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United Bank Limited (UBL): 3Q2018 EPS of Rs2.9, -42% YoY (+4% QoQ); DPS Rs 2/share (Below expectations)

• United Bank Limited (UBL) reported earnings of Rs2.9/share in 3Q2018, down 42% YoY and much lower than market consensus. Earnings were lower due to significant increase in total provisioning charge. Moreover, there was also additional pension charge of Rs342mn taking 9M2018 total pension charge to Rs8.7bn. To note, UBL had provided an estimate of Rs3.4-5.9bn for potential pension expense in its 2017 annual report.
• Net Interest Income (NII) of UBL has remained flat in both this quarter and over 9M2018 despite 275bps hike in policy rate. This could likely be due to both high proportion of fixed rate PIBs in UBLs book and scaling down of international operations, we believe.
  • As a result of Rs2.4bn provision for NPLs as well as Rs604mn provision for diminution in value of investments, total provision expense rose by 4.9x YoY. In our opinion, a big chunk of said provision for NPLs is attributable to UBLs international loan book.
• Bank’s non-markup income grew by 19% YoY mainly due to Rs1.3bn (up 2.2x YoY) income from dealing in foreign currencies and Rs3.8bn (up 9% YoY) fee and commission income.
• Similarly, non-markup expense rose by 9% YoY as administrative expenses increased by 9% YoY.
• The Bank’s effective tax rate came in at 42.6% compared to 29.6% in the same period last year.
• For the 9M2018 cumulatively, EPS clocked in at Rs8.0, down by 50% YoY primarily due to Rs8.7bn in total pension charge and 17x higher total provision expense booked by the Bank. 
• Key risks for UBL include: 1) Further NPL creation on international book 2) lower than expected advances growth, 3) delay in hike in interest rates, and 4) deterioration of Pakistan macros.