistan Eurobonds?

Okay. So I mean, in terms of the reversal, obviously, these have been taken under IFRS 9 based on our credit policy and our overall methodology. So we will continue to reassess the requirement of the expected credit loss provision every quarter based on changes in the market scenario and based on Pakistan's outlook as well. And then we will reassess that on a quarterly basis. And if there's a material change, of course, you will see it and we will talk about it. But this is something...

The prerequisite, Murad, will be that the bond yields start to move up back towards 100%. So once that starts to happen, then we will do all of the above that Arif has just talked about.

And you would also need the rating upgrades to come through, right? I mean so for those payments to come through...

Well, you see the thing is the rating is important. But part of it is that the bond may be underpriced at the moment because there is a political unrest and there is global issues and there are domestic issues. But if something were to stabilize and the bond yields start to move up with or without the country upgrade, then obviously there will be a point when we will think about all these things.

And you would be using the standard PDs and LGDs for assessing these provisions on the downgrade and specific…

That we do already.

Instance? Yes.

That we do already.

Okay. So from a -- in the UAE business, these would now be classified as in Stage 2 bucket, right?

Yes. So these are obviously in Stage 2, but just a valid clarification for people who are familiar with this. So most of this loss was already in the OCI within the – for the AFS book, just to claw back from here to the P&L.

And just one other clarification, when Imran is talking about innings coming up, he means prices coming up. Okay, next question.

Yes, just last question on this that I have is if you could share the provisions on the Eurobond just for third quarter?

I think you already mentioned that the overall charge that was taken was about PKR 3.5 billion on the Eurobonds, right, in this quarter, right? At the...

Yes. Got it. Moving on from this to some of the asset quality issues, again, interest rates, high weak economy. Just your thoughts on how do you see asset quality evolving over the next quarter or so? And also, if there are any stresses coming from -- due to the floods?

Yes. So I'll ask Imran to comment on that. You can imagine and expect, as a senior management, we are constantly asking that question to ourselves and Imran is constantly doing stress testing in periods like this or even in normal periods. I think generally speaking, we feel our quality -- our portfolio has withstood very well despite some very heavy clouds and dark clouds in some of our sectors. But needless to say, when there are areas which are of concern to Imran and us and he is monitoring that and he can give you some more color on that.

So as far as the lending book portfolio is concerned, and I'm now referring only to domestic Pakistan book, there was a question which says the early assessment of the portfolio. At the moment, our portfolio, touch wood is doing very well. We have so far no concern whatsoever. And we have done extensive amount of work on the floods and how it has impacted our portfolio. We have derived -- we have practically gone on the sites and figured out how much of our portfolio was under water. At the moment, our estimate is about PKR 2 billion of our portfolio was affected by the floods. Now I'm not saying this PKR 2 billion is going to go bad, but we put everything that we finance directly or indirectly within that area. Once we did that, we've done stress tests on our -- the smaller portfolios, the agri, the small enterprise and the consumer portfolio. So far, we see that the spike in NPL is very small. It could be just the one-off thing. However, we do consider that going forward, there will be additional NPLs because of the flood. It was clearly an unprecedented natural event. How much of that actually gets crystallized is the only question mark we have. I think we'll be in a better position to answer that question a bit more empirically after the next call.

We have a question from [ Anas Motiwala ].

I was just wondering about the rise quarter-over-quarter in the operating expenses of the bank. I know with an inflationary environment, this makes sense, but I was just trying to gauge what these operating expenses growth would be going forward because we are in a strong inflation environment right now as -- so if you can just give some sort of clarity on that? And on the State Bank fines that are being put on these commercial banks, I'm not sure if UBL is part of that 7, 8 banks that they put out. But if you could just talk a bit more about the mechanism and how they're going about that and when we can get some more clarity on that, when do you think this could get resolved?

So I think on the expenses, I mean, we've all seen the power utilities going up right onwards from the second quarter, right? So essentially, most of the impact pertains to that across the branch network. Of course, we continue to hire and build our workforce. There's a little bit of an impact over there. We also did revise some of our allowances across -- for our branch and operational teams. That element is also built in. And of course, there is the impact of dollar devaluation right on IT contracts and the others. So all of that is sort of factored into the 11% or so. But obviously, specific guidance is difficult because for a large institution, but we don't expect the cost base to materially change, at least in the last quarter from the levels where we are now because a lot of the FX deval and the utility bills increased adjustment has been done in the third quarter. So -- and obviously, U.K., you do know that there is an overall very high inflation environment overall that we've seen in the first 9 months. So that would be on the expense base. I think I defer the question on penalties to Shazad.

Yes. And again, if you look at our operating expenses, I think we have tried to be -- there's a lot of cost initiatives that we are doing to curtail that. But again, assuming gains current when it comes to some of the headwinds, which are dollar, where a lot of your technology bills are there, utilities have become a real issue for us and minimum wage and the impact of that, plus we are doing the right things by addressing to the majority of our people in terms of salary adjustments and so forth. But again, there, if you look at it, we have been very -- but I think the dollar and utilities are 2 big factors that do that. To your question on FX, well, we hope there's no penalty because we have done no wrong. And I think that would be a unanimous view from all our colleagues in other banks, but there is a process. We are working with the State Bank. We have been served a show-cause notice. We have provided all the details of our trades during the day, intraday and acquisitions. And I know from my past experience with the State Bank they will go through all of that and then there will be whatever determination they do based on that. In terms of quantum, honestly, I don't know. I've heard the same things that you guys have heard. I just hope that reasonableness prevails and one looks at the entire picture of the role of banks, what they have been doing and why they've been doing. And keep in mind, there's extremely high volatility in the marketplace that as we all have experienced or experiencing or we experienced during those periods in question and the volumes and the negative dollar position that we -- all banks were running because of the fact that there was a shortage of hard cuts. So we'll see. We have not taken an attempt, but we are working with the regulator very closely, providing them any and all information that they need to determine the extent of what will need to be done as next steps, fully incorporated. Next question?

So a couple of questions going back to asset quality. I mean, if there is any insight that you can share on in terms of sectoral exposures where these potential stresses are coming from in -- due to floods.

Imran can...

Yes. So Murad, categorically speaking, as of right now there are no stresses in our portfolio as at September. I mean, it's BAU just like we were in the last 3 quarters, there is no issue. What I'm saying is that we have internally stress tested our portfolio, which is likely going to be affected by the flood. In our big picture, it comes to about PKR 1.8 billion that can potentially get impacted. However, we think that PKR 1.8 billion -- of this PKR 1.8 billion, PKR 1.1 billion is the crop finance, which was impacted by the floods. So even that PKR 1.1 billion is not going to be impacted completely. But we also believe that some part of this PKR 1.8 billion will be impacted because of the situation that you understand. So point number one, so far, up to September, our portfolio stands resilient, there is no issue. We also believe that by December or even by Feb or March, we will have some impact of the flood coming through to our portfolio. But as I said, this is a developing story. We are not in a position to comment exactly what those numbers will be, but we will share with you as and when they become clearer.

Question on the chat box. Where do you see borrowings going forward given the gap between T-bill yields and repo costs be reduced?

Well, I think -- I mean, repo participation within the market is always driven by your position and the fact that how attractive do you think a particular option is given the rate scenario. So the repo borrowings have come down this quarter. Obviously, yields have also receded a little bit, you may have seen in September a little bit, in October as well. So I think repo funding will always remain a part of the overall balance sheet management for the bank. And you -- and every quarter, you will see movements in that, not just for UBL, you'll see it all across the market. Yes, Murad. Does that answer that? Murad, can you hear us?

Murad, can you hear us?

I can hear you.

Okay. Good. So we can just keep on talking.

Let me just check with Murad.

We could say a few things that assuming nobody else is hearing us and then find out tomorrow in the headlines. And UBL something and CEO said something. But we hopefully are smarter than that. Otherwise, these people would not invest in our store. So Murad is gone off now.

I think we've covered as usual, allotted time through 50 minutes already. So yes. Yes, we have a host of -- I think he is gone off.

I think he has gone.

He is gone off. So let's give him a couple of minutes. Hopefully he will come back.

And then we can probably -- no, no. Okay. I think we can be heard across the call. Murad himself is just dropped off. So let's just wait.

No. I think we still have 72 participants on.

Yes, we do. I think we'll just wait for Murad. He is getting online I think in a minute. Okay. I think if while Murad is logging in if somebody has a question, I think you are audible. So please go ahead and let's utilize the time.

Sorry, I got disconnected. Can you hear me?

Yes.

Yes. Sorry. Okay. So we had a few remaining questions, I think on the PIBs, if you're seeing any maturities coming through over the next 2 quarters? And also on the current portfolio, do you have anything under [indiscernible] fixed bond portfolios? Can you hear me?

Yes. I can hear you.

Okay. Yes, I can't seem to connect with the…

I think -- yes, I think they have gone, Shazad is connecting to audio.

Yes, they got dropped off.

Yes. You can hear us, Murad?

We are here.

Sorry. Yes. So sorry for that. So I don't know if you got my question on the PIB, if there are any maturities coming through over the next 6 months?

So no, no major maturities in this -- in the fourth quarter. And I can give you the full year, so we have about PKR 65 billion or so which are maturing next year in 2023. Of course, that's a little bit spread out. And obviously that will get reinvested at much better yields hopefully.

Sure. Last question I have on the chat box is normalized EPS would be higher in the coming quarters. Can we expect UBL to pay a higher dividend maintaining an average payout of 70% to 75%?

You know our answer on that, right? We don't -- but you have a history, you have a -- we are -- we don't shy away from ensuring that we pay -- our dividend yield story is a good one. And again, we hope the interest rates -- the tax rates continue to come down and that's something that will continue to maintain.

Great. Last question I have to take on that is what drives cost of swap? And what is the bank's strategy on building up general provisions over the next couple of -- over the next few quarters?

So I think we answered the provisioning question. Imran, you already answered that question.

Yes. So swap cost is typically the same for across the market. So you can look at the swap cost for all the banks, and you can just look at the swap curve essentially. And that obviously is oscillated from a high of 7% to 8% down to a 3%, down to a much lower number right now. And that's essentially the forward curve on the dollar. And not just for UBL, typically, all the [ FA25 ] deposits, a large component of them are swapped in the market and there is obviously a good spread to be made versus PKR assets. So that's what drives swap cost. And I think our year-on-year number has not been particularly different, if I may recall correctly.

Great. I think we can close the Q&A at this point in time. I would like to hand the call back to Mr. Shazad Dada for his closing remarks before we end the call.

No. Thank you, Murad, and really thank you for all the listeners and investors who are on the call and some extremely important and relevant questions. But I will just conclude by saying we continue to deliver a strong 2022 on the backs of a very strong 2021. And we are hoping that we target for another record year despite some strong headwinds coming our way. We are pivoting around our core strengths and our core strategy as the economy transitions from -- to stability over time, which we hope should happen. Imagine if that was not there, imagine if we had done that sooner rather than later where we would have resulted because we have clear beneficiaries of a stable and a growing economy, and we play a pivotal role in that. I think we all know in the backdrop, we'll continue to have high inflation. But we are hoping, as we talked earlier, that is something that we are monitoring very closely and its impact on interest rates and all other things. But clearly, I think our strategy to continue to grow our low-cost deposit and maintain an aggressive customer acquisition strategy while optimizing our network. And by that, I mean relocating, opening new ones, capitalizing on new areas, not along all of Pakistan. And I think there are some amazing new prosperity coming in some of the second-tier cities. And last -- yesterday only I was visiting some districts of ours and we see a lot of promise there. So that's going to be very much part of our growth story when it comes to branch banking and continuing to optimize the network. Our investment strategy continues to remain dynamic. We'll build up a portfolio across long-term and floating assets, seize the trading opportunities as and when they come along. And I think we have over the last 18 months proven that that strategy has been implemented, not just talked about. Our focus on quality asset growth will remain steadfast, whether it's on the corporate or SME side. On SME side, we are investing heavily on the trade business, and it will be trade-led. On the corporate side, again, we are going to be doing not just pure lending, but we want to become partners with the corporates by helping them from investment banking all the way to their cash management business and provide them the capital, but at the same time, be a partner with them. We have the risk appetite to do and we have the card and we also have the ADR backdrop in the mine. So we'll continue to grow the balance sheet, but continue to remain -- look at risk, especially in light of this current backdrop. Digital banking, this is a big area. We have talked about it. It's a priority area. We continue to build our business model. It's something that's playing very well, whether it's on digital payment side, digital asset lending side, and we set up efforts so that we can really penetrate throughout Pakistan and become -- be able to offer a digital account to every Pakistani and that's our aspiration, we are pivoting from -- to digital. We are trying to take traffic out of our branches into the app and into alternate delivery channels because we see clearly a customer need for it. And also selfishly, it is much lower cost by a factor of almost 1/10 to serve a customer in a branch versus serving the customer on the alternate channels. Islamic banking growth is an aspiration, an ambition. We have done some structural changes internally. We are giving all the necessary resources so that we can build the UBL a mean network footprint, brand and people. And I think that's, like I said, a developing story that we are working on. International, that continues to be, again, a unique asset for us and we have been able to really stabilize that business and grow selectively where we think there are opportunities and continue to do that. We build the wholesale business and improve the ROE there. So in conclusion, I would just say we remain -- we continue to remain resilient on our core needs to continue to grow the earning growth and diversifying to new business opportunities. And with that, continue to give strong dividend paid to our investor base. Thank you very much all of you for your time. I hope you all have a great weekend and hope to see you next year with even better results and even better update on our progress.

Okay. Thank you so much to the management team at UBL for taking out time for this call. Mr. Shazad Dada, especially to you for taking out time off your busy schedule. Thank you to all the participants who joined the call today and had questions for the management. We will look forward to hosting you again on the next results quarterly call. Thank you so much, and this ends the call today. You can now disconnect.

Thank you, Murad.

Thank you, and bye-bye.