United Bank Limited UNCONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 2016 UNITED BANK LIMITED DIRECTORS’ REPORT TO THE MEMBERS 2016 On behalf of the Board of Directors, I am pleased to present the 58th Annual Report of United Bank Limited for the year ended December 31, 2016. Standalone Results - Rs. in billion Financial Highlights UBL posted a profit after tax (PAT) of Rs. 27.73 billion for the year ended December 31, 2016. The consolidated PAT was 46.02 42.17 recorded at Rs. 28.00 billion, an increase of 25.73 27.73 4% over the prior year (2015: Rs. 27.01 billion). The Earnings per share stood at Rs. PBT PAT 22.65 per share for the year ended 2016 in 2015 2016 comparison to Rs. 21.02 per share in 2015. Profit before tax (PBT) stood at Rs. 46.02 billion, a growth of 9% over the last year. The overall Return on Equity (RoE) measured at 25% (2015: 25.7%). This consistent performance has been achieved through strong balance sheet growth driven by gaining market share through core deposits along with prudent build up in high yielding assets. The break-up value per share has increased to Rs. 124.0 as at Dec 31’16 (Dec’ 15: Rs. 116.1 per share) Overall revenues have grown by 4% over 2015, closing at Rs. 80.65 billion. Net Markup Income has increased by 2% and non-markup income by 7% year on year. The cost base continues to be efficiently managed, with the overall expense growth curtailed at 3% over 2015 and the cost to income ratio maintained in line with the previous year’s level at 39.6% despite lower margins, expansion across the branch network and reinvestment in our core business segments. Maintaining the focus on underwriting standards along with aggressive recoveries resulted in a net reduction in NPLs from Rs. 46.83 billion in 2015 to Rs. 44.57 billion in 2016. The asset quality level continues to improve and stood at 8.1% as at Dec’16 (2015: 9.4%). This has resulted in a more than 50% reduction in the provisioning expense for the year. The Board is pleased to recommend a final cash dividend of Rs. 4 per share i.e. 40% for the year ended December 31, 2016, bringing the total cash dividend for the year 2016 to 130%. 1 UNITED BANK LIMITED DIRECTORS’ REPORT TO THE MEMBERS 2016 Net Markup Income Rs. in billions 55.84 57.04 The prevailing low interest rate 60.00 8.0% environment along with the 7.0% 50.00 savings floor continued to 6.0% 40.00 5.0% constrict banking margins. These 30.00 5.6% challenges notwithstanding, UBL 4.7% 4.0% 20.00 3.0% has expanded its Net Markup 10.00 2.0% Income by 2%, closing 2016 at Rs. - 1.0% 57.04 billion. Net interest margin 2015 2016 was recorded at 4.7% in 2016 Net Interest Income Net Interest Margin (2015: 5.6%). UBL’s balance sheet growth has resulted from a robust buildup in deposits as average domestic current account volumes saw an increase of 18% year on year in 2016. The Bank’s overall cost of deposits decreased by 42 bps to 2.7% in 2016 (2015: 3.1%). Growth in the loan portfolio across all major business segments despite modest credit demand along with further investment in high yielding bonds portfolio maintained interest earnings. Non-Markup Income UBL’s non-markup income grew by 7% over 2015 to close at Rs. 23.61 billion and continues Rs. in billions to strengthen the overall revenue profile of the 7% bank. Earnings are built on a diverse range of services, from fee based facilities across Retail Bank and UBL’s flagship branchless banking 23.61 service, Omni. Trade and investment banking 21.99 services across Corporate as well as leading positions within Treasury and Capital markets continue to grow and diversify revenue 2015 2016 potential. The overall contribution of Non Mark Non Interest Income up Income to gross revenues improved to 29.3% in 2016 (2015: 28.3%). Fee, commission and brokerage income constituted 52% of total non-markup income and was recorded at Rs. 12.32 billion (2015: Rs. 12.20 billion). The ATM / Debit Cards business witnessed significant growth during the year with over half a million new cards issued and consistent 2 UNITED BANK LIMITED DIRECTORS’ REPORT TO THE MEMBERS 2016 growth in customer transaction volumes resulting in a 21% growth in commissions. Trade commissions grew by 14% over 2015, in spite of commodity price pressures and weak trade performance of the economy impacting business. UBL Omni remains one of the largest contributors to the fee base as we expanded our Omni network to over 42,000 agents in order to better serve an ever growing customer base. This has resulted in increased revenues from payment services and disbursements under G2P programs. General economic slowdown in the Gulf Cooperation Council (GCC) region and rebate cutback by the State Bank of Pakistan restricted home remittance earnings. However, despite these challenges, we managed to increase our overall volumes from last year and continue to retain our leadership position with a market share of over 25%. Corporate mandates for equity and debt advisory as well as trusteeship services led to a 19% growth in investment banking fees. 2016 proved to be a particularly successful year for International Investment Banking that saw an increase in revenues of around 70% over the previous year. Dividend income reached Rs. 3.27 billion, slightly ahead the previous year’s level of Rs. 3.20 billion. With focus on maximizing dividend yield, our strategy remains to maintain a well- balanced equities portfolio with investments in a diverse range of sectors and scrips with strong fundamentals. Capital gains increased to Rs. 5.36 billion from Rs. 3.24 billion in 2015, primarily on timely realization on bonds and equities. Foreign exchange earnings closed at Rs. 1.70 billion, a reduction of 25% from Rs. 2.27 billion earned in 2015 as reduced foreign exchange flows and a relatively stable currency market weighed heavy across the industry. Provisions and loan losses Rs. in billions 3.71 The net provisioning expense decreased by 53% from Rs. 3.71 1.74 billion in 2015 to Rs. 1.74 billion in the current year. Asset quality was measured at 8.1%, an improvement of 133 bps from last year. This 2015 2016 improvement can be attributed to credit quality considerations driving Total Provisions loan book expansion along with enhanced focus on recoveries against the bank’s non-performing corporate portfolio led by our Special Assets Management Unit. We remain well-reserved against loan losses as the coverage ratio improved from 80.1% at Dec’15 to 83.9% as at Dec’16. 3 UNITED BANK LIMITED DIRECTORS’ REPORT TO THE MEMBERS 2016 Cost management UBL’s administrative expenses increased by 3% over 2015 to close at Rs. 31.90 billion (2015: Rs. 30.90 billion). Staff cost increase was well contained at 6% over 2015, with headcount maintained at optimum levels. The increase in personnel cost can be attributed to market linked salary increases and performance increments. Premises costs were up by a mere 2% over the previous year, essentially a result of rent increases on lease renewals across a major part of the network. Electricity and gas costs were well-contained through the introduction of cost saving initiatives to ensure efficient usage while centralization of the procurement process restricted overall expenses. Variable costs decreased by 5% compared to the previous year as we continued to actively monitor and rationalize controllable expenses. The Bank’s cost to income ratio was recorded at 39.6% (2015: 39.7%). Maximizing operational efficiencies remains our key priority as we continue to evolve leaner operating models. As we build synergies across front office and operations we remain fully committed to continuous improvement in service standards. Rs. in billions Balance Sheet Management 121 120 UBL’s balance sheet size reached Rs. 1.58 trillion as at Dec’16, an increase of 13% 12.2% over Dec’15. The Bank’s overall deposits grew by 12% over Dec’15 to reach Rs. 1.18 931 1,059 trillion (2015: Rs. 1.05 trillion). Average domestic deposits grew by 14% over Dec’15 with market share recorded at 2015 2016 8.66% in 2016 (2015: 8.55%). Our deposit Core Deposits Non-Core Deposits mobilization strategy centers around active acquisition of new to bank relationships with aggressive focus on current accounts. This is depicted by a year on year growth of 16% in core deposits and 18% in average current deposits during the year. The expansion in the Banks’ core deposits provides a sustainable funding base for business growth in addition to keeping costs down in the current low interest rate scenario. Domestic CASA stood strong at 84% (2015: 84%), with the overall cost of deposits witnessing a 56 bps reduction from 3.4% last year to 2.9% in 2016. The Bank’s net loans and advances grew by 12% over Dec’15 to close at Rs. 510.1 billion (Dec’15: Rs. 455.4 billion). The lending strategy is focused on selectively growing the loan book, while maximizing yields on overall relationships. The corporate advances portfolio grew by 10% 4 UNITED BANK LIMITED DIRECTORS’ REPORT TO THE MEMBERS 2016 over Dec’15, with 15% growth in the SME segment. Despite limited credit opportunities in the GCC, the International loan book grew by 16% to Rs.