United Bank Limited (UBL) Earnings Call Transcript & Summary

Thank you very much for joining the UBL analyst meeting. This is Mohammed Sohail from Topline. So we are here at the UBL Head Office in Karachi. So those who have joined us on Zoom, thank you for joining from different parts of the world. So before we formally start the presentation, let me explain the structure of the meeting. The President of UBL will give 10, 15 minutes presentation. After that, we'll open the floor for the question-and-answer. I'll take a few questions from [ Tehnical Difficulty ] and then also the participants who are there on the screen. For those who have joined us online, I request to please don't post any question till the time President completes his presentation. Once the presentation is over, just put your question and your name in the chat box, and we'll try to get as much question as possible. So, just before we start, I'll just give you what has happened in the last 18 months. I was just calculating the return of UBL stock, although the share has increased from 100 to 320. But the actual return of UBL in the last 18 months, in fact, less than 18 months is 400%, which means if somebody has invested PKR 1 million in UBL 18 months back, so his or her -- portfolio value is more than PKR 5 million. So investors, both locally and foreign are very curious to know, Mr. President that what has happened in the last 18 months has been extraordinary, and they are very happy, and they are very keen to know the way forward. So with these words, I'll request Mr. Jawaid Iqbal, President, UBL, to please come here and share his view and outlook. So Mr. Jawaid.

Good afternoon, and [ Foreign Language ]. We will start with the presentation, but the main thing we will focus in this presentation on the strategic shift that has taken place in the recent past. So, the first thing we have done is, we have made the bank as an employee-centric bank. So it's our belief that, if we take care of employees, they would take care of our customers. And if our customers are taken care of, everyone else would be taken care of. So shareholders would be taken care of, if the customers are being taken care of. So all these things, if you see, have moved with this change in thought. So it's a competent and engaged dedicated employees, which we have got, as I will show you in the next sheet, and those are helping the customers. So coming back, so if you see the Topline, if you have got motivated and competent employees, and then if those people are, you can say, very well engaged, then that leads to lower staff turnover. If the lowest staff turnover there employees are competent, then it will lead to higher customer service. And higher customer service means a growth in the bank and growth in the bank leads to a higher profitability. And once higher profitability, you can have a higher ROE and then you can maintain a high payout as well, if you want to. So in last, you can say, 2 years, we have added 59 new staff. I think probably this is the highest number. And this has come up in a senior and middle management. So this was the one major change. Compensation has been changed altogether. We have made it quite fair and market-based. UBL was the first bank in the country to announce inflation allowance, which helped 75% of its employees. So we understood the challenges faced by the employees in 2023 when the inflation was too high, so we announced that. So as a result of all these changes, today, we have got a very low turnover compared to 2022. Now, this is our belief. I think it's a typical understanding that you can achieve either high growth or high payout. That's a typical thought. But I think what we have been trying -- we have been trying to accomplish the both simultaneously, high payout and high growth. So, how it can happen? So I think it can happen through that if you grow -- if you achieve a high growth, and then if you focus on your capital structure, you should know where you're investing, where you are disinvesting, everything and then can lead to higher earnings and higher payout sustainability. That's what we have been focusing in the recent past, and we would continue to focus. So our aim is higher growth, especially deposit growth in Pakistan. And when I say the deposit growth, I mean, the low-cost deposit growth. I'm not saying about the high-cost deposit growth. Capital structure, we would continue to optimize, and we aim that our earnings and our payout remains sustainable. So this is the major growth part. In Pakistan, the banks would make money the one which have got higher current accounts. That is the key to success. UBL in the last 2 years has done exceptionally well in this area. So our current account has grown by 58% when industry grew by about 38% in this period. So this is the story from December '22 to June '24, we could not show September 30th data because data of all banks is not available. Similarly, we have done very well in our international book as well. Our GCC current account has almost doubled -- has almost doubled in December '22 to September '24. Remittance, UBL is already, you can say, leader in the market share. Our share is the highest, has been highest, and hopefully, it will remain highest. In trade, we were very, very low, and we are still very low. This is the area which we did not focus much in the past, but we have now started focusing on this area. Our market share has inched up from 6.5% to 8.7%, but this is the area where we would like to grow much faster. So that's the area which would remain under focus, because this brings fees and law to other businesses. As I said to you that, we have been doing both things simultaneously. So in the last 2 years, we have paid the highest dividend in Pakistan. But at the same time, we have achieved the highest growth in current accounts as well. So both things were achieved together. So UBL paid about PKR 105 billion in dividends. And how we achieved this, we did it through a combination of things. The one thing which we have done is especially that we sold our UBL U.K. operations. UBL U.K. was contributing a little in earnings, but was eating up a lot of our capital adequacy ratio. When the Pakistan currency devalued, it changed the dynamics. So GBP 1 billion was a different when the dollar to rupee exchange rate was PKR 110, and it changed when exchange rate moved to PKR 270 or PKR 300. So I think that is the major shift which we undertook. And [ Foreign Language ] today, our capital adequacy is quite strong. Our payout is strong and our growth is strong. So OMO, you might be -- you can say this is the one we have been under a lot of discussions. So we'll talk a little bit about it. We forecasted some time ago about something I think, last quarter of 2023 that the interest rates would come down. And it will take, say, 1 year, 1.5 years. I think one thing which we could not calculate, if anyone remembers, the Pakistan Bureau of Statistics last year miscalculated their gas increase. So that increased the inflation number artificially by 2%. So due to that, it took much longer to -- you can say, our view got corrected, but we got a little late, but we were still right. So we took a position both into, you can say, short-term T-bills and into long-term treasury bonds, and hedged our interest rate risk. So we figured out some time ago. It was -- I think it started -- we started investing from October 2023 that the interest rate reduction would become a major risk for the bank. So to protect your earnings, you had to take a little bit longer investments and take a bet. So we undertook positions as these are showing, we took a majority of the investment came into the treasury bills, which are just you can say, 12 months. So these are our yields, and we -- you can say we invested these. And as a result, today, we are sitting very comfortably. And these unrealized gains are going to help us in 2025. So this is, I think, the major, major thing which should be of high interest. Today, we have got about PKR 1.15 trillion into fixed bonds. The average duration is 2 years, and the yield is about 16%. So this is the major statistics, and this is going to protect the earnings both in 2025 and 2026, even if the interest rates go down to 10%, 11%, 12% or 13%, whatever it comes in. So this is the 30th September position. Our OMO borrowing was around PKR 4.16 trillion. Out of that, the T-bill portfolio was PKR 3.2 trillion. So they will give you the presentation, you need not worry right. We'll give you the presentation, you need not take a note, I'll tell you. So T-bill portfolio was 3.2% and yield on this portfolio was 20.5%. Out of this 4.16, the maturity till December 31 is 2.6. Maturity till April 30, 2025 is PKR 525 billion and by September, October, another PKR 115 billion. So this OMO will be getting lower by this PKR 3 trillion until we make new investments. So this is our international piece. So right now, we have sold UBL U.K. Right now, our international is only GCC. We are operating in Qatar. We are operating in Bahrain, and we are operating at UAE. Over there, we have also made a great shift. So we used to invest because our deposit was low. So what we used to do, we were investing into high-yield bonds. So we're investing into Kenya, Nigeria, Pakistan, Sri Lanka, Egypt, right, name any high-risk country and we were there. But now we have shifted our strategy. What we have tried to now do, we have focused on raising the low-cost deposits over there and investing into investment-grade bonds. So this has -- this strategy shift has protected our earnings over there because our deposit size is almost double over there. And even at a lower yield, we are able to maintain our earnings over there, but our investment has gone to investment-grade bonds. As you will see, over 90% of our investments today is into investment-grade bonds. So this is what probably Sohail was talking about. This is the relative return compared to the 5 banks here. UBL has been able to generate a total return of 405% since January 2023. And it has been driven both by capital gains and high payouts. So we can start the Q&A. We want to show the last 2 pages, which is the profitability and all that. I missing the one. Sorry. Is there the 2 pages more? I think it's a mandatory requirement to show you the income statement and balance sheet that we would show you and then we can move to Q&A.

I think we can refer that into the Q&A, if you.

I think it will just take a minute.

Okay.

So I think you must have seen our financials. This is nothing. It is just the same, we have copied it from our financials, which have been already uploaded. And finally, balance sheet [ Foreign Language ], please. So this is a balance sheet we have talked about a major shift has been in investments and that we have talked about under the OMO as well. So I think nothing more significant than this. And one thing I think, which I did not touch is we have met ADR requirement today. So today, it is 50%.

Okay. So thank you, everybody, for listening. I think there are -- there will be many questions, but one of the questions President has already answered that the ADR right now is 50%. So first, we'll go to the people who are present here in the auditorium. So just raise your hand and introduce yourself. Yes, please.

Nehal Kazim, am I audible? 2 short questions. You got the interest rate right, you got the current accounts, right? Where will you be investing this money going forward? Will you be going on to the ADRs? If you're lending, then is it going to be -- what sectors -- what areas of business, agriculture, SME or corporate, few corporates in certain sectors? And secondly, in the international business, outside of GCC, which other countries are you focusing on?

I think in the Gulf, we are focusing on the GCC country, but primarily it's the UAE. UAE is growing much faster than the other GCC countries. So that is the area of focus. And as far as lending is concerned, we lend primarily on the base of risk, not on the base of sectors. So we have seen in Pakistan, company factors dominate over the industry factors. So we are company specific. You will see in textile, you will find a few best companies in textile and you will see a lot more worst as well. So I think we are not a specific one who will be focusing on industry A, B, C, the company factors would dominate in our lending decisions. I think you could turn the mic on and I think raise the volume, please.

Okay. So this is Harika from [ Jubilee Life ]. First of all, I would like to congratulate you on the impressive set of results over the past 1 year. I have 3 brief questions. First of all, I want to know how will reprofile your investment book going forward in medium to long term as major maturity of T-bills will be realizing soon in the next few quarters. Also, how will your book align with the strategy of GoP investments as GoP is recently reprofiling its current debt and they are going for T-bill buybacks and inflows are coming in 10-year bonds. So how will UBL reprofile its investment book?

I think we have got 2 things simultaneous, if you see it. On the one side, we have got investments. On the other side, we have got OMO borrowings. So any investment which is maturing is automatically reducing the OMO book. So it is not as if we have got an excess liquidity, which we have to redeploy somewhere. So we would be retiring. And I think the government has -- in the last 1 month has bought back a lot of treasury bills. And we were one of the participants who surrendered a lot of those treasury bills and reduced its OMO borrowing. So I think our OMO borrowing is already down in this month, close to PKR 1 billion, close to PKR 1 trillion.

In the current quarter, sir?

In the current quarter, yes. I think so we are not facing any difficulty here. So we would retire OMO. And whether we would reinvest into OMO or what would be the strategy, I think it is based on the opportunity. If you sense that you can make money, we'll go and you can say, reinvest. And if we see the opportunities are not really that great or the margins are quite low, then we may not invest into that. And as far as the government desire to move into a longer duration bonds, we do not see much trouble investing into long term into government. And I think one positive thing has changed in Pakistan. Previously, the liquidity in the longer-term bonds was not there. So now we were active, you can say, traders to these government bonds ourselves, and we have seen the market liquidity has improved tremendously. So I think we are quite open to investing into longer yield bonds.

The question is that, if you have reached 50% ADR, would you record a tax reversal next quarter?

I think, first of all, our tax was not recorded based on the ADR, number one. I think it was a tax which came primarily on our, you can say, the investment on our U.K. UBL subsidiary sales. So I think that was the major difference. So I think our tax is 49%, and it was recorded as 49% in our stand-alone accounts, which are, you can say, the primary driver of the ADR tax.

Yes. Please.

I just have one more question, if I may, please. Okay. So we have seen currently most of the banks have negative carry in their saving account. And UBL being one of the banks who are very consistent with your current account growth. So in next year, what will be the target for UBL and how they will -- what's the current account ratio they are targeting for next year? Any number you can give us?

Yes. First of all, we did not operate on the ratios. We operate on the absolute amount of current accounts. So we are not interested that we will operate 60, 40, 30, 40, no. I think we are focusing on a growth into a current account. And it will depend how much the market grows and how much, you can say, we can grow. I think the market probably would grow between 15% to 16%, and we would try to increase the market share. But I think it will depend how the market reacts, what other players come up with the strategy. So I think it all will be dependent on how we can -- whether we can sustain the momentum or not. We are going to make an effort, but I think results, we would only know when the results come out.

Shakeel Ahmad [ Foreign Language ] polio number 03277-23109 [ Foreign Language ] Government of Pakistan?

You can say, if we look at our investment book, so that is primarily Government of Pakistan. And if we look at the lending portfolio, it's a mix of government and the private borrowers.

I think we'll take one question before we come to Bilal. Okay. So President [ Foreign Language ] given the emerging context, the taxation may be based on average ADR for the year and IMF has also highlighted banks on average, have 60% of their assets invested in government securities versus 20% in the emerging markets. How will the bank tackle this to ensure sustainability and growth in the bottom line and in shareholders' return?

So I think we are working on multiple things. First, we want to cut our exposure into expensive accounts. So even, for example, if we have got a large corporation investing into the saving accounts. So we are trimming those deposits. And by law, we are not required to take those deposits. So that's the one thing which we are going to change. And right now, we are working on that. So we have trimmed a lot of savings accounts and a lot of term loans to cut our deposits. So the core deposits, we will just focus on the core deposit and we'll try to cut non-core deposits, especially of the corporates. So, that's the one thing which we'll do. Second is, we'll continue to focus on our lending, and we will try to, you can say, achieve this ADR next year as well. But at this point in time, I'm not sure how things would translate for next year. So, I think right now, our major focus is in 2024.

Yes, please.

But I think one thing which other things we are doing is we are -- all the banks -- almost all the banks, we are going into litigation. We do not believe that this tax is quite a fair one. You should be taxing income, not how we earn our income.

Yes, please.

[ Foreign Language ] This is Bilal [ Technical Difficulty ] #1 is on your leverage ratio. As we understand from your books, you are operating on a concession from the State Bank on your leverage ratio, which will expire in this year. The way I see your presentation and your T-bill maturity book, it looks like for you to meet the regulatory requirement, you will need to expire all your T-bills by the year-end and then perhaps decide to go for further borrowing if need be. So, will that be the case or?

I mean, as the case stands today, our leverage ratio would expire on the January 1, 2025. So 2 things are happening in between. The one is our own capital is going up with the higher profitability. So, we had a good quarter this year where we retained more money and [ Foreign Language ] we'll have a great quarter -- the current one as well. So that will shore up our equity, #1. And simultaneously, a lot of T-bills would get matured by year-end. So adding all this together, we would reach to, you can say, a leverage ratio as described by State Bank at 3%, right? And for the next year, then we will see how much cushion we get based on profitability we can earn.

The second question is regarding the ADR ratio. You said that, you know...

And then the second important thing is now this investment is no longer attractive. So it was attractive. The strategy worked last year. I mean, next year, I do not see a great opportunity out of it as well. So, we may not have that much need as well.

So I'll build up on this point that you spoke about. So it's an industry-wide question. So, we've seen the Government of Pakistan go towards OMO-based way of financing their deficits right now. So we saw last year, UBL was one of the top banks participating in those OMOs. So going forward, with the deficit continuing to increase, how do you see this level of huge OMOs continuing to be financed by the government at some point? Because it does eaten into your capital in terms of leverage ratio. How do you see the industry responding to that? It's a huge risk on the industry balance sheets as well.

First of all, I do not consider it a huge risk. What happened in the Western world, a lot of central banks are buying the government bonds. So that -- if we go and look at the things, so it's a very common thing, central banks themselves are buying a lot of, you can say, government debt. So in Pakistan, they are not, you can say, taking debt directly, and it is being done through OMO, right? And I think if the deficit requires extra OMO and looking at all banks together, I do not see it a major challenge. So, maybe if the government has to finance, maybe yields might inch up a little bit, but I do not see it a huge risk in any way.

Not even for the commercial banking book, especially the relatively smaller ones. I mean, you have a huge book, you have perhaps.

First of all, it's not a mandated to participate in OMO, #1. And those who have a stronger capital can participate into OMO. I think today, banks are quite open to it and a lot of banks have not fully utilized their leverage ratio. So I do not personally see a much issue with this.

Okay. So we'll take one question from the people who have joined online. So Mr. President, the question is as the gross ADR of UBL was 26% at September and now you have met 50% ADR target. Can you elaborate on how it was met, like how much of the high cost deposits were shed and how much lendings were made to DFIs, et cetera?

So I think I would, first of all, I think if you know there was one lending by the 1-month specific borrowing requirement by PASSCO and the amount was quite huge. So I think we participated over PKR 200 billion in one debt specific lending. And that was the one major thing. And then I think we have cut a huge amount of saving accounts, and we have done some extra lending as well. So, exact amounts are not available right now with me, but it's a combination of both.

Understood. So one question from the guy who's there on the last row.

[ Foreign Language ]

[ Foreign Language ]Let the President answer.

[ Foreign Language ]

Thank you for your feedback. We would look into this.

Thank you for the question. One more question online. The bank has an unrealized capital gain of more than PKR 50 billion on debt securities. So the person is asking, will this income come through the NII or will it be recognized as capital gain? So it's more like an accounting thing. It is a gain, but how will it be recorded? This is the question.

I think, first of all, we are quite indifferent to this, #1. And again, it is, I think primarily, it should come through NII, #1. But if we get an opportunity to sell something at a good profit or good, you can say, opportunity cost, we would always sell it. And so it will be a combination of both. So, exact honestly, I'm not aware of it, and we really don't know it.

And any further questions? Yes [ Foreign Language ] then we'll give to....

Sir, you mentioned your GCC business has current accounts have grown by a substantial percent. Can you please brief -- have you done any branch expansion over there? And also, what is the update on the planning business of UBL as your peers are focusing on that side a lot?

Sorry, I have not understood the question. You have 2 separate questions you asked. One is about the GCC and other is about Islamic Banking. So the GCC question, sorry, I did not understand what you tried to.

You have shown the current accounts balance have increased over there.

Yes.

That has done through branch expansion over there in the GCC?

No, I think it has been done through basically the changes in, you can say, in our management, we have been changing and then the focus over there. Focus on the current accounts, #1. Islamic Banking, we are quite focused. We are in the process of converting our entire Balochistan and KPK into Islamic. It is right now with the approval for the approval of -- statement for its approval. And once it is done, it should be even say, through hopefully, in the month of November.

[ Foreign Language ] That answers your question, please.

[ Foreign Language ]

I'm quite confident that our profitability would sustain, as I have -- you can say, mentioned in my presentation, would sustain [ Foreign Language ] in 2025 and 2026, because we have already taken a position, which would help us maintain our profitability in both years.

One more question online regarding asset quality. Do you anticipate any pressure on the advances front that could lead to higher provisioning in the coming years?

We are very mindful of our lending, very mindful. I think one of the reasons that the UBL lagged behind other banks that we incurred a lot of NPLs, both internationally and locally. So, we are quite mindful that we do not repeat this kind of thing, because this kind of things, you can say, push you back for many years. So that's an area we are very, very focused. I think personally, I do not see any significant price, and I said, not in terms of percentages, but I'm not seeing a portfolio deteriorating in large amounts. I think a credit charge of 0.5% of your assets should be normal, and we would remain around this number. 0.5% of our assets per year.

Okay. One more question online. You mentioned that bank is laser-focused on low-cost CASA and particularly current account. So are there any targets for CASA and current account that you are looking to achieve in the next 12 and 24 months? And given your intended CASA mix, what sort of deposit growth one can expect? I think you have partially answered, but just to.

So, first of all, the targets are an internal thing, and I would not like to share those with you. I'm being credit, #1. That's an internal thing based on we do not want to, you can say, tell what we are doing to our competitors, all these things. So these are confidential. And as I said, I expect the market to grow around 15% to 16%. And we would try to grow beyond that.

So there is another question, which is on a separate note. Is there any possibility of merger of Silkbank with UBL?

I cannot again talk much about this because right now, we are under discussion with State Bank on this. Right now, under discussion with them, once we have, you can say, anything on that, we will share with the public right away.

Sure. Sure. [ Foreign Language ]

[ Foreign language ]

Yes, I think it's a deposit insurance, it is basically a protection for a small depositor. So State Bank does not guarantee that every depositor would be taken care of. But I think in the past, if we look at the history, State Bank has tried hard that no bank, as you can say, becomes a bankrupt and the depositor lose money. So in the past, they have merged failed banks with the stronger entities. So I think the risk is there, but State Bank is working hard that no bank fails, #1. And #2, if we look at the capital ratios of the major banks operating in Pakistan, which I would say 90% by weight, those are very strong. So, I do not see the possibility of any significant bank failing in Pakistan in the next decade or so.

[ Foreign Language ]

[ Foreign language ]

First of all, I think government, they have the ability to print the notes. So the default by government is quite unlikely. I'm not saying, it's almost impossible. I mean, it's possible, but it's quite improbable, #1. And #2, I think, it's easier said than done. As you said, we are easy way of making money, no. It's far more difficult to raise deposits only then if I succeed in raising the deposits only then I can lend. So I think you are missing the point of raising deposits. That's a far more difficult job. All banks are working hard to raise deposits. And for this, they are spending a lot of money in Pakistan. So, large banks are spending about PKR 100 billion every year in operating expenses to generate those deposits.

[ Foreign Language ] Again on a different note, what's your view on policy rate and inflation? This is a common question [ Foreign Language ] So would you like to share what's your internal or personal view on inflation?

I think my personal view, I think the policy rate probably would drop to somewhere between 30% to 12%. And I think at that stage probably State Bank probably would consider giving a pause to reflect upon how the lower rate would impact the currency rate. I think the State Bank is probably very mindful of our foreign exchange situation. So, they are mindful that they do not repeat a kind of old kind of cycle that we end up depreciating a lot of currency due to additional demand. So, I think that would be in the mind of State Bank of Pakistan. Although, I think the inflation would be far lower. So we might see a much higher spread between, you can say, between the policy rate and the inflation going forward.

Right. So any more questions before -- yes, Bilal.

So this is regarding your ADR ratio and the general level of competition in the industry. So when you look at the industry statistics, you don't see advances rising that much that all banks will be able to meet the required ratios. And when we look at the overall industry averages, they're quite below 40% right now to the best of my recall. Now if UBL has increased the ratio, it would have come at the cost of some other bank right now. We still have approximately 2 more months to go to the year-end. Do you see any risk in terms of competition coming there?

Yes, definitely, competition would be coming. And we are looking at the possibility that some of our loan book going to our competitors. And we are mindful of that. And we are, you can say, working on that side that December 31, we are able to meet the ADR requirement.

And a follow-up. We've seen this point coming from the government circles as well of the entire banking industry shifting to Islamic Banking. How practically possible do you think this will be for the industry?

I think, again, humans are very capable. So if we -- you can say we come up with to create securities, which meets the requirement of some. I think if you ask me, today, the major hurdle to convert entire family bank is not based on the, you can say, willingness of the banks. Banks would be willing, #1. I think the real challenge is we do not have enough sukuks in Pakistan, who can replace the T-bills. So I think that's a major area. And if the government works, they can find a way out because as a country, we have got a lot more assets, which can probably be packed with those sukuks. So I think that's the area. If we fix that, then I think 3 to 4 years, definitely, it's possible. But UBL is voluntarily working very hard to convert this Islamic domain.

Okay. So there's a question online, while continuing to grow at high rate and maintaining high payout, what is the targets CAR, which you will be able to maintain while paying high dividends?

So I think we are quite flexible. So we are not stating that we'll maintain a CAR of 20%, or CAR of 25%, or 15%, we are not looking at that. We are looking first at what's the regulatory threshold, #1. And there should be enough buffer into it, right? So we will be operating in a range. So we are not targeting any specific CAR ratio. And again, the second thing is it would depend what kind of lending we have. So for example, this year, we just -- I mean, this month, we gave a lending to Government of Pakistan that is secured by government of guarantee. So, if our lending book has those kind of assets, then we may not be even say, pushed to have a very high capital adequacy. But if we have to lend to a private sector more and then the lending is a bit more riskier, so that case, we would like to have more cushion. So I think we would try to be very, very -- we'll be very flexible.

Right. So I think there are no more questions online. If there is any last question from the audience, otherwise, we will close the session. So thank you, President. Thank you very much, and thank you everybody for coming. It's a full house here, and there are more than 80 participants, which is extraordinary, because normally, the participants are 40, 50. So, there is a lot of interest. I think all the credit goes to last 18 months of performance. So that's why we see this extraordinary participation here. So thank you, everybody, for coming. [ Foreign Language ] see you next time. Thank you.

Thank you. Thank you very much. Thank you.