CFA Institute Research Challenge

Hosted in
PAKISTAN
PROMETHEUS CAPITAL INVESTMENTS
 Prometheus Capital Investments
Financial Services, Karachi Stock Exchange
UNITED BANK LIMITED

Date: 06/01/2015 Current Price: Rs. 173.92 Recommendation = BUY (Upside 24.14%)
Ticker: UBL:PA Target Price: Rs. 215.9

INVESTMENT SUMMARY

Recommendation

We issue a BUY recommendation on United Bank Limited (UBL), traded primarily on Karachi
Stock Exchange (KSE) with a one year target price of Rs. 215.9 using average of five models
used by the team. This offers 24.14% upside from its closing price of Rs. 173.92 as of January 6,
2014. UBL is performing in excess to its cost of capital consistently and is able to grow and
capitalize on its increasing share in the banking industry. UBL, with current market
capitalization of Rs. 213.64 billion, is underpriced as per team’s estimates based on 1)
increasing market share coupled with sustainable profitability, 2) reducing NPLs by improving
asset quality, 3) low CASA resulting in cost efficiencies, and 4) strong international exposure
with sound future prospects.

Increasing Market Share to Strengthen UBL

The deposit base of UBL has increased with a compound annual growth rate (CAGR) of 13%
Model Price Weight from 2008 to 2013. While in the industry, they only grew by 0.6%, the core deposits in UBL
FCFE 222.20 20% rose by 4% from 3.81 million accounts to 3.95 million accounts during Q1FY14. This increase in
DDM 219.29 20% deposit base and hence increase in market share promises the growth of UBL in future.
ER 199.09 20%
P/B 232.67 20% Steady Decline in NPLs makes Performance Certain
P/E 206.26 20%
Maintaining a well reserved loan book, the coverage improved continued to improve to 83.3%.
Target Price 215.90
This was also backed by the reduction in Non-Performing Loans (NPLs) of 6.4% with an amount
Current Price 173.92
of Rs. 3.7 billion in 2013. Although the gross advances decreased, UBL was able to maintain
Upside 24.14%
Asset Quality at a level of 11.9% in 2013.

Low Cost of Deposits & International Expansion Promises Growth

UBL has maintained low cost of deposits (lower than 4.5%) despite the continuous regulatory
changes which have led to an increase in saving rate and downward inelastic deposit cost. UBL
has also expanded itself internationally particularly in UAE where it is one of three banks who
has Quality Management System Certifications.
 BUSINESS DESCRIPTION

United Bank Limited (UBL) is one of the largest commercial banks in Pakistan operating more
NBP
than 1300 branches nationwide. UBL was established in 1959 and privatized in 2002. UBL
18%
Others MCB currently holds almost 10% market share measured by customer deposits that bank holds.
40% 6%
Presently, UBL has international branches located in the United States of America, Qatar, UAE,
UBL
Bahrain, and Republic of Yemen. It also has representative offices in Beijing, Tehran, and
10%
HBL Almaty. It owns subsidiaries in the UK (United National Bank Limited), and in Zurich,
13% Switzerland. The banks ordinary shares are listed on all three stock exchanges in Pakistan and
BAF ABL its global Depositary Receipts (GDRs) are on the list of the UK Listing Authority and the London
6% 7% Stock Exchange Professional Securities Market. These GDRs are also eligible for trading on the
international Order Book System of the London Stock Exchange.

100% Despite being strongly regulated by State Bank of Pakistan and operating in challenging
90% economic environment, the bank has maintained a strong performance with increasing profits
80% on a consolidated and standalone basis.
Others
70%
60% The customers of UBL are first classified into local and international. The local operations are
Commercial
50% then divided in five main segments commercial banking, retail banking, trading & sales and
Banking
40% corporate banking, asset management and others. As per 9MCY14 accounts almost 54% of the
30% Retail
revenues come from retail banking business.
20% Banking
10% Trading and Company Strategies
0% Sales
 Improving Asset Quality
NPLs
Expenses
PBT
Income

Corporate
Finance  Commercial and Corporate Lending
 Optimize vast branch network
 Emphasize on service delivery
 Cost Consciousness
 Innovation Leadership

Shareholding Pattern

Most of the shares of UBL are held by Bestway Holdings Limited which owns 51.6% of the
shares. The next major shareholder is Bestway Cement which has 7.65% stake in United Bank
Limited. No single individual or institution owns more than 5% holdings in UBL. Previously,
government of Pakistan was other major shareholder of UBL with 19.8% stake. However, in an
attempt of privatization and increasing foreign reserves, GoP sold its shares at fixed price of Rs
155 in June 2014. 81% of the buyers from the government were foreign companies which
increased foreign companies share to 27.94%. General public holds 2.72% locally and 0.92%
internationally.

MANAGEMENT AND GOVERNANCE

Corporate Governance
UBL has met all the corporate governance criteria set by SECP. UBL has made the reasonable
effort to make true and fair financial statements as reported by their auditors. The bank has its
own control mechanisms in place. Moreover, UBL has been involved in various risk
management measures and has the Board Risk Management Committee in place. Other
committees to promote corporate governance include Board Human Resource and
Compensation Committee and Board Audit Committee. It has disclosed the compensation
policies and management ownership in its notes as per corporate governance code.

Social Responsibility

UBL is one of the top five biggest banks in Pakistan, therefore it has the responsibility to
contribute back to the community it thrives in. It 2013, UBL contributed Rs 77 million to
various corporate social responsibility events. Out of total 77 million, 50 million were invested
in education sector which shows their commitment towards educated Pakistan. UBL helped
The Citizen’s Foundation establish primary school in Gharo, Sindh. At post-secondary level, it
contributed money to Lahore University of Management Science, Institute of Business
Administration and Forman Christian College to extend scholarships to students. In addition,
21 million were contributed towards health sector by funding different NGOs. The company
aspires to continue investing in CSR activities in future to build better Pakistan.

INDUSTRY OVERVIEW AND COMPETITIVE POSITIONING

Economic Performance of Pakistan

Steady GDP Growth shows signs of recovery

Pakistan’s GDP grew last fiscal year by 4.14% as compared to 3.7% the year before. Services
sector grew more than the average by 4.29%. Improving power policy and hence electricity
production coupled with improving the overall business climate have led to achieving more
growth in this year.

Stable Exchange Rate and Increasing Remittances

Pakistan is ranked 7th in terms of largest officially recorded remittances in the world. Pakistan’s
remittances cover 20% of its imports and only 20 countries in the world have that potential. In
addition, remittances are equivalent to 30% of the exports of Pakistan. It is a good sign for the
economy as it will help in meeting debt obligations smoothly. Pakistan Remittances scheme
launched by SBP has greatly contributed towards the increase in remittances over the years.
The increase in remittances has also resulted in higher import cover for Pakistan. It is good
news for UBL as the fee income by providing remittance services have doubled in last year.
Further increase in remittances will mean more profits.

Declining Interest rate in response to lower inflation

State Bank of Pakistan has decreased policy rate by 500 bps in last two years and changed
wheels to accommodating monetary policy. However, it has proved disastrous for banks as the
spread earned by banks has decreased. Current Nov-14 inflation clocks at 3.96% YoY which is
lowest in last 11 years. Low inflation indicates further decrease in discount rate but there is
also high chance that minimum deposit rate set by State Bank will also be reduced which
means that bank’s spread is set to increase in future.

Increasing Government Debt: Need to Refocus on Private Sector

Banks have been able to take advantage from high yield government PIBs this year. A 200 bps
differential is noted between TBills and PIBs therefore most of the banks parked their deposits
in PIBs. However increase in foreign exchange reserves and non-tax revenue coupled with
higher inflows from national saving schemes, the future outlook of government borrowing
from banks looks bad. In addition, because of monetary easing private sector will also retire
their expensive debts to issue more debt on lower interest rates. The upshot for banks is to
issue more new loans to increase profitability in the future and focus on private sector.

Financial Services Sector: Banks

Low penetration as percentage of GDP: High Potential

Credit penetration (advances as % of GDP) clocks at 17.6% which is regionally very low. The
same ratio is 54% for India, 48% for Bangladesh, 42% for Srilanka. However, there exists a lot
of underserved market which can be tapped in future. In past high government borrowing
shifted the focus towards investing in government securities however now that government
borrowing is decreasing, while spreads become tighter banks are going to focus on increasing
advances and target individuals and private sector. Therefore, room for future profitability is
high.

Profitability grow while spreads take hit

Current banking spreads are at historical low however profits are increasing because of several
factors which include increase in non-interest income and rising yield from Pakistan
Investment Bonds (PIBs). Due to low inflation spreads are not expected to increase in future as
decrease in policy rate is expected.

Lowering Infection Ratio and Improving Asset Quality

Prudent lending and good recoveries have resulted in phenomenal improvement in asset
quality. Infection ratio decreased from 14.3% in Sept-13 to 13% for same period this year. In
number terms, Non-Performing Loans decreased by 8.47 billion for the banking sector from
Sept-13 to Sept-14. UBL’s infection ratio clocks at 12.1% which is better than the industry
average. Coverage ratio is set to increase in future because of strict credit policies coupled with
focus on recoveries.

COMPETITIVE POSITIONING

Higher Non – Mark-up Income then its peers

In the financial climate when spreads are shrinking UBL has strong non-mark-up income.
Increasing fees and commission backed by home remittances, trade bancassurance and capital
gain the non-mark-up income has increase 16% YoY for 1H14. Remittance business grew 34%
and trade business grew 16%. The momentum is set to continue in future supported by UBL
Omni. Effective use of derivatives for hedging purposes has also resulted in two fold increase in
derivatives income.

Strong International Business

UBL has strong international operations and its presence in Gulf Countries such as UAE,
Bahrain and Qatar is integral to its long term sustainability and profitability. UBL’s international
loans consist of almost one-third of the total loan book. UAE is of prime importance here as
out of international loan almost three-fourth of the loan is dispersed to UAE clients. The steady
growth of UAE backed by strong real state demand shows positive prospects for UBL as credit
demand is going to increase in future.
FINANCIAL ANALSIS

Strengthening Profitability
The Return on Equity Margin for UBL has shown a positive trend in the past five years growing
steadily from 19.5% in 2009 to 23.8% in 2012. In 2013 however the ratio fell slightly to 22%,
reflecting the tightening of spreads in the banking industry and also the fall in interest rates of
about 500 basis points in the last 2 years.

Increasing Efficiency

The ROA has also remained fairly constant over the past 5 years increasing only steadily from
1.5% in 2009 to 2% in 2013. This however looks fairly low when compared to industry averages
(insert figure). This could be due to the extremely high amount of assets tied up in current
assets which amount to about 59% of the bank’s total assets. The asset utilization also needs
to be closely monitored.

Improving Operations

PBT ratio has grown from 31% in 2009 to a healthy 49% in 2013, displaying improved efficiency
and operations of the bank. More than an increase in spreads this is due to a heavy increase in
non-interest incomes and decreases in provisions for non-performing loans which shows the
bank is performing well which is why it was also rated as one of the best banks of 2013.

Impact of Regulations
The Gross spread ratio increased initially form 53% in 2009 to 56% in 2010 but started falling
back steadily to 52% in 2013, reflecting the government policy to tighten spread of banks by
increasing the minimum required rates on deposits, cutting 500 basis points on the lending
rate in the past 2 years and linking minimum savings rates to repo rates. Despite all these
measures UBL has continued to report a healthy gross spread of over 52%.

Earnings Performance with Capital

The return on capital employed (ROCE) has also exhibited a positive trend in the period 2009-
13 growing from 15.5% in 2009 to 21% in 2013. When compared to Return on Assets this ratio
shows a much better performance by the bank. This is because a high proportion of the
liabilities of the bank is held in current liabilities which overstates total assets. Hence this is a
better measure for measuring the performance of UBL and shows strong profitability of the
bank.

Maintaining Adequate Capital

The requirement under regulations is to maintain the CAR of at least 10% and hence UBL is far
above that line. However, in the recent years, UBL has decreased its capital adequacy from
15% in 2010 to 13.1% in the first quarter of 2014. This may be as a result of the increasing
amount of Risk Weighted Assets (RWA) which has continued to rise from Rs 527 billion in 2010
to Rs. 772 billion in 2013. The Tier 1 CAR has also decreased from 10.4% to 9.7% from 2010 to
2014 showing that the Risk Weighted Assets are not adequately backed by Tier 1 equity
capital.
 Spread Is Expected to remain under Pressure

Due to decreasing policy rate and increasing cost of deposits the interest income margins are
assumed to remain at current level. Decreasing inflationary pressure also indicates further
monetary easing resulting in curtailment of base rate.

Strong Non-Interest Income to Support ROE & ROA

The diversified portfolio of UBL insures it against decreasing margins. Recent stock market rally
and expanding UBL Omni network will boost capital gains and fee income. UBL’s role as dealer
in money market and increasing remittances also support the case of increase in ROE and ROA
given pressure on interest margin. Recent 2% jump in yield of PIBs and T-Bills will is also
evident of sustainable long term profitability represented in high profitability ratios.

Contingencies & Commitments

A look at the notes to the financial statements also tells us that the Bank has recognized a
provision for Off-Balance Sheet items, post-retirement benefits and advances of about Rs
5500m in its statements, which is an extremely material amount and also results in significant
deferred which may or may not materialize depending on the contingency. The notes tell us
that the bank has contingencies worth of Rs.310 billion, which if realized could result in
significant deterioration of the Bank’s financial statements. Note 23 also tell us that the
company has commitments of about Rs.470 billion, which should be recognized in the Balance
sheet as liabilities at their present values. This will change the company’s leverage and
profitability ratios to a great extent as these commitments have been made by the Bank and
future economic outflow of resources is expected.

INVESTMENT SUMMARY

Model Price Weight We issue a BUY recommendation on United Bank Limited (UBL), traded primarily on Karachi
Stock Exchange (KSE) with a one year target price of Rs. 215.9 using average of five models
FCFE 222.20 20%
used. This offers 24.14% upside from its closing price of Rs. 173.92 as of January 6, 2014. UBL is
DDM 219.29 20%
performing in excess to its cost of capital consistently and is able to grow and capitalize on its
ER 199.09 20%
increasing share in the banking industry. UBL is underpriced as per team’s estimates based on
P/B 232.67 20%
1) increasing market share coupled with sustainable profitability; 2) reducing NPLs by
P/E 206.26 20% improving asset quality, 3) low CASA resulting in cost efficiencies, and 4) strong international
Target Price 215.90 exposure with sound future prospects.

VALUATION

We derived our target price of Rs. 219.29 using Dividend Discount Model. Other methods such
as FCFE, Excess Equity Return and Multiples Approach were also used giving a price in the
range of Rs. 199.09 - Rs. 222.49.

Drivers of Volatility in Earnings

Our research identifies that the discount rate and the money supply are the main drivers of
volatility in earnings. Since the discount rate affects the saving rate and hence the level of
borrowing and lending in the market, it is an important variable which make earnings volatile.
 Money supply also do affect the level of deposits in the banking industry which in turn has an
impact on the advances issued by the bank to the borrowers. Changes in money supply vary
the growth in balance sheet of UBL.

Possible Investment Risks

Possible risks that are faced when investing in UBL include macroeconomic risk which
encompasses changing law and order situation, interest rate decline and consumption/saving
pattern of the population. In addition to that UBL faces industry risk which is sum total of low
barriers of entry for new banks and regulatory requirements. Operational risks faced by UBL
include declining growth of branches, competitive branchless banking, increase in Non-
Performing loans, and contagion risk. Since UBL has done hefty investments (40% of total
assets), it also faced risk of decrease in value of investments. A detailed analysis of risks is done
at the end of this report.

Valuation Models

Dividend Discount Model

Dividend Discount Model is used to estimate the target price which came out to be Rs. 219.29.
This method takes future dividends as the cash flows to the shareholder and discounts them to
estimate the equity value.

Earnings estimates from the forecasted income statement for the year 2014 to 2019 have been
used. The dividend payout ratio is taken to be the average payout in the last six years from
2008 - 2013. Expected earnings are multiplied with the average dividend payout ratio to arrive
at the dividends each year. Terminal growth is taken to be the average growth rate coming
from the product of return on equity and the retention ratio. Dividends each year and the
terminal value are discounted at the cost of equity to arrive at the total equity value which
gave the price of Rs 219.29 per share.

Discounted Free Cash Flow to Equity Method

Variable Value It is difficult to estimate the free cash flow from operations in the banking industry due to the
Risk Free Rate 11.00% nature of operations of the financial institutions. Therefore another approach that has been
Market Risk Premium 4.90% devised is to use the cash flow to equity holders. This may be calculated by redefining the
Beta 1.13
investments that the bank has to undertake in order to continue operations. The main
Cost of Equity 16.54%
requirement, BASEL III accord, is therefore to maintain the regulatory capital at the prescribed
1 - Tax Rate 67.45%
Tax Rate 32.55% levels. Keeping this in consideration, we estimated the Free Cash Flows to Equity giving a
Debt Adjustment Factor 1.38 target price of Rs. 220.49 per share.
Bond Rate 11.00%
LT Debt to Total Debt 70.00% In this method, the estimated net earnings after tax are taken to be the profits earned on risk-
Bond Rate X LT Debt Ratio 7.70% weighted assets (RWA). The reinvestment in regulatory capital is the difference between the
Note Rate 0.74% ending and beginning book values of equity each year less the unappropriated earnings. The
ST Debt to Total Debt 30.00% terminal growth is taken to be the industry assets growth of 8.5% and then the free cash flows
Note Rate X ST Debt Ratio 0.22%
are discounted using cost of equity to arrive at the equity value of Rs. 250.05 billion.
Cost of Debt 7.37%
Excess Equity Return Method

This model defines the value of the equity as the sum of the current value of equity invested in
the firm and the present value of the excess returns expected in future. The excess return
generated by the bank in future periods over the cost of equity is the value driver in this
model. By discounting each year’s expected excess of returns on equity over its costs and
adding it to the level of estimated book value of equity, we arrive at the equity value of UBL
giving us the price of Rs. 199.09 per share.

Multiples Approach

The multiples approach may be used to value financial institutions but the multiples need to be
selected carefully. Firm value multiples such as Value to EBITDA or Value to EBIT cannot be
easily adapted to value financial service firms. We have used two approaches in the multiples
valuation method: price to book (P/B) and price to earnings (P/E) multiples approach.

This valuation is based on the premise that in an efficient market similar asset should warrant
similar returns. The one year forward P/B and P/E estimates of comparable firms were taken
from the Bloomberg resource. The basis of selection of comparable firm from the banking
industry of Pakistan was the similarity in size of assets and/or revenues. Moreover, the forward
looking estimates was used in an attempt to incorporate the future earning potential of the
banks because it is the anticipated performance which matters. The average of these estimates
were taken as a proxy to UBL’s estimates and then both P/B multiple and P/E multiple proxies
were multiplied by expected book value per share and expected EPS to get the price. With P/B
multiple approach, the price came out to be Rs. 232.67 per share while P/E multiple approach
gave a price of Rs. 206.26 per share.

SENSITIVITY ANALYSIS

After calculating the estimated price through each method, we considered the average of the
price coming from each model to be our target price of UBL. We also performed a sensitivity
analysis to see how sensitive this average target price to cost of equity and dividend payout is.
The table below shows the results. It turned out that only a higher cost of equity, i.e. close to
20% changes our recommendation to HOLD. However, at most of the combinations of cost of
equity and dividend payout, the target price remain higher which shows that our BUY
recommendation holds in most of the cases.
INVESTMENT RISKS:

Macroeconomic Risk: Interest rate

The interest rate volatility had a significant impact on the performance of UBL. A decline in the interest rate leads to a
proportional decline in the deposits of UBL whereas advances are bound to increase due to cheap availability of capital.

Macroeconomic Risk: Political Instability and Governance

The GDP growth is an important variable determining the growth prospects of the UBL. The asset quality of the loans is
determined by the overall macroeconomic factors like GDP growth which is a function of energy shortages, governance, law and
order in Pakistan. We expect real GDP growth to remain at 4% for Pakistan. UBL mitigates this risk by reviewing the credit limit
for all the sectors and updates the limit for ones that are most affected by the macroeconomic instability.

Macroeconomic Risk: Consumption pattern of the population

Pakistani masses are a consumption oriented society with very low saving rate of 13.2% as compared to other comparable
countries in the developing and emerging spheres (India's 32.9 percent and Bangladesh's 28.8 percent). A sufficiently strong
saving performance is an important prerequisite for economic growth, macroeconomic balance and the maintenance of
financial and price stability.

Industry Risk: Regulations

The banking sector is strictly monitored by the state bank of Pakistan. The regulations of the central bank may have material
blow to the profits and margins of the banks depending upon the exposure of profits to the markup revenues. Majority of the
savings are invested in PIBs. Therefore, decreasing interest rate or PIB yield decreases the mark up income. The phased
implementation of Basel II capital adequacy requirements till 2019 can pose challenges if UBL does not meet them. UBL has its
Internal Capital Adequacy Assessment framework which is revised with changing regulations. Currently, UBL maintains CAR ratio
well above the requirement.

Industry Risk: Low entry Barriers for International Banks

Currently there are 20 domestic banks and 12 international banks that hold 80% of the total assets in the banking sector. This
high ratio of international banks to domestic banks is unparalleled in the developing countries. Foreign banks enjoy the same
facilities and same access as the domestic banks and there is no preferential treatment for domestic institutions. Unlike many
countries, foreign banks can have 100 percent ownership, can open their branches or establish local subsidiary with full
ownership. Therefore, foreign banks with state of the art technology and better facilities and big capitalization can give
domestic banks a tough challenge while competing for professional services and deposits.

Operational Risk: Low growth in branches

Although the banking industry has been growing on average of 10% annually, UBL’s growth in branches have not been
proportional to the industry growth, even in comparison with its competitors. UBL has been trying to cut its operational cost
and perhaps that is why it is not increasing its branches. Although it has the third largest chain of branches, this sluggish
approach may hamper its penetration in the under and unbanked areas of the country.

Operational Risk: Credit risk and NPLs

The performance of the loans is tied with the performance of the companies to which the loans have been made. The business
risk and financial risk of the borrower are the key determinants of the viability of the interest and principal payments. It is
important for UBL to monitor the developments of the sectors it is exposed to. This directly affects NPLs and increases the
infection ratio. UBL mitigates this risk by updating Risk Acceptance Criteria by lending to low risk customers. UBL has also
formed Credit Policy and Risk Division which intimates management of key developments related to macroeconomic issues and
industry updates. Obligor Risk Rating model developed by UBL gives more objective ranking of customer.

Operational Risk: Competitive Branchless Banking

A third of UBL’s total income comes from non-markup revenues, a major chunk of which is contributed by UBL Omni. UBL has
been spending a big amount each year for marketing of UBL Omni, however, the competition in this branchless sector is very
fierce. Easy paisa has the largest market share with 62% of transactions. Easy paisa has also introduced Mobile account ATM
card while MCB has also introduced a VISA powered mobile wallet namely MCB Lite. UBL mitigates this risk by Business
Continuity Planning and outsourcing policies however, with increasing competition, it may be difficult for UBL to increase or
even maintain its market share.

Operational Risk: Contagion Risk

Contagion risk is the possibility that problems in a subsidiary or branch may directly affect the head office or parent bank or
another branch or subsidiary of the same international bank in a country related to the one where the problem initiates. Banks
are more vulnerable to this risk as failure of branches or subsidiaries abroad can impact the whole bank. UBL has been
expanding its network to other countries for example Gulf and Africa. Recent decline in oil prices in from $110/barrel at start of
the year to current level of 60/barrel exposes UBL to contagion risk as performance of foreign branches and subsidiaries will be
highly affected.

Market Risk: Diminution in value of investments

UBL holds majority of their holding in PIBs and government issued sukuks. This high exposure to government securities poses a
credit risk because the debt to GDP ratio is very high for Pakistan while at the same time the government has been facing
mounting budget deficits over the years. UBL conducts sensitivity and scenario analysis to assess the risks faced by current
investments.
APPENDIX 1: INCOME STATEMENT

Income Statement 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E 2019E
Mark-up/return/interest earned 52,763 61,745 60,046 71,374 75,380 75,709 90,565 97,807 106,863 116,814 128,130 142,343
Mark-up/return/interest expensed 24,247 28,323 25,208 31,339 35,759 36,200 42,751 46,950 51,554 56,602 62,137 68,204
Net mark-up/interest income 28,516 33,422 34,838 40,035 39,621 39,509 47,814 50,857 55,309 60,211 65,993 74,139

Provision against loans and advances - net 4,515 9,645 6,838 6,195 3,359 1,346 2,223 2,780 3,151 3,568 4,036 4,563
Provision against lendings to financial institutions - net 561 0 346 168 61 140 140 140 140 140 140
Provision for diminution in value of investments - net 1,872 1,187 304 412 401 6 226 230 235 239 244 249
Bad debts written off directly 1,368 1,486 1,008 340 319 182 250 250 250 250 250 250
7,754 12,879 8,150 7,294 4,247 1,594 2,838 3,400 3,776 4,197 4,670 5,203
Net up/return/interest income after provisions 20,762 20,543 26,688 32,741 35,374 37,915 44,975 47,457 51,533 56,014 61,323 68,937

Non Mark-up/interest income

Fee, commission and brokerage income 7,243 6,736 7,022 7,783 9,455 11,444 13,455 15,819 18,600 21,868 25,712 30,231
Dividend income 191 215 134 297 540 1,612 1,841 1,977 2,163 2,413 2,639 2,944
Income from dealing in foreign currencies 1,657 1,276 1,735 2,268 1,946 2,212 2,538 2,912 3,341 3,834 4,399 5,048
Gain on sale of securities - net 201 699 188 510 1,259 3,026 3,268 3,283 3,298 3,314 3,329 3,344
Unrealized loss on revaluation of investment classifed as held for trading -11 -3 -33 -32 -1 -4 -4 -14 -14 -14 -14 -14
Other income 1,917 3,147 1,539 2,403 3,993 1,127 2,355 2,355 2,355 2,355 2,355 2,355
Total non mark-up/interest income 11,199 12,071 10,584 13,228 17,193 19,416 23,452 26,333 29,743 33,770 38,419 43,907
Gross Income 31,961 32,613 37,272 45,969 52,567 57,331 68,427 73,790 81,276 89,784 99,742 112,843

Non Mark-up/interest expenses

Administrative expenses 16,680 17,803 19,138 21,233 25,558 28,571 30,942 33,232 35,358 37,480 39,729 42,232
Other provisions - net 468 642 68 226 489 326 326 326 326 326 326 326
Workers’ Welfare Fund 341 401 415 515 536 503 526 662 704 745 789 838
Other charges 292 65 240 105 65 249 249 249 249 249 249 249
Total non mark-up/interest expenses 17,781 18,911 19,861 22,079 26,648 29,649 32,043 34,468 36,637 38,800 41,093 43,645
Share of profit of associates -128 690 277 -257 2,398 1,282 1,389 1,492 1,587 1,682 1,783 1,896
Profit before taxation 14,052 14,392 17,689 23,634 28,316 28,965 37,774 40,813 46,226 52,666 60,432 71,094
Taxation 5,607 4,904 6,668 8,747 9,069 9,234 12,371 13,369 15,177 17,335 19,941 23,527
Profit after taxation 8,445 9,488 11,021 14,887 19,247 19,731 25,403 27,444 31,049 35,332 40,491 47,567
APPENDIX 2: BALANCE SHEET

Balance Sheet 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E 2019E
Assets
Cash and balances with treasury and other banks 64,683.88 75,612.13 94,098.15 102,888.88 116,814.51 122,250.21 133,549.81 181,542.47 225,401.06 261,878.81 314,642.25 357,605.08
Lending to financial institutions 22,805.34 23,162.13 11,934.78 12,375.26 22,828.83 29,858.04 49,622.49 55,364.16 61,770.18 68,917.41 76,891.64 85,788.53
Investments - gross 117,245.88 139,881.37 234,366.22 303,841.50 382,666.47 460,330.70 525,784.67 564,714.44 617,701.77 689,174.15 753,538.04 840,727.62
Advances - gross 397,736.45 390,493.95 376,480.02 382,115.78 430,694.44 461,675.00 498,609.00 540,990.76 589,679.93 645,699.52 710,269.48 784,847.77
Performing 369,183.72 350,428.72 327,866.95 330,971.61 372,244.29 406,840.07 433,789.83 470,661.96 513,021.54 561,758.59 617,934.45 682,817.56
Non Performing 28,552.72 40,065.24 48,613.08 51,144.17 58,450.16 54,834.93 64,819.17 70,328.80 76,658.39 83,940.94 92,335.03 102,030.21
Operating fixed assets 19,926.92 23,734.08 24,684.57 25,745.22 27,460.84 28,037.98 29,323.64 30,667.80 32,073.09 33,542.28 35,078.25 36,684.02
Other assets 20,288.80 18,099.39 22,477.43 25,097.24 28,162.02 29,356.98 31,608.39 34,032.47 36,642.45 39,452.58 42,478.23 45,735.93
Total assets - gross 642,687.26 670,983.06 764,041.17 852,063.87 1,008,627.11 1,131,508.91 1,268,498.01 1,407,312.09 1,563,268.48 1,738,664.76 1,932,897.89 2,151,388.94

Provisions against non-performing advances 19,791.08 28,414.36 34,969.61 40,976.26 44,860.18 46,391.69 48,614.38 51,394.12 54,545.39 58,112.96 62,148.58 66,712.06
Provisions diminution in value of investments 2,188.79 2,146.79 2,649.01 2,734.62 1,420.57 1,484.51 2,103.14 2,258.86 2,470.81 2,756.70 3,014.15 3,362.91
Total assets - net of provision 620,707.39 640,421.91 726,422.55 808,352.99 962,346.36 1,083,632.72 1,217,780.49 1,353,659.11 1,506,252.28 1,677,795.10 1,867,735.16 2,081,313.97

Liabilities & Equity

Deposits & other Accounts 492,267.90 503,831.67 567,611.26 633,889.42 752,785.90 889,525.60 992,449.88 1,107,283.21 1,235,403.54 1,378,348.29 1,537,832.74 1,715,770.65
Borrowings 44,749.69 37,168.28 47,631.81 50,845.88 69,693.58 41,077.73 67,852.67 75,703.69 84,463.13 94,236.10 105,139.87 117,305.28
Sub-ordinated loans 11,993.85 11,989.80 11,985.75 11,317.08 9,319.26 665.33 - - - - - -
Bills payable 5,210.87 5,166.36 5,074.70 5,879.04 7,615.38 16,600.69 11,325.52 12,635.96 14,098.03 15,729.27 17,549.26 19,579.83
Other liabilities 17,089.42 14,947.44 18,984.85 19,352.73 21,004.54 24,490.22 26,317.56 28,281.26 30,391.48 32,659.15 35,096.03 37,714.73
Total Liabilities 571,311.73 573,103.55 651,288.37 721,284.14 860,418.66 972,359.57 1,097,945.63 1,223,904.12 1,364,356.19 1,520,972.82 1,695,617.90 1,890,370.49

Equity 0.11273577
Share Capital 10,117 11,129 12,242 12,242 12,242 12,242 12,242 12,242 12,242 12,242 12,242 12,242
Reserves 17,256.06 21,167.95 24,101.84 27,495.96 32,298.69 38,049.35 43,409.17 49,524.00 56,500.19 64,459.09 73,539.12 83,898.21
Unappropriated profit 17,703.33 23,617.88 27,576.33 35,481.97 39,305.13 45,208.30 46,788.40 48,804.72 51,996.18 56,786.48 60,599.83 66,417.53
Equity - Tier 1 45,076.58 55,914.74 63,919.97 75,219.72 83,845.62 95,499.45 102,439.37 110,570.52 120,738.17 133,487.37 146,380.75 162,557.54
Non-Controlling Interest 2,044.59 2,279.69 2,207.24 2,324.39 2,827.06 3,487.92 3,881.13 4,318.67 4,805.54 5,347.30 5,950.13 6,620.92
Surplus on revaluation of assets 2,274.50 9,123.94 9,006.97 9,650.85 15,255.02 12,285.78 13,514.36 14,865.80 16,352.38 17,987.62 19,786.38 21,765.02
Equity 49,395.66 67,318.36 75,134.18 87,194.96 101,927.70 111,273.15 119,834.86 129,754.99 141,896.09 156,822.28 172,117.26 190,943.48
Total Liabilities & Equity 620,707.39 640,421.91 726,422.55 808,352.99 962,346.36 1,083,632.72 1,217,780.49 1,353,659.11 1,506,252.28 1,677,795.10 1,867,735.16 2,081,313.97
APPENDIX 3: INCOME STATEMENT – COMMON SIZE

Income Statement 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E 2019E
Mark-up/return/interest earned 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Mark-up/return/interest expensed 45.95% 45.87% 41.98% 43.91% 47.44% 47.81% 47.21% 48.00% 48.24% 48.46% 48.50% 47.92%
Net mark-up/interest income 54.05% 54.13% 58.02% 56.09% 52.56% 52.19% 52.79% 52.00% 51.76% 51.54% 51.50% 52.08%
0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Provision against loans and advances - net 8.56% 15.62% 11.39% 8.68% 4.46% 1.78% 2.45% 2.84% 2.95% 3.05% 3.15% 3.21%
Provision against lendings to financial institutions - net - 0.91% 0.00% 0.48% 0.22% 0.08% 0.15% 0.14% 0.13% 0.12% 0.11% 0.10%
Provision for diminution in value of investments - net 3.55% 1.92% 0.51% 0.58% 0.53% 0.01% 0.25% 0.24% 0.22% 0.21% 0.19% 0.18%
Bad debts written off directly 2.59% 2.41% 1.68% 0.48% 0.42% 0.24% 0.28% 0.26% 0.23% 0.21% 0.20% 0.18%
14.70% 20.86% 13.57% 10.22% 5.63% 2.11% 3.13% 3.48% 3.53% 3.59% 3.64% 3.65%
Net up/return/interest income after provisions 39.35% 33.27% 44.45% 45.87% 46.93% 50.08% 49.66% 48.52% 48.22% 47.95% 47.86% 48.43%

Non Mark-up/interest income

Fee, commission and brokerage income 13.73% 10.91% 11.69% 10.90% 12.54% 15.12% 14.86% 16.17% 17.41% 18.72% 20.07% 21.24%
Dividend income 0.36% 0.35% 0.22% 0.42% 0.72% 2.13% 2.03% 2.02% 2.02% 2.07% 2.06% 2.07%
Income from dealing in foreign currencies 3.14% 2.07% 2.89% 3.18% 2.58% 2.92% 2.80% 2.98% 3.13% 3.28% 3.43% 3.55%
Gain on sale of securities - net 0.38% 1.13% 0.31% 0.71% 1.67% 4.00% 3.61% 3.36% 3.09% 2.84% 2.60% 2.35%
Unrealized loss on revaluation of investment classifed as held for trading -0.02% 0.00% -0.06% -0.05% 0.00% -0.01% 0.00% -0.01% -0.01% -0.01% -0.01% -0.01%
Other income 3.63% 5.10% 2.56% 3.37% 5.30% 1.49% 2.60% 2.41% 2.20% 2.02% 1.84% 1.65%
Total non mark-up/interest income 21.23% 19.55% 17.63% 18.53% 22.81% 25.65% 25.90% 26.92% 27.83% 28.91% 29.98% 30.85%
Gross Income 60.58% 52.82% 62.07% 64.41% 69.74% 75.73% 75.56% 75.44% 76.06% 76.86% 77.84% 79.28%

Non Mark-up/interest expenses

Administrative expenses 31.61% 28.83% 31.87% 29.75% 33.91% 37.74% 34.17% 33.98% 33.09% 32.09% 31.01% 29.67%
Other provisions - net 0.89% 1.04% 0.11% 0.32% 0.65% 0.43% 0.36% 0.33% 0.30% 0.28% 0.25% 0.23%
Workers’ Welfare Fund 0.65% 0.65% 0.69% 0.72% 0.71% 0.66% 0.58% 0.68% 0.66% 0.64% 0.62% 0.59%
Other charges 0.55% 0.10% 0.40% 0.15% 0.09% 0.33% 0.28% 0.25% 0.23% 0.21% 0.19% 0.18%
Total non mark-up/interest expenses 33.70% 30.63% 33.08% 30.93% 35.35% 39.16% 35.38% 35.24% 34.28% 33.22% 32.07% 30.66%
Share of profit of associates -0.24% 1.12% 0.46% -0.36% 3.18% 1.69% 1.53% 1.53% 1.49% 1.44% 1.39% 1.33%
Profit before taxation 26.63% 23.31% 29.46% 33.11% 37.56% 38.26% 41.71% 41.73% 43.26% 45.09% 47.16% 49.95%
Taxation 10.63% 7.94% 11.10% 12.25% 12.03% 12.20% 13.66% 13.67% 14.20% 14.84% 15.56% 16.53%
Profit after taxation 16.01% 15.37% 18.35% 20.86% 25.53% 26.06% 28.05% 28.06% 29.05% 30.25% 31.60% 33.42%
APPENDIX 4: BALANCE SHEET COMMON SIZE

Balance Sheet 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2018E 2019E
Assets
Cash and balances with treasury and other banks 10.1% 11.3% 12.3% 12.1% 11.6% 10.8% 10.5% 12.9% 14.4% 15.1% 16.3% 16.6%
Lending to financial institutions 3.5% 3.5% 1.6% 1.5% 2.3% 2.6% 3.9% 3.9% 4.0% 4.0% 4.0% 4.0%
Investments - gross 18.2% 20.8% 30.7% 35.7% 37.9% 40.7% 41.4% 40.1% 39.5% 39.6% 39.0% 39.1%
Advances - gross 61.9% 58.2% 49.3% 44.8% 42.7% 40.8% 39.3% 38.4% 37.7% 37.1% 36.7% 36.5%
Performing 57.4% 52.2% 42.9% 38.8% 36.9% 36.0% 34.2% 33.4% 32.8% 32.3% 32.0% 31.7%
Non Performing 4.4% 6.0% 6.4% 6.0% 5.8% 4.8% 5.1% 5.0% 4.9% 4.8% 4.8% 4.7%
Operating fixed assets 3.1% 3.5% 3.2% 3.0% 2.7% 2.5% 2.3% 2.2% 2.1% 1.9% 1.8% 1.7%
Other assets 3.2% 2.7% 2.9% 2.9% 2.8% 2.6% 2.5% 2.4% 2.3% 2.3% 2.2% 2.1%
Total assets - gross 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Provisions against non-performing advances 3.1% 4.2% 4.6% 4.8% 4.4% 4.1% 3.8% 3.7% 3.5% 3.3% 3.2% 3.1%
Provisions diminution in value of investments 0.3% 0.3% 0.3% 0.3% 0.1% 0.1% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2%
Total assets - net of provision 96.6% 95.4% 95.1% 94.9% 95.4% 95.8% 96.0% 96.2% 96.4% 96.5% 96.6% 96.7%
Liabilities & Equity
Deposits & other Accounts 76.6% 75.1% 74.3% 74.4% 74.6% 78.6% 78.2% 78.7% 79.0% 79.3% 79.6% 79.8%
Borrowing from financial institutions 7.0% 5.5% 6.2% 6.0% 6.9% 3.6% 5.3% 5.4% 5.4% 5.4% 5.4% 5.5%
Sub-ordinated loans 1.9% 1.8% 1.6% 1.3% 0.9% 0.1%
Bills payable 0.8% 0.8% 0.7% 0.7% 0.8% 1.5% 0.9% 0.9% 0.9% 0.9% 0.9% 0.9%
Other liabilities 2.7% 2.2% 2.5% 2.3% 2.1% 2.2% 2.1% 2.0% 1.9% 1.9% 1.8% 1.8%
Total Liabilities 88.9% 85.4% 85.2% 84.7% 85.3% 85.9% 86.6% 87.0% 87.3% 87.5% 87.7% 87.9%
0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Net Assets/Liabilities 6.8% 9.1% 9.0% 9.4% 9.1% 8.9% 9.4% 9.2% 9.1% 9.0% 8.9% 8.9%

Equity
Share Capital 1.6% 1.7% 1.6% 1.4% 1.2% 1.1% 1.0% 0.9% 0.8% 0.7% 0.6% 0.6%
Reserves 2.7% 3.2% 3.2% 3.2% 3.2% 3.4% 3.4% 3.5% 3.6% 3.7% 3.8% 3.9%
Unappropriated profit 2.8% 3.5% 3.6% 4.2% 3.9% 4.0% 3.7% 3.5% 3.3% 3.3% 3.1% 3.1%
Equity - Tier 1 7.0% 8.3% 8.4% 8.8% 8.3% 8.4% 8.1% 7.9% 7.7% 7.7% 7.6% 7.6%
Surplus on revaluation of assets 0.4% 1.4% 1.2% 1.1% 1.5% 1.1% 1.1% 1.1% 1.0% 1.0% 1.0% 1.0%
Equity 7.7% 10.0% 9.8% 10.2% 10.1% 9.8% 9.4% 9.2% 9.1% 9.0% 8.9% 8.9%
Total Liabilities & Equity 96.6% 95.4% 95.1% 94.9% 95.4% 95.8% 96.0% 96.2% 96.4% 96.5% 96.6% 96.7%
APPENDIX 5: WACC

Type Value (Rs. Million)

Market Cap 230,562
Short term debt 27,432
Long term debt 63,417
Total Capital 321,410.80

Varialble Value
Risk Free Rate 11.00%
Market Risk Premium 4.90%
Beta 1.13
Cost of Equity 16.54%
1 - Tax Rate 67.45%
Tax Rate 32.55%
Debt Adjustment Factor 1.38
Bond Rate 11.00%
LT Debt to Total Debt 70.00%
Bond Rate X LT Debt Ratio 7.70%
Note Rate 0.74%
ST Debt to Total Debt 30.00%
Note Rate X ST Debt Ratio 0.22%
Cost of Debt 7.37%

Capital Structure
Share in Capital Cost Weighted Average Cost
Equity 71.73% 16.54% 11.86%
Debt 28.27% 7.37% 2.08%
WACC 13.95%
APPENDIX 6: Balance Sheet Assumptions

Deposits: Industry deposits are increasing at CAGR of 14.54% in last five years where as UBL’s share of deposits has been
almost constant at the rate of 10.6% of the industry deposits and we assume that it will remain the same. The money
supply (M2) in Pakistan’s economy is increasing at average rate of 13.11%. Over the last five years growth has been slow for
the deposits of UBL which clocks at CAGR of 12.56%. We have take average of growth of industry deposits, money supply
growth (M2) and UBL’s deposits. The average increase in deposits comes out to be 11.57% which is assumed to be
forecasted growth rate of UBL’s deposits in coming five years.

(Rs in Millions) 2008 2009 2010 2011 2012 2013 9MCY14 Average CAGR
Industry Deposits 4,217,724 4,785,892 5,450,980 6,243,606 7,290,925 8,310,529 8,739,840 14.53%
Industry Deposits Growth (Average = 14.5%) 13% 14% 15% 17% 14% 5% 14.45%
UBL Deposits 492,268 503,832 567,611 633,889 752,786 889,526 927,561 12.56%
Growth in UBL Deposits (Average = 7.16%) 2% 13% 12% 19% 18% 4% 7.16%
UBL Share of Total Deposits 11.7% 10.5% 10.4% 10.2% 10.3% 10.7% 10.6% 10.61%
Money Supply (M2) 4,689,143 5,137,219 5,777,200 6,695,194 7,641,795 8,857,812 13.57%
Money Supply (M2) Growth (Average = 14%) 10% 12% 16% 14% 16% 13.11%

Year 2014E 2015E 2016E 2017E 2018E 2019E

Industry Deposits 9,511,173 10,885,277 12,457,902 14,257,728 16,317,580 18,675,024
UBL Forecasted Deposits (Average=11.57%) 992,450 1,107,283 1,235,404 1,378,348 1,537,833 1,715,771

Advances: The steady decrease in discount rate from its peak in 2009 at 14% to current level of 9.5% due to different
factors including decrease in inflation indicates shift in yield curve. We estimate that banks will also shift their focus from
government securities to lending in future in order to increase their profitability as PIBs does not offer good return at
current discount rate. The shift is already visible as the CAGR of increase in advances was 3% for last five years and growth
in first 9 months of this calendar year has been 8%. We estimate that discount rate will decrease by 50 bps in 2015; a
further decrease of 100 bps is expected in 2016, followed by 50 bps decrease in 2018 based on IMF estimates of inflation
for that period. We estimate that advances will grow more than they did in past when the rates offered by PIBs were
attractive. Therefore, we estimate advances to grow by 8%-10.5% from 2014 to 2019.

Year 2008 2009 2010 2011 2012 2013 9MCY14

Gross Advances to Deposits Ratio 81% 78% 66% 60% 57% 52% 53.8%
Advances (Gross) 397,736 390,494 376,480 382,116 430,694 461,675 499,164
Growth in Advances -2% -4% 1% 13% 7% 8%

Growth in Advances (CAGR) 3.0%

Growth in 9MCY14 8%

Year 2014E 2015E 2016E 2017E 2018E 2019E

Gross Advances to Deposits Ratio 50.2% 48.9% 47.7% 46.8% 46.2% 45.7%
Growth in Advances 8.0% 8.5% 9.0% 9.5% 10.0% 10.5%
Discount Rate (Expected) 9.5% 9.0% 8.0% 8.0% 7.5% 7.5%
Advances (Gross) 498,609 540,991 589,680 645,700 710,269 784,848

Non-Performing Loans: Last year non-performing loans were 11.9% of the gross advances however exposure of UBL to gulf
countries and sharp decrease in oil prices from $110 per barrel at the start of the year to current level of around $60 per
barrel indicates increase in non-performing loans. Therefore, we have assumed that non-performing loans will cloak at 13%
of the gross advances of UBL.
Provision for advances: We estimate that provision for advances will remain at current level of 10% of gross advances.

Year 2008 2009 2010 2011 2012 2013

Performing Loans as percentage of advances 93% 90% 87% 87% 86% 88%
Non Performing Loans as percentage of advances 7.2% 10.3% 12.9% 13.4% 13.6% 11.9%
Provision against advances as percetange of advances 5.0% 7.3% 9.3% 10.7% 10.4% 10.0%

Assumptions
Non Performing Loans 13% of gross advances
Provision against advances 10% of gross advances

Investments: In last five years, due to attractive yield from PIBs and surge in stock market, investments as percentage of
deposits increased from 28% in 2008 to 53% in 2013. However, we suggest that recent decrease in discount rate has made
PIBs unattractive and we estimate that the ratio will decrease from current level of 53% to 49% in 2019 motivated by
further decrease in discount rate. UBL has already shifted its focus to advances which can be noticed by the fact that
investments grew at CAGR of 31.5% in last five years and increased only 7% in 9MCY14.

Year 2008 2009 2010 2011 2012 2013 9MCY14

Investment to Deposits Ratio 24% 28% 41% 48% 51% 52% 53%
Investment 117,246 139,881 234,366 303,841 382,666 460,331 491,407
Growth in Investment 19% 68% 30% 26% 20% 7%
Provision against diminishing value of investment 2,189 2,147 2,649 2,735 1,421 1,485 1,874.97
Provision as percentage of Investment 1.87% 1.53% 1.13% 0.90% 0.37% 0.32% 0.38%

Growth in Investment (CAGR) 31.5%

Growth in 9MCY14 7%
Forecasted Growth in Investment 12%

Year 2014E 2015E 2016E 2017E 2018E 2019E

Investments to Deposit Ratio 53% 51% 50% 50% 49% 49%
Investments 525,785 564,714 617,702 689,174 753,538 840,728
Growth in Investment 14% 7% 9% 12% 9% 12%
Discount Rate (Expected) 9.50% 9.00% 8.00% 8.00% 7.50% 7.50%
Provision against diminishing value of investment 2,103.14 2,258.86 2,470.81 2,756.70 3,014.15 3,362.91

Provision for diminishing value of investment: We estimate that provisions will remain at historical average of 0.4% of the
total investments.

Lending to Financial Institutions: We assume that lending to financial institutions remain at 5% of the deposits. The current
level of 4% of deposits has increased from 1.95% in 2010. We assume the trend to continue to part excess cash.

Year 2008 2009 2010 2011 2012 2013 9MCY14

Lending to Financial Institutions 22,805.34 23,162.13 11,934.78 12,375.26 22,828.83 29,858.04 37,252
Lending to FI as percentage of Deposits 4.63% 4.60% 2.10% 1.95% 3.03% 3.36% 4.02%
Growth 1.6% -48.5% 3.7% 84.5% 30.8% 24.8%

Year 2014E 2015E 2016E 2017E 2018E 2019E

Lending to Financial Institutions 49,622.49 55,364.16 61,770.18 68,917.41 76,891.64 85,788.53
as % of Deposits 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%

Operating Fixed Assets: Operating Fixed Assets are assumed to increase with increase in number of branches. In last two
years, UBL has added five branches to its system. Given, management’s intention to operate at this level we assume the
UBL will add five branches every year. Operating fixed assets per branch is increasing at CAGR of 4.18% from 17.81 in 2008
to 21.85 in 2013. We assume that it will increase at same CAGR.

Year 2008 2009 2010 2011 2012 2013

Operating Fixed Assets 19,926.92 23,734.08 24,684.57 25,745.22 27,460.84 28,037.98
Number of Branches 1,119.00 1,120.00 1,124.00 1,218.00 1,278.00 1,283.00
Increase in Branches 1.00 4.00 94.00 60.00 5.00
Operating Fixed Assets per Branch 17.81 21.19 21.96 21.14 21.49 21.85

Year 2014E 2015E 2016E 2017E 2018E 2019E

Estimated Number of Branches 1,288.00 1,293.00 1,298.00 1,303.00 1,308.00 1,313.00
Operating Fixed Asset per Branch 22.77 23.72 24.71 25.74 26.82 27.94
Operating Fixed Assets 29,323.64 30,667.80 32,073.09 33,542.28 35,078.25 36,684.02

Other Assets: Other assets are assumed to be increasing at historic CAGR of 7.67%

Year 2008 2009 2010 2011 2012 2013

Other Assets (CAGR = 7.67%) 20,288.80 18,099.39 22,477.43 25,097.24 28,162.02 29,356.98

Year 2014E 2015E 2016E 2017E 2018E 2019E

Other Assets 31,608.39 34,032.47 36,642.45 39,452.58 42,478.23 45,735.93

Borrowings: We have forecasted borrowings in two parts: secured and unsecured. Secured borrowings as percentage of
deposits are assumed to remain at current 9MCY14 level which is 5.44%. Whereas, unsecured also assumed to remain at
1.4% of the deposits.

Year 2008 2009 2010 2011 2012 2013 9MCY14

Borrowing from Financial Institutions 44,749.69 37,168.28 47,631.81 50,845.88 69,693.58 41,077.73 63,416
State Bank 17,085.58 19,390.67 20,083.32 17,356.06 16,850 17,250.29 17,222
Repo Agreement Borrowings 14,284.14 5,066.10 22,412.24 28,241.67 45,065 12,042.85 33,196
Secured 31,369.72 24,456.77 42,495.56 45,597.73 61,914.55 29,293.14 50,418.11
Unsecured Borrowings 13,379.97 12,711.51 5,136.26 5,248.15 7,779 11,784.59 12,998
Secured as % of deposits 6.37% 4.85% 7.49% 7.19% 8.22% 3.29% 5.44%
Unsecured as % of Deposits 2.72% 2.52% 0.90% 0.83% 1.03% 1.32% 1.40%

Year 2014E 2015E 2016E 2017E 2018E 2019E

Secured 53,945.19 60,187.02 67,151.08 74,920.93 83,589.80 93,261.71
Unsecured 13,907.48 15,516.67 17,312.05 19,315.18 21,550.08 24,043.57
Total Borrowings 67,852.67 75,703.69 84,463.13 94,236.10 105,139.87 117,305.28

Subordinated Loans: Since UBL has paid off the subordinated loan which there in 2013 financial statements as indicated by
9MCY14 financial statements. We assume that there will be none in the future because there is no reasonable ground to
estimate the amount neither the need of could be forecasted.

Bills Payable: Bills payables are constant when taken as percentage of deposits. We assume that bills payable will remain at
average rate of 1.14% of the deposits.

Year 2008 2009 2010 2011 2012 2013 9MCY14

Bills Payable 5,210.87 5,166.36 5,074.70 5,879.04 7,615.38 16,600.69 11,175.73
Bills Payable as % of deposits 1.06% 1.03% 0.89% 0.93% 1.01% 1.87% 1.20%

Year 2014E 2015E 2016E 2017E 2018E 2019E

Bills Payable (Average = 1.14% of deposits) 11,325.52 12,635.96 14,098.03 15,729.27 17,549.26 19,579.83
 Other Liabilities: Other liabilities are assumed to increase at five year CAGR of 7.46%.

Year 2014E 2015E 2016E 2017E 2018E 2019E

Other Liabilities 26,317.56 28,281.26 30,391.48 32,659.15 35,096.03 37,714.73

APPENDIX 7: INCOME STATEMENT ASSUMPTIONS

Markup/Return/Interest Earned

The top line of the Banks Income statement comprises of 3 individual heads; Interest on Advances, Interest on Lendings to
&Deposits with Other Financial Institutions and Investment Income, each of which has been forecasted individually. The most
significant portion of the Banks earnings, Interest on Advances is a function of the discount rates and amounts outstanding. Since
Discount rates are expected to fall owing to a fall in expected inflation, we expect interest on advances to fall as well. Interest
income is assumed to be 9% of all performing loans in 2014 based on past estimates of discount rates and returns on advances
which has exhibited a decreasing trend in the past 4 years falling from 12.3% in 2010 to 8.4% in 2013. Since the bank expects to
improve its efficiency, we believe that 9% is a reasonable number for return on performing advances.

Return on Loans to and Deposits with other Financial Institutions has exhibited an even larger decrease, decreasing from 13.7% in
2010 to 3.7% in 2013. Even though the average for the period came out to be 7.7%, we used a much more conservative figure of
4.1% on all expected outstanding loans to and deposits with Financial Institutions for our forecasts.

For forecasting Income from Investments we have used the average return on gross investments for the past 2 years, which
approximates to about 9%. This figure is applied on all expected gross investments in the future years.

Assumption 2014 2015 2016 2017 2018 2019

Interest Income 9% of All performing Loans 41,210.0 44,712.9 48,737.0 51,962.7 57,158.9 63,160.6
Loans to & Deposits with OFIs 4.1% of All Outstanding loans 2,034.5 2,269.9 2,532.6 2,825.6 3,152.6 3,517.3
Investment Income 9% of Gross Investments 47,320.6 50,824.3 55,593.2 62,025.7 67,818.4 75,665.5

Markup/Return/Interest Expensed

The major expense for the bank, Interest paid on deposits is forecasted using the following methodology. For predicting the future
discount rates we used the figures from IMFs report : “Fourth and Fifth Reviews Under the Extended Arrangement and Request
for Waivers of Nonobservance of Performance Criteria”. To obtain a reasonable estimate of Interest expense we also calculated
the ratio of Interest Expense to All Remunerative Deposits for the past 4 years. Comparing this with the Discount rate (average
yearly Kibor)for the past 4 years we were able to ascertain that Interest Expense as a percentage of Total Remunerative deposits
was approximately 3.5% less than the discount rate. We have hence used these calculations for predicting Interest expense on
Expected Remunerative Deposits in future years.

Assumption 2014 2015 2016 2017 2018 2019

Discount Rate Discount Rate less 3.5% on all 6.40% 6.35% 6.30% 6.25% 6.20% 6.15%
Interest Expense Remunerative Deposits 42,751.4 46,949.8 51,554.0 56,602.5 62,137.2 68,204.2

Provisions

Provision against loans and advances – net

For forecasting this figure we compared the Income statement expense with the corresponding change in opening and closing
figures for Provisions in the Balance Sheet. Since the Income Statement expense roughly approximated to the Increase/decrease
in the balance sheet figures, we assume that this will be the case in coming years as well.

Provision against lendings to financial institutions - net

Since this was a very volatile figure in the past 5 years we have taken an average of those figures as a constant expense in the
coming years, with the expectation that the average will smooth out any temporary differences in the forecasted years. Provisions
against lendings to OFIs is taken at a constant Rs 140m in the forecast period.

Provision for diminution in value of investments - net

For arriving at this figure we calculated the average expense for the past 4 years. But since the figure for the last financial year was
significantly lower than previous years and the value of investments is expected to increase rather than decrease owing to an
expected decrease in discount rates, we gave a higher weightage to recent years to arrive at the forecast figure. This came out to
be about Rs 225m, which we have assumed to grow at the same rate that gross investments grow, which is 4%.

Bad debts written off directly

Again since this is a very volatile figure and predicting real bad debts can be very difficult we have taken the last 5 year average to
be constant over the next 5 years, with the average expected to smooth out the volatility in consequent years. Bad Debts expense
is hence taken at a constant Rs 250m.

Assumption 2014 2015 2016 2017 2018 2019

Provisions against Loans & Advances Change in Balance Sheet Figure 2,222,689 2,779,745 3,151,271 3,567,564 4,035,622 4,563,481
Provisions against Lendings to OFIs Last 5 year average 140,000 140,000 140,000 140,000 140,000 140,000
Provisions for Investments Last 4 year Time-weighted average expected to grow at 4% (rate of growth of investments) 225000 234000 243360 253094 263218 273747
Bad Debts Written Off Directly Last 5 year Average 250,000 250,000 250,000 250,000 250,000 250,000

Non Mark-up/interest income

Fee, commission and brokerage income

Since this figure has shown a continuous positive trend for the past five years and the Bank has repeatedly emphasized on
increasing earnings from Non-Interest income due to decreasing spreads, we assume it to grow at a similar rate in coming years.
We have hence taken the harmonic mean of the growth rates in the past 3 years and assumed that this head will continue to grow
at this rate (17.57%) in the forecast period.

Dividend Income

Since Dividend Income is expected to vary with long term investments, we have took the ratio for dividend income to long term
investments and normalized it to come up with a figure for dividend income to total investments. This came out to be about 0.35%
of gross investments, which we have assumed to be continue in the forecast period.

Income from dealing in foreign currencies

Since this exhibited a continuous positive growth, we calculated its compounded annual growth rate and assumed that this will
continue to grow at this rate in the forecast period.

Gain on sale of securities - net

Predicting the actual gain is again a very difficult task. As a proxy we used the change in value of investments as an indicator of
which way the income from gain on sale from securities would move. Hence we used the income statement figure for the last year
and increased it by the expending change in value of investments in the subsequent year to arrive at the forecasted figure.

Unrealized loss on revaluation of investment classified as held for trading

Since this was again a volatile item, we took the 5 year average which was around 13.9m and assumed it to be constant over the
next five years.
Other Income

This was another item which was difficult to forecast since it varied significantly from year to year. Hence the average 5 year figure
for Other Income was used as a proxy for Estimated other income in the forecast period.

Assumption 2014 2015 2016 2017 2018 2019

Fee, commission and brokerage income Harmonic Mean of Past 3 years (Assumed Growth Rate= 17.5%) 13,454,753 15,819,388 18,599,602 21,868,430 25,711,746 30,230,513
Dividend Income 0.35% of Gross Investments 1,841,114 1,977,432 2,162,975 2,413,247 2,638,626 2,943,934
Income from dealing in foreign currencies Assumed to grow at CAGR for past 5 years (14.74%) 2,537,851 2,912,025 3,341,366 3,834,008 4,399,284 5,047,902
Gain on sale of securities - net Income Statement figure increased by Expected % change in value of Investments 3268220 3546019 3865161 4232351 4655586 5144423
Unrealized loss on revaluation Last 5 year average 13,900 13,900 13,900 13,900 13,900 13,900
Other Income Last 5 year average 2,354,000 2,354,000 2,354,000 2,354,000 2,354,000 2,354,000

Administrative expenses

These were assumed to grow at the rate of inflation from the previous year with expected inflation rates taken from the IMF
report.

Other Provisions

Since we could not get detailed information about this, the five year average was taken for the forecast period.

Workers’ Welfare Fund

For estimating the amount for Worker’s Welfare fund we used the policy disclosed by the company, which was to pay an amount
equal to 2% of Profits before Tax. Since this charge is included in the Profit before Tax figure an iterative process was used to
arrive at this figure for the forecast period.

Other Charges

The 5 year average was used for forecasting this figure which was relatively volatile during the previous five years.

Share of Profits from Associates

Since this was again very volatile, we took an average for the past five years with higher weightage iven to recent years and
assumed the profit from associates to grow by the rate of inflation.

Taxation

With the corporate tax rate for banks being 35%, we have assumed that the effective tax rate paid out by the bank to be 34%,
taking into account the lower taxes applicable on dividend income and other temporary and permanent differences. The tax rate
is applied on all profits, excluding profits from associate which are assumed to have been taxed before being apportioned to the
Bank.

Assumption 2014 2015 2016 2017 2018 2019

Assumed to grow at rate of Inflation from previous year 30,941,926 33,231,629 35,358,453 37,479,960 39,728,758 42,231,670
Last 5 year Average 325,562 325,562 325,562 325,562 325,562 325,562
2% of Profit before tax 713,143 805,088 917,132 1,050,271 1,210,473 1,428,734
Last 5 year Average 249377 249377 249377 249377 249377 249377
Assumed to be 34% of All profits excluding Profit from Associate 12,370,854 13,458,672 15,369,834 17,647,004 20,391,716 24,139,669
Time-Weighted average of past 5 years increased with the rate of inflation 1,388,820 1,491,592 1,587,054 1,682,278 1,783,214 1,895,557
APPENDIX 8: Valuation Assumptions

Multiples Approach

This valuation is based on the premise that in an efficient market similar asset should warrant similar returns. We estimated the
equity ratios as the harmonic averages of the comparable bank’s ratios in the industry. The basis of comparison was size and
revenue. Moreover, the forward looking price earnings ratio was used in an attempt to incorporate the future earning potential of
the banks because it is the anticipated performance which matters.

Multiples Approcah
Ticker Name Price to Book P/E Ratio
ABL Allied Bank Limited 1.72 8.57243
BAFL Bank Alfalah Limited 1.27 7.92214
HBL Habib Bank Limited 2.06 11.0792
MCB MCB Bank Limited 2.70 13.2858
NBP National Bank of Pakistan 0.94 9.3599
SCBPL Standard Chartered Bank Ltd. 6.66 9.42
Average 2.56 9.94
UBL United Bank Limited No. of Shares 1,224.18
Book Value per Share (UBL) 90.90
UBL Price using Price to Book Ratio 232.67
EPS (UBL) 20.75
UBL Price using P/E mulitple 206.26

Excess Return Model

The inputs of this model are the book value of equity and the excess return expected. Book value of equity can be obtained from
the financial statement. The excess as explained earlier is the excess return above the cost of equity capital. Cost of Equity capital
is calculated using the CAPM. The assumptions and calculations of the Capital Asset Pricing Models have been discussed
previously.

Excess Equity Return Model

2014E 2015E 2016E 2017E 2018E 2019E
Net Income 25,402,831 27,443,888 31,048,606 35,331,858 40,491,417 47,566,551
- Equity Cost 15,792,743 16,940,398 18,285,047 19,966,471 22,074,806 24,206,985
Excess Equity Return 9,610,087 10,503,490 12,763,560 15,365,387 18,416,611 23,359,566
Terminal Value of Excess Equity Return 141,256,372
Cumulated Cost of Equity 1.165 1.358 1.583 1.844 2.149 2.505
Present Value 8,246,383 7,734,032 8,064,553 8,330,828 8,568,219 56,392,980

Beginning BV of Equity 95,499,445 102,439,366 110,570,520 120,738,170 133,487,367 146,380,752

Cost of Equity 16.54% 16.54% 16.54% 16.54% 16.54% 16.54%
Equity Cost 15,792,743 16,940,398 18,285,047 19,966,471 22,074,806 24,206,985

Return on Equity 25.67% 25.77% 26.85% 27.80% 28.94% 30.79%

Net Income 25,402,831 27,443,888 31,048,606 35,331,858 40,491,417 47,566,551
Dividend Payout Ratio 53.82% 53.82% 53.82% 53.82% 53.82% 53.82%
Dividends paid 13,670,957 14,769,386 16,709,325 19,014,428 21,791,131 25,598,732
Retained Earnings 11,731,874 12,674,502 14,339,281 16,317,430 18,700,286 21,967,819
Equity Invested 146,380,752 Value of Equity 243,717,747
PV of Equity Excess Return 97,336,995 Price Using Excess Return 199.09 Number of shares 1,224,180

Dividend Discount Model

Variable Dividend Growth Model is used. The growth rate is calculated through the product of return on equity and retention
ratio. Retention ratio is determined through harmonic average of past dividend payout ratio and then taken as constant. Return
on equity for each year is calculated through the forecasted income statement and balance sheet.
 Dividend Discount Model
2014E 2015E 2016E 2017E 2018E 2019E
Dividend 13,670,957 14,769,386 16,709,325 19,014,428 21,791,131 25,598,732
DPO 53.82% 53.82% 53.82% 53.82% 53.82% 53.82%
Terminal Growth 10.99% Terminal Value 461,768,380
Present Values 11,731,001 10,875,138 10,557,653 10,309,271 224,973,187
MV of Equity 268,446,249 No. of Shares 1,124,180 Price Using DDM 219.29

Free Cash Flow to Equity Method

In this method, Profit after tax from the forecasted income statement is taken as Profit from Risk Weighted Assets. The
reinvestment value is the difference between each year’s book value of equity less the unappropriated earnings. This method is
used taking into consideration the regulation requirement of 10% for capital adequacy ratio.

Free Cash Flow to Equity Model

2014E 2015E 2016E 2017E 2018E 2019E
Net Income 25,402,831 27,443,888 31,048,606 35,331,858 40,491,417 47,566,551
Tier 1 102,439,366 110,570,520 120,738,170 133,487,367 146,380,752 162,557,539
Reinvestment in Regulatory Capital 6,939,921 8,131,153 10,167,651 12,749,197 12,893,385 16,176,787
FCFE 18,462,909 19,312,735 20,880,956 22,582,661 27,598,032 31,389,764
Terminal 390,008,998
Present Values 15,842,959 14,220,541 13,193,465 12,243,900 194,289,187
MV of Equity 249,790,052 Price using FCFE 222.20

APPENDIX 9: SENSITIVITY ANALYSIS

APPENDIX 10: PORTER’S FIVE FORCES ANALYSIS
APPENDIX 11: BUSINESS MODEL OF BANKING INDUSTRY

*Source: BMI Matters Consultants

APPENDIX 12: UBL LOCATIONS
APPENDIX 13: KEY MANAGEMENT PERSONNEL

Director Position Held Since Other positions and Honors

Sir Muhammad Anwar Pervaiz Chairman Dec-13 * Chairman Bestway Group UK
* Chairman Bestway Northern Limited UK
awarded the Order of the British Empire (OBE) in 1992
* Chairman of Bestway Foundation UK
conferred the title of Knight’s Bachelor in 1999
Mr. Zameer Mohammed Choudrey * Director Oct-02 * Chief Executive of Bestway Group fellow of the
* Chairman audit Committee Board Institute of Chartered Accounts of England & Wales.
* Deputy Chairman of the
Pakistan Britain Trade and Investment Forum (PBTIF)
* Co-Chairman of the Conservative Friends of Pakistan.
* Trustee of Bestway Foundation UK
* Chairman of Bestway Foundation Pakistan
* Member of British Asian Trust’s UK Advisory Council.
* Vice Chairman of Pakistan Britain Trade & Investment Forum.
Haider Zameer Choudrey * Director Mar-14 * Chief Executive of Bestway Group.
fellow of the Institute of Chartered Accountants of England & Wales
Rizwan Pervez * Director Apr-10 * Represents the Bestway Group on the Board of United Bank Limited.
* Member of the Institute of Chartered Accountants in England & Wales.
* BoD member BestWay UK
* Served as Governor of John Kelly Schools in North West London
* Trustee of Bestway Foundation UK.
Mr. Amin Uddin * Director Mar-09 * Ecobank Group, a leading Pan African Banking Institution
* Member of Board Audit Committee * Bank of Credit and Commerce
Mr. Arshad Ahmad Mir * Director Oct-06 * Member of Institute of Chartered Accountants
* Member of the Board Risk Management Committee * Member of Institute of Bankers UK
Zaheer Sajjad * Director Mar-14 * Chairman State Cement Corporation,
* Member of the Human Resource Compensation Committee * Chairman National Fertilizer Corporation
* Secretary Ministry of Health
* Secretary Economic Affairs Division
* Cabinet Secretary to the Government of Pakistan
Wajahat Husain President & CEO May-14 * Director in the Bank’s International Subsidiaries and Associate Companies
* President of Abu Dhabi Cricket Council.
* Senior Executive Vice President UBL’s International business
Disclosures:
Ownership and material conflicts of interest:
The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company.
The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the
content or publication of this report.
Receipt of compensation:
Compensation of the author(s) of this report is not based on investment banking revenue.
Position as a officer or director:
The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company.
Market making:
The author(s) does not act as a market maker in the subject company’s securities.
Disclaimer:
The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to
be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The
information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute
investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a
recommendation by any individual affiliated with CFA Society of Pakistan, CFA Institute or the CFA Institute Research Challenge with regard to
this company’s stock.

CFA Institute Research Challenge