Bank's consumer business is growing at a faster rate due to diversified range of products and growing outreach in rather smaller cities; overseas network helping implement new strategy.

SHABBIR H. KAZMI, Special Correspondent
Apr 09 - 15, 2007

United Bank Limited (UBL), previously working under state control, was privatized in 2002 and majority stake was acquired by a consortium of Abu Dhabi Group of UAE and Bestway Group of the UK. The bank comes under the classification of 'Big Five' group of commercial banks in Pakistan. It has registered significant turnaround in the post privatization era, which is evident from overall change in the quality of services to the clients, diversification of product range and payment of dividend to the shareholders. The bank has the distinction of being one of the first banks to offer full range of corporate, SME and consumer products to its clients.

UBL recently released its financial results for the year ended 31st December 2006, higher than market expectations. The bank posted after tax profits of Rs 9,529 million (EPS: Rs14.72), registering 57% YoY growth. The Board of Directors also recommended distribution of 30% dividend along with the issue of 25% bonus shares.

The bank posted 44% YoY increase in revenues, with net interest income (NII) going up by 47% YoY. This increase could be attributed to a growth of 19.39% in gross advances and 110bp jump in net interest margins (NIM). While State Bank of Pakistan's (SBP's) tight monetary policy stance and a shift in composition of UBL's local loan portfolio in 2006 (from 10% consumer advances to 20%) helped NIM, a 24% jump in overseas advances boosted loan growth too. Non-interest income growth was also strong, up 36% YoY due to higher fees and commissions from consumer lending, trade finance and third-party bill collection, helping mitigate the 38% jump in operating costs.

During 2006, UBL primarily financed its loan book growth via debt and higher cost deposits, which led to the cost of funds rising by129bps. However, a rising KIBOR (beneficial in a floating rate asset book) and a shift in the composition of loan book (contribution from consumer finance up from 10% to 20%) meant that UBL was able to raise the blended yield on its assets by around 249bp. The rising contribution of consumer finance and low likelihood of a rate cut before hints towards better earnings.


While UBL's gross loans rose by 19.4% YoY, moderately ahead of overall banking sector growth for 2006, the two segments that stood out were consumer finance and international advances. Bank's consumer business is growing at a faster rate due to the diversified range of products and growing outreach in rather smaller cities. The repayment behavior was better than in top-tier cities. This bodes well for future provisioning expenses, but it is still early days for this asset class. These advantages are reflected in the 2006 numbers the consumer loan book has grown by about 30%, cementing UBL's position as the leading consumer finance bank in Pakistan. According to the details, UBL now has 26% market share in auto loans, now available in 44 cities, and 14% share in total credit card balances outstanding.

Offshore banking is fast becoming UBL's core businesses. While other banks have usually utilized their offshore branch network to supplement their trade activities and generate remittances business, UBL has been actively engaged in broader banking activities in countries where it has operating licenses. Prime focus is on the Middle East. The impact is visible on the asset generation side around 19% of both advances and pretax profits are now generated from UBL's overseas businesses.

Apart from providing diversification benefits to UBL's operations, offshore banking also enables it to offset the impact of increasing competition in the local markets. The bank also views its increasing foreign exposure to counter country risk. If international operations continue to do well, UBL plans to position itself in a situation where it can make a case for its credit ratings to be viewed exclusive of the country ceiling. It is working on a three-year horizon to reach a point where 50% of its loan book would comprise consumer plus international advances.

This view is also supported by the steps being taken by the bank. It has already become an active participant in oil and gas development and infrastructure funding in the Middle East on the wholesale banking side. It has set up a representative office in Almaty, Kazakhstan and signed a MoU with China Development Bank for the promotion of bilateral trade between China, Pakistan and the Middle East.

Another area deserving specific mention is its initiative in its international operations. It has launched a home financing product 'Address Mortgage' for Pakistanis living in the UK. This would enable the non-resident Pakistanis to buy properties in their hometowns. UBL is exploring potential for expanding its ATM network, launching competitive mortgage finance product and introducing debit cards.

One of the concerns is that UBL continues to report higher operating costs as it is investing heavily to expand its 'brick and mortar' network, systems, process and personnel. The bank is reengineering its business processes at an estimated cost of around US$ 3 million (around Rs 200 million). It is also implementing core banking software that should integrate and streamline internal processes.

It has a plan to bring 50 branches online in 2007. However, increasing costs signal management's intention to invest in the future, and the initiatives taken in 2007 should yield benefits in the coming years.

UBL also plans to tap the international debt markets to strengthen its capital base to meet Basel-II requirements and to support volume growth. Its advances to deposits ratio is very close to the theoretical limit. Additional impetus to non-interest income could be asset management, insurance and Islamic banking. Massive under-penetration characterizes all three segments and given UBL's management track record, one would expect it to gather a sizeable chunk of the growth in all the three areas.