EUR 4.36 For Business Accounts Only

Intermarket Pulse: UBL: Dividends to sustain on better capital management

• We revise down our CY18-22F EPS estimates for UBL by 4% on average, which reduces our Dec'18 Gordon Growth based TP to PRs207/sh from PRs212/sh previously; maintain Neutral. Bulk of our downward revision is concentrated in CY18F owing to one-time pension related expense of up to PRs5.9bn (EPS impact: PRs3.13).
• UBL posted NPAT of PRs26.19bn (EPS: PRs21.39) in CY17, down 6%YoY (pre-tax: down 13%YoY). We now see EPS of PRs18.18 in CY18F (normalized: PRs20.50) and PRs24.61 in CY19F. Importantly, we see Tier-I ROE bottoming out this year before converging to 20% over the medium-term (Total ROE to converge to 17%). This can unlock valuation rerating where UBL trades at a CY18/19F Total P/B of 1.3x/1.2x and P/E of 10.7x/7.9x.
• While overseas asset quality remains challenging, we are encouraged by the pickup in fee income towards end-CY17 while UBL is now also better positioned for the domestic rate up-cycle. We also draw attention to the increase in CAR to 15.1% in CY17, propelled by lower RWA density. Together with the recently announced ADT-1 issuance of up to PRs10bn, this puts to rest dividend sustainability concerns, in our view.