PUBLIC OFFERING OF UNITED BANK SHARES

Government to get Rs3.89 billion, if fully subscribed, including the green shoe option, which seems likely

By SHABBIR H. KAZMI
June 06 - 12, 2005

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 percentage terms.

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 Pakistan.

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, 2005.

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.