With the banking sector at the top of its
performance, this seems to be the best time to list a bank. And so it
shall be done. The government is offloading 10% of its share in United
Bank Limited (UBL) through the local bourses from June 3-8, 2005. The
government has also expressed intent to also exercise a 5% green shoe
option in case of over subscription. The offer will raise an amount of
Rs3.89 billion, if fully subscribed, including the green shoe option,
which seems likely.
UBL has grown to become the second largest private
bank in the country, after Habib Bank, and the third largest overall,
in terms of advances and deposits. Aided by the improving economic
situation of the country after its privatization in 2002, the bank has
shown tremendous growth. It has almost doubled its advances in the
past two years, despite a very large base to start with.
A main concern for the banking giants has been the
amount of non-performing loans (NPLs) they carry and the coverage that
they have provided for these. As on 31st December 2004, UBL had 79% of
its NPLs provided for as compared to 81% covered by National Bank of
Pakistan and 76% covered by Muslim Commercial Bank. However, in
absolute rupee terms, UBL's NPLs amount to Rs20 billion and make up
12.4% of the gross advances, whereas MCB's NPLs amount to Rs8.8
billion and are only 6% of gross advances.
UBL shares are being offered to the general public
at a price of Rs50/share. This actually means that the improvement
brought about by the new management is being offered for just
Rs3.25/share. The bank returned 24% on equity in 2004, more than what
most of the other banks returned. The share is being offered at a
discount of 10-20% from our fair value of Rs55-60/share. The hitch
here is that the lot size this time has been reduced further and an
investor can only apply for 200 shares. This will restrict the
absolute return in rupee terms, however, return will be good in
The government is offering 77.7 million shares of
UBL through State Bank of Pakistan, which currently has 252 million or
48.7% shares of the bank. The size is not as big as some of the
offerings in the past. However, it is not a very small one either.
Hence one can call it a mid-sized offering by the government of
The rigorous breakdown of the lot size has been
done to facilitate 'small investors' to put in their applications for
the subscription. The subscription amount would be Rs10,000 per
application. This would take the total number of applications needed
for complete subscription (including green shoe option) to 388,500, if
all applications are for 200 shares.
The banking sector has a capitalization of Rs178.3
billion in the market as of May 26, 2005. The listing of UBL will
increase this amount by Rs25.9 billion at its offer price of
Rs50/share. The total market capitalization of KSE of Rs1,871 billion
will be increased to Rs1,897 billion. If UBL trades at a fair value of
Rs60/share, its capitalization would be Rs31 billion.
According to InvestCap, including UBL in the
KSE-100 index will increase the banking sector's weight in the index
from the current 10.3% to 11.7%, assuming UBL's price of Rs50/share.
At Rs60/share, this weight would further increase to 11.9%. As on May
26, the banking sector's capitalization in the index amounted to Rs167
billion with 14 banks (out of the total 18 listed) already included in
the index. This would increase to Rs198 billion with the addition of
UBL. Further analysis shows that UBL's weight (at fair value of
Rs60/share) in the index would be 1.9% and a one rupee change in the
price of UBL will move the index by 2 points.
The UBL has its name in the big five banks of the
country as it commenced operations in the early days of Pakistan. To
be exact, the bank was established in November 1959. It currently
operates with five subsidiaries, three based in Pakistan, and one each
in Switzerland and United Kingdom. It currently has a large number of
branches, 1,043 in Pakistan and 15 overseas branches as at March 31,
This is not the first time that UBL is setting its
foot into the KSE. The bank has two TFC issues listed at the KSE,
worth Rs2 billion each. However, this is UBL's first entry into the
equities markets of the country as a listed company. The company's
books reflect the amount of money received through issuance of the
TFCs in the subordinated loans head, which shows a liability of Rs3.5
billion. The absence of Rs500 million is due to the amount not
received yet from the public offering of the TFC. Rs1.5 billion from
the Pre-IPO of the second TFC issue have been taken into account.
UBL recently floated two issues of TFCs to increase
its Capital Adequacy Ratio (CAR). The TFCs were worth Rs2 billion each
(total Rs4 billion). Out of this Rs3.5 billion have been taken into
account as of March 31, 2005 whereas the remaining amount was yet to
be subscribed. The TFCs increased the bank's CAR. Estimates of the CAR
suggest that UBL's ratio of 10% is quite above the minimum requirement
of 8%. This is much better than some of the commercial banks in the
country. Generally a higher CAR spells more room for growth of the
balance sheet. This can be done by extending more credit and getting
into high yielding risky assets.