United Bank Limited (UBL) Earnings Call Transcript & Summary

As is usual for this call stay, these calls will have a presentation by Mr. Arif on discussing the financial performance of the bank during the first half, and we'll follow it up with Q&A. With that, I would like to transfer the call to Mr. Arif to start proceedings for today.

I would like to thank everybody who joined us on the call for the half year results. And we have our COO, Mr. [ Muhammad ] as well with us on board. I'll just first go through the overview of the performance for the first half year. And so in terms of the overall margin expansion that we've seen in the first half has obviously grown the earnings base. This is Slide #3, Maral, please pull that up. And that is seen in the growth in revenues, which were $85 billion for the first half year with an increase of 36% versus last year. The NII was at $72.3 million with a growth of 54%, well positioned by the balance sheet. The NIM for the first half year at the MAC level, up 5.5% versus 4.5% that we had last year. The contribution of our fee-base is about 15% of overall revenue with the NFI at EUR 12.8 billion, with good growth in fees and commissions. Branch banking remains a cornerstone of the bank, where fees were up 7% to $1.3 billion and other corporate service charges and traded guarantee income has also improved in the first half year, while our card-related fee income and our home remittance commissions also remains stable and keep growing year-on-year. So the fee contribution is well maintained despite the overall increase in the NII as well. In terms of the cost base, inflation has impacted costs as gas with the overall banking sector. But I think the key message is that we continue to reinvest in technology and people despite the overall stack higher inflation level. For us, improving efficiencies has always been a key focus, and that is going to continue. And we will see that the overall increase in expenses is essentially a result of inflation. But along with that, we've also improved our staffing levels across the entire network with a clear direction to improve service levels as well. So that's an overview of the P&L. I'm sure you all see in the results in detail by now. I'd just like to quickly touch upon the balance sheet on the next slide. So as always, for us, a key focus is building the balance sheet. And then you can see the 3.4 trillion level of total assets and the 16% growth. The funding profile of that is, of course, driven by domestic deposits, which is led by our advanced banking team, where our objectives, of course, to improve service level, while we continue to expand and improve the footprint as well within both inversion and [ SAM ]. Our average current accounts in this paper are up by 16%, while seasonal accounts are up by 9%. And the current approval deposits ratio stood at 48%, and that is the average current overmanage ratio for the bank versus 45% last year. Our CASA levels are now have in fact, crossed 90% as against 87% last year. And like to mention before as well for us, new business momentum across all our regions is key, and that has continued in 2023 with a number of new-to-bank customers acquired during the current half-year. In terms of the asset profile, Corporate Bank lending continues with strong asset quality levels, which we thought to maintain with close vigilance. The advances averaged 754 billion in this half year with an 18% growth over last year. In terms of our NPL recoveries, the focus obviously remains as it has been in the last few years within more domestic and international. In terms of the overall investment portfolio and the mix as of 30 June, we are well diversified with the overall increase in the investment portfolio by approximately 28% versus last year. And we believe the balance sheet is well-positioned for further repricing across the asset base. And as you can see, the overall equity of the bank has grown by 9% versus just the December level. So that is, of course, an overview of the P&L and balance sheet. We will look forward to your questions. So I'll hand the call back to you, Maral, and let's take it from there. Thank you.

[Operator Instructions] We have our first question coming from the line of Raza Jafri.

Congratulations on a strong set of results and dividend. Two questions. One with respect to, I mean, obviously, capital allocation, we've seen fantastic dividends from UBL last few quarters. My question is, when you're looking at how much space you have with respect to the capital ratios, should we be looking more at on consolidated numbers or consolidated? There seems to be a bit of a gap. So what numbers do you look at? Do you look at one-off or either or the lower of the 2 when you're looking at the minimum requirement and your capital levels? And then I'll ask my second question and follow-up.

Very good question indeed. So we look at both the levels. So we look at both channels, which is north of 16% per CAR as of June. And yes, of course, we also monitor the consolidated CAR as well, which is just close to about 15% at the end of this quarter. So what I'd like to just mention here is that for us, we obviously monitor capital levels very closely in terms of the buffer that we are carrying and we are adequately capitalized in terms of our power as we have historically been in the past as well. And along with the capital base that we have, we believe that this capital level is adequate from the perspective of further building up the balance sheet and for further growth across both asset businesses and liability business. So I think maintaining an optimal CAR level, by producing the right level of ROE, this is the optimal equation that we would like to maintain. I hope that answers your question.

It does. So if I were to read it correctly, stand-alone is what you're focusing more on, but you do obviously give due consideration to the consolidated CAR as well. Is that correct?

Absolutely. I think that's a fair understanding.

Right. So when the state bank obviously looks at the minimum, would they be looking at the stand-alone as well? Their requirement from their perspective, they want you to maintain that a stand-alone rate or a...

No. I think let me just clarify regulatory ratios have to be maintained across both domestic or stand alone and consolidated. We also monitor it accordingly. And obviously, the buildup within the balance sheet and the growth that we anticipate these capital levels and earnings that we have within the balance sheet are adequate to maintain the ROE that we would like to see.

Understood. My second question is, obviously, in the second quarter, we did see UBL, I think, sell down some overseas sovereign bonds. And maybe some color on that. And with particular respect to the strategy going forward, is this something that we can expect to become a recurring phenomenon? I understand, not just [ Barkata ] a lot of other emerging frontier markets there, bonds would have rallied recently, for various reasons. Is that something that you will continue to take advantage of and trim down its holdings in the next year or so?

Yes. Okay. So I'll handle that. So part of the answer you actually gave yourself. We have 2 sets of bonds in our international portfolio. One set is the government of Pakistan Eurobonds and then we've got various other sovereign bonds. And let me make it clear, we've only historically invested in sovereign bonds. We don't have maybe one. But other than that, we don't have any corporate or F5 bonds. And on those points in the past, when things are not that good, we have taken some provisions. And then there was improvement in prices, we decided to take advantage of that. So that is something which we have done. And opportunistically, we will continue to look at that venue.

I will now move to our next question from Muhammad Saeed.

So I think one part of my question was already answered related to capital adequacy ratio. Second is more like an accounting terms like you have been declaring above-average dividends so the dividend to the sponsors is being credited into the sponsors account or the rupee component is still with the bank. This is the question number one. And question number 2, we recently saw a voluntary staff retirement scheme announced by UBL. This has been done at a time when other banks were aggressively expanding or hiring people. So can you just comment on these 2 things?

So thank you so much for being on the call. So the sponsor dividends are obviously credited to these accounts as per their requirement. And based on that, any further future investment as is the case for all of the shareholders is obviously with them. So that is how the dividend is credited to our sponsors. And I think on your question on the BSS part, I'd like to [ Muhammad ] to comment.

So listen, the BSS part, you talked about other banks hiring. So our hiring numbers on an annualized basis. I don't know it's more than 20% of our workforce that we hire. But listen, the thing is we also took a stock of how the metal and the micro situation and the business environment have changed. And we also recognize big parts of our businesses will not be aggressively growing and where we will be investing more. So with those things in background, we decided that we want to optimize those areas of the bank, create more efficiencies. And as a responsible corporate citizen, legally speaking, it's a lot less than one can offer, but we decided to go this route. And I can tell you this scheme has now concluded very, very successfully. There's been a lot of positive sentiment within the organization. And some of our people have actually financially benefited considerably. So it's now finished and finished quite well. And on the high-end side, we continue to hire. You may have seen we recently launched a campaign to start hiring people with 14 years of education to FA level. And then we are offering that if they come and join UBL, we will sponsor their next level of education. So absolutely, there is no letting up on hiring the right talent. And this whole exercise was aimed at optimizing and creating efficiencies.

We'll now move to questions on the Q&A box from Sunny Kumar. First question on capital adequacy dropped from 17% in December to 14.8% in June due to an increase in risk-weighted assets. Could you please explain the reason behind the higher risky assets?

Yes. So essentially, there is no increase in risky assets impact on consolidated CAR is purely a function of the devaluation of the PK. And that is about it. The dollar on the GD balance sheets have not grown, but the PTRs depreciated. But just to explain to you, while the RWAs go up, the equity at the consolidated level also goes up because of the devaluation in the PKR. So that equation will continue. And I think the key is that the balance sheet that we have, even in the overseas, they are liquid enough for us to be able to compress them when we want. And that is something that we monitor at the day job to make sure that if we need to compress the balance sheet where required, we will do so and accordingly maintain the capital where it is required. But I think just a clarification for everyone is that so 95% of the earnings are driven out of the domestic standard or bank, where the CAR level is 16%. And in fact, that level should improve with the overall earnings profile of the bank. So that is where the bank has a comfort in terms of adequate buffers. And as you may have also noticed that in terms of the asset quality, reduction, all of that is also there. So that is how we work comfort on the capital base and the ability to maintain that level in our business going forward.

Let's stick to the capital adequacy theme. There's another question here. Can you please give insight into the wide difference between consol and unconsol card levels?

Yes. And I think I've already explained that is essentially because of the dollar base of foreign currency-denominated RWAs, which sit within the blue, which obviously result in some dilution in the overall CAR leverage. But even at that, close to 15%, we have a decent buffer of 3.5% on the total car.

A question from [indiscernible], current PI breakup between floaters and fixed and outlook for investment strategy going forward?

I think the splits between fixed and floater is very much there in the financials. In fact, we have the classification as well. I think all I'd like to say is historically, we've maintained a diversified portfolio so that we can obviously play the yield curve up or down, and that is very much the gate that you see even right now. But I think let me also just clarify that as book investment strategy, the actual buildup in earnings, which we track and which I think the market should also track is the current account base, which truly creates a real alpha in the overall earnings performance and the overall bottom line as well.

Question on the Khushhali Bank mentioned in its financial statement that you'd be able to inject PKR 2.5 billion in the bank. Any update on that? And also what about other investors in Khushhali Bank, are they willing to inject capital in the bank as well?

Yes. So other than UBL, which is B, we are slightly less than 30%. The remaining 70% investors are in discussion with the bank, the Board of Khushhali. And some of them being closed ponds have their to the Board that they will not be able to invest any further. So Khushhali's Board has hired advisers to look for equity contributors. And UBL has told them our pro rata, we will look at injecting equity where everybody else is ready to do that. But overall, Khushhali situation is slightly better. Their liquidity is much better. Their lending ratios are -- I mean they are not where we would ideally bank them to be, but they are in tracking in the right direction.

Question from [ Amarin Sorani ], despite economic consolidation, bank's fee income momentum has been excellent. Can you please shed some light on whether the growth is a reflection of capturing market share? Or is the pie size increasing? Also, please guide with the outlook for the same.

Yes. So I think a good question on the fee side. So the fee buildup, for example, is driven by the branch banking NTV acquisition. And for us, the fee buildup is along with fees on branch banking, including credit card fee buildup is also home remittances. And you know that we are a leader in owned remittances. So that impact also is there for the bank in terms of the buildup and fees and commission. I think anything between 12% to 15% annualized total piece is always expected for a bank like UBL, and that's the track record that we've had. Obviously, branch network keeps improving. And in terms of taking share away from competitors, that, of course, is the driver of UBL.

A question from Irtiza Hassan when compared to calendar year '22, the cost of deposit for the bank has badly changed, even though we have seen a material change in policy rate. Can you please explain the reason for such sticky cost of deposits? Can we assume that these costs have peaked out in the event that there is no further hike? Or can we expect more repricing to materialize in the coming quarters?

Okay. So the cost of deposits for us is obviously the elasticity of that is a function of the current account base. And as I mentioned in the preamble that we will add 49% current accounted total deposits. Obviously, that makes it inelastic. Our slam banking business is also picking up along over the conventional side. So that will strengthen, hopefully further in [ channel ] as well. Obviously, that will do away with the impact of any higher interest rates. But I think just along with that, I'd like to say that we should not be too hung up on the corporate order level because that can be monitored or shifted based on our investment strategy as well. But I think the bottom line to look at is the expansion of NIMs, which is 5.5% versus 4.5% last year, which is a good shift for a bank outside.

Question from Ali Mohammad, is the bank going to buy back at safe?

I think we discussed this last time as well. At this point, I think we feel that we do have the right capital structure and the right free float as well. And I think you've seen the way we -- in terms of our earnings profile. So I wouldn't put too much thought into that at this point.

Question on [ BioWorks ] again. During this time of high levels of inflation, what kind of strategy are you implementing in expanding your investment portfolio by 28%?

Yes. I think the investment portfolio buildup by 28% is obviously a function of balance sheet growth, 16% of which is coming straight from current accounts. That obviously is again going to be a function of how we diversify the book and how we play the overall yield curve. So if you look at the bank's balance sheet over the last many years, the investment portfolio will always be a function of our funding profile and how we grow our deposits and borrowings, et cetera. So that obviously is expected to continue because we are obviously -- if I may use the term hungry for further growth in the balance sheet, and we will obviously continue with that in the years to come.

If I could add a question over there as well. Is it too early to be thinking about the move from floating rate to fixed rate, obviously, over the past year, 1.5 years, there's been a very strong buildup in floating rate PIBs, understandably slow because rates were rising. Any views on how do you see the rate environment moving forward? And is there now a sense that the composition of the portfolio should be shifting to more towards fixed or would you still like to maintain a short-dated profile?

Well, I think for any bank, including us, it's a function of how you view your own balance sheet and the flexibility that you have in your balance sheet in terms of funding and in terms of the asset side. That will continue to direct the composition of the portfolio. And obviously, that will vary. I don't think there is one answer typically in terms of exactly what you would intend to do. But obviously, we will continue to monitor balance sheet spreads, our growth in our deposits, our overall portfolio duration, et cetera, in order to play the appropriate mix in the overall earnings profile.

And if I could add another on the NIM profile. So we've seen a very strong buildup over the past year. Obviously, the deposit franchise has helped very strongly over here in NIM expansion. But on the asset side, the loan book, in particular. Where are we in terms of repricing? How much of the book would have probably be reflecting where the current interest rates are?

Yes. So roughly half of the book is short term and bad book, the short-term book reprices max 6 months. So we either use a 3-month or a 6-month CIBOR base, so it reprices in 6 months started.

Question from [indiscernible], there has been a material buildup of fixed PIB during the quarter of about EUR 100 billion. Could you share the yield and duration of this newly built portfolio? And in light of that, what is the outlook on rates going forward?

Well, I think the participation and the buildup in the portfolio is obviously based on the fact that we would like to maintain a certain mix in the overall investment book. And while I say that, I think I would like to light that nothing is cast in stone. We will continue to diversify the investment portfolio as and when we have a view on what's happening in the interest rate scenario. And that is something that is ongoing. It's there in the next quarter, is there in Q4, et cetera. So I don't think there's a clear single view that we could share at this point.

Sure. And a question from Irtiza Hassan, what's the yield on the fixed rate PI? Can you give a broad idea about the balance sheet growth targets for this year? Secondly, as GOP Eurobonds prices and rating improves, will the bank book more reversals?

I think I think on the balance sheet growth, that's a good question. You have seen the strong buildup in the balance sheet in the first half year. I think we would want to maintain this level, in fact, improve it towards every quarter, maybe as we move towards September and December and next year as well. That's very much the plan, which you have seen in terms of our overall positioning, and that's why you can actually see better NIMs as well in the second quarter. As far as Eurobonds are concerned, obviously, the prices, yes, they've improved. There hasn't been a drastic change in the last month or so. We have adequate coverage on our Eurobond exposure. And we'll continue to monitor that position. Obviously, that only impacts our DTC business. And appropriately, deals were necessary.

A question from [indiscernible], the deposit growth has been somewhat muted during the quarter at about 2%. What is the outlook for full-year deposit growth?

Okay. So I think I just like you gave some guidance that period-end deposit growth is never an indicator of performance. So period-end deposit growth is something that we don't look at. We look at our average deposit growth. And that, if you compare our first quarter versus the second quarter, there's a significant improvement in current account. And also year-on-year, we've had a 16% growth. And something I'd like to collect that the larger the base obviously is difficult to grow that given the fact that there is obviously a market share that we've already attained. So I think we've done very well in terms of the current account performance. And hopefully, that should continue in Q3 and Q4.

And what we should expect in this rate environment that banks will continue to focus on improving the mix towards current rather than just headline deposit growth in absolute terms. Is that something we should expect for the rest of this year?

Logically speaking, that is the right answer. So you will see the bags moving more and more, pushing more and more towards current accounts.

But a more broader question. It is interesting that banks have been able to continue to grow current accounts in this high-interest rate environment. Specifically in New York case, if I may ask, what kind of strategies are helping and growing the absolute number of current deposits? Are these payroll accounts that are coming through? Is there anything else that's helping? Because logically, you would expect a lot more shift towards return-generating deposits in this environment.

Yes. But you see, I'll tell you the beauty of having a 1,300 large network is there is still so much opportunity out there for -- and I don't want to use the term financial inclusion, I think that has its own merits. But there is so much opportunity still for bringing in the products into the system, which we are doing. And we have LTV or a new to bank acquisition drive. We have a very strong sales and performance culture in our network, and we are seeing the benefits of that. But that has built over years of efforts, and having very strong regional teams. And just like any company having a sales culture, you will build the key product, which is current account. And for us, Mukammal current account, which has been the brand that we've had for the last 6 to 8 years has been successful and that is continuing, and we hope to call maintain it.

Question going back to Khushhali, do you think that SBP might force you UBL to manage the Khushhali bank situation considering that microfinance banks issue was part of IMF discussion?

Do we think what SBP will do we really don't know. But what I read between the lines here is the question is about will SBP force UBL to put money into Khushhali. Listen, I've already explained to you that we are almost slightly short of 30%. So if a situation arises where all the shareholders get together and decide to recapitalize the back, of course, UBL will play its road. Having said this, helping manage the situation is not just financial. We are represented on the Board. And in addition to that, we are providing significant amount of advisory, manpower and specialized skill sets to Khushhali Bank norm UBL to help them guide through these difficult times. So whether SBP asks, no, we are still doing it regardless.

Questions from [ Pazanhan ] while domestic infection is under control. Overall inflection is higher than peers, which is under pressure from the international book. What is the outlook on the infection ratio on the international book?

Infection ratio actually has not gone up. It is essentially because of the dollar devaluation. [ Jatin ], maybe you can elaborate on.

Yes. I was surprised to read that question on the chat box. Our corporate loan book whether it is international or domestic, we've not had a single NPL in the first half of 2023. If you look at increase in NPLs, as coming from purely FX translation, otherwise, if you compare it dollar to dollar, there is nothing new for again.

Other question, what deposit growth do you expect for the year? And what is your view on NPLs?

So I think deposit growth historically has been a key. And at the total deposit level, I don't think that would be very relevant because the key to focus on is current account growth. I think we've had 16% over the last half year. I hope that we will, in [ Chala ], maintain that, if not improve it by December '23.

Question from [ Musa Zahid ] Basel III Endgame has recently come into the spotlight under which the RWA calculation is being changed. Is there any development of the same in the pipeline from Pakistan?

No, actually, I think at this point in time, no significant development on that side within the local [ regulator ].

Question from [ Oman Nasir ]. How much of the Pakistan Eurobond has been provided for? And at what point you bill would consider reversing it, considering we are in an IF program and FX reserves are improving?

So we have a 30% coverage on our Eurobond exposure. I think the bonds have rallied in the last month or so, which is a very positive sign, I think, for Pakistan and bondholders. But of course, we will continue to monitor the situation going carefully and deals were necessary, as I mentioned earlier in the quarter.

In the last conference call, we were discussing about local debt restructuring and systemic risk. Do you think that we can face similar situation in the near term? IMF is still cautious [ about it ].

Listen, we have done extensive amount of work on domestic debt restructuring. We've done run scenarios, et cetera. We've had discussions with various government batteries at various levels. It's a personal opinion whether government of Pakistan requires it or not. But it seems that at the moment, that is not a priority. At least for the next 1 year, we don't foresee that helping.

Last question we have on the Sandbox. Any plans for branch expansion in second half '23 since no new branches opened in first half?

Yes, absolutely. We have a branch relocation plan in process as well where we relocate our branch line licenses. So you may not see the count going up, but there will be a number of new UBL branches coming up or shifting where there a better business opportunity. Other than that, there is also a branch expansion plan for new branches within both conventional and Islamic which is in play. I hope that we will be cutting a few ribbons in the second half of the year, and you will see an increase in the branch count by 7.

A question on the deposit base. I think we've already discussed that a while earlier on the current account base. Maybe a broader question. If you look at UBL's performance over the past 5, 6 quarters, what's been very consistent that you've been reporting reversals on NPLs, all of that's a great sign to see recovery coming through. If you total that up over the last 6 quarters, you have recovered almost about $5.5 billion in reversals. So if you could maybe help us understand how in this environment, you're still managing to do that? And where are those coming from? Are these large accounts that are being restructured or recovered? Or is there a broader team in play? And secondly, following up that, touchwoods been a great performance over the last 1.5 years risk managed well. We've had the floods, we've had the economic meltdown, and you've still managed to hold up asset quality quite well seems like it's bulletproof. So just your thoughts on how you see over the next 6, 12 months in this rate environment and economic environment, the asset quality holding up?

Okay. So let me reverse the order of the questions. Let me answer the second part first. It always helps to be a little bit skeptical all the time. Not a whole lot, just a little bit. So we've been keeping a very, very close tab on our asset books across all segments and international. And I'll say that the risk team along with the business teams have been proactive in resetting our short-term plans, strategies, target markets, et cetera. And I think this is no rocket size, but just staying on top of this has helped us navigate through some very, very difficult times. On the international front, we had a strategy we put in place about 4 years ago, all of us stuck to the strategy and that is exactly what is bearing fruit right now. So what you see in terms of how we've managed the book in the last about 1.5 years, 2 years is this testament to our risk team as well as our business teams. Now for the recovery part, this is coming from core from international as well as domestic. Domestic recoveries has been a constant feature over many, many years. In the last couple of years in the international, which is primarily GCC, with the oil price going up, we saw some of our clients which were previously not in a very good shape. Their businesses start to wake up and they started coming to us to negotiate settlement, repayments, et cetera. So we've now seen some of them coming through, and we hope to see more of that coming through next year as well. As far as where this money is coming from, really, this is across the board. It is from Corporate Bank in Pakistan. This is from SME accounts with Sam in Pakistan, and this is from our consumer. And also this is from UAB, we don't have any NPLs. So it's very difficult for me to say which segment, what area. This is pretty much across the board.

That's very helpful. And last question, maybe if I can add over here on a broader level, [ Jawaid Iqbal ] has joined as CEO, a great quarter for him to start off with expense results, great dividend. I would assume that broader strategy for an institution like UBL would stay the same, which is focus on deposits, focus on Islamic, something that's been there for past 3 years. The previous CEO was championing as well, digital, et cetera. Maybe a little bit early, but are there any new additions there? Are there any changes, modifications being made to those strategies? Any priority areas? Just wanted to get a sense that with the [ Jawaid ] now coming in, is there any change?

At a higher level, we at you're actively right. We will continue to follow the same course. We are open for business. We are going to look for balance sheet growth. However, with a very strong focus on risk-reward equation, we will not grow or lend just for the sake of it. Only where we think the risk is managed and we get the right return. So you will, in all like you would see that our balance sheet will be on a growth trajectory. Current account will remain the hallmark of our strategy, digital, absolutely. So no, broadly speaking, our main pillars of strategy will remain the same.

Yes. And just to add to that, along with that, there is an additional focus on our service levels. And that is something what you will see a little bit more focused on in addition to what we've already had and is in motion.

Yes. Great. I think we've reached the end. No more questions that we have on the chat box. No raised hand. So I think we can move towards concluding the call today. I think before I end the call, Arif and [ Muhammad ], back to you for any concluding remarks before we end the call.

So I think we'd just like to thank everybody who's on the call today. And as always, we appreciate your questions and comments and look forward to your interest in UBL. Thank you so much.

No. Thank you. Thank you very much.

Ladies and gentlemen, we look towards concluding the call. I'd like to thank UBL's management for taking out time for this earnings discussion, thanks to all the participants who joined the call as well. And we wish UBL all the best for the remaining part of this year. Thank you. You can now disconnect. Goodbye, and have a good day. Bye.