United Bank Limited UNCONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 2020 UNITED BANK LIMITED DIRECTORS’ REPORT TO THE MEMBERS On behalf of the Board of Directors, we are pleased to present the 62nd Annual Report of United Bank Limited (UBL or the bank) for the year ended December 31, 2020. Introduction The COVID-19 virus, has emerged as one of the most disruptive event in recent human history. The pandemic has resulted in the loss of countless lives all across the world and has had an unprecedented impact on the domestic as well as the global economy. The discovery of an effective vaccine against the virus provides some hope as the world slowly emerges from the second wave of infections, however, the outlook for the global economy remains uncertain. On the domestic front, the country has fared better in dealing with the health and economic fallout from the pandemic compared to others in the region. The Government of Pakistan and the State Bank of Pakistan (SBP) initiated significant relief measures to protect the country’s most vulnerable citizens as well as supporting businesses to enable the economy to navigate this crisis. As domestic demand picks up with macroeconomic indicators exhibiting encouraging trends, it is imperative that this positive momentum is maintained in the medium term, while implementation of reform measures remains key in addressing the long standing structural issues holding the country back in achieving its true economic potential. Performance Overview On a standalone basis, UBL recorded a profit before tax (PBT) of Rs. 34.2 billion for the year 2020, largely in line with the PBT earned in 2019. Gross revenues were recorded at Rs. 92.1 billion for 2020, growing by 10% over 2019. The bank recorded a strong year on year growth of 21% in net markup income which stood at Rs. 75.0 billion for 2020. Non-markup income was recorded at Rs. 17.1 billion for 2020 (2019: Rs. 21.7 billion), lower mainly due to the COVID led slowdown in fee earnings and lower foreign exchange income. The bank’s administrative expenses remained well controlled, standing at Rs. 40.1 billion for 2020 (2019: Rs. 40.2 billion). Resultantly, the cost to income ratio improved significantly, from 48.2% in 2019 to 43.5% in 2020. The bank recorded a net provision charge of Rs. 16.8 billion in 2020 as against a net provision charge of Rs. 8.2 billion in 2019, mainly against UBL International’s loans and advances portfolio. Directors’ Report FY 2020 P a g e | 1 UNITED BANK LIMITED DIRECTORS’ REPORT TO THE MEMBERS Financial Results UBL posted an unconsolidated profit after tax (PAT) of Rs. 20.9 billion for 2020, a growth of 9% over 2019. The unconsolidated earnings per share (EPS) were recorded at Rs. 17.07 as against Rs. 15.63 last year. On a consolidated basis, PAT stood at Rs. 20.8 billion (2019: Rs. 19.0 billion). The consolidated EPS was measured at Rs. 17.10 for 2020 (2019: Rs. 15.60). Net Markup Income UBL posted net markup income of Rs. 75.0 billion for the year ended 2020, a strong growth of 21% over 2019. To address the slowdown emanating from the pandemic, the SBP reduced the policy rate from 13.25% at Dec’19 to 7.00% at Jun’20, a cumulative reduction of 625 bps. The bank’s average interest earning asset base was measured at Rs. 1.6 trillion for 2020, growing by 7% year on year. Bank level net interest margins (NIMs) improved by 47 bps year on year, from 4.3% in 2019 to 4.7% in 2020 while UBL Domestic’s NIMs improved from 4.5% in 2019 to 5.0% this year. This is mainly due to strong yields on earnings assets supported by active build up in the low cost deposits base, which contained the overall cost of funding. Bank level average deposits scaled the Rs. 1.5 trillion mark, as they recorded a 10% growth year on year. The average domestic earnings asset base recorded a strong growth of 11% over 2019, measuring at Rs. 1.4 trillion for 2020. This is primarily due to 14% year on year growth in average CASA deposits, which stood at Rs. 1.1 trillion for 2020 i.e. an increase of Rs. 134 billion. The bank continued its active sales drive to acquire new customers, particularly within current accounts, as it added 571,000 new current accounts in 2020 (2019: 534,000 new current accounts). This enabled domestic bank to record a 13% growth in average current deposits, which stood at Rs. 538 billion in 2020, a net increase of Rs. 63 billion. Led by the ‘Mahana Amdani’ savings proposition, the domestic average savings deposits were measured at Rs. 544 billion for 2020, a strong growth of 15% over 2019, i.e. a net increase of Rs. 70 billion. This enabled the bank to maintain a strong average domestic CASA ratio of 85.4% in 2020 (2019: 86.2%). The active build up in low cost core deposits enabled the domestic bank to reduce its cost of deposits by 106 bps, from 5.5% in 2019 to 4.5% in 2020. UBL International’s deposits base averaged USD 1.4 billion in 2020, declining by 17% year on year. Bank level cost of deposits was measured at 4.0% in 2020, a reduction of 87 bps year on year. On the asset front, the bank’s earning advances averaged Rs. 569 billion for 2020, declining by 10% over 2019. Domestic performing advances averaged Rs. 461 billion in 2020, down 4% versus last year. Islamic banking advances witnessed strong growth in 2020 with the average portfolio measuring at Rs. 21 billion, more than doubling over 2019. Despite the slowdown, the consumer loan book averaged Rs. 17 billion, in line with last year, with the portfolio predominantly concentrated in Directors’ Report FY 2020 P a g e | 2 UNITED BANK LIMITED DIRECTORS’ REPORT TO THE MEMBERS the secured autos segment. The bank continued its de-risking strategy within International as the performing loan book was reduced by 32% year on year, averaging USD 666 million in 2020. The bank’s markup earning investments averaged Rs. 1.0 trillion for 2020, growing by 24% over last year. The government securities portfolio averaged Rs. 839 billion in 2020, growing by 27% over last year, earning the bank a strong yield of 10.0% during the year (2019: 10.3%). UBL International’s markup earning investments, largely comprise of sovereign government debt holdings, averaged USD 705 million for 2020, an increase of 7% year on year, and earned the bank healthy returns of 6.0% (2019: 6.2%). Non-Markup Income The bank earned non markup income of Rs. 17.1 billion in 2020 as against Rs. 21.7 billion earned in 2019. Non markup income contributed 19% to bank’s overall gross revenues in 2020 (2019: 26%). Last year’s non-markup income included a major one-off in the form of realization of exchange translation reserve on the winding up of the bank’s New York operations. Fees and commissions were recorded at Rs. 11.1 billion in 2020, down 20% over last year. Fees and commissions contributed 65% to the total markup income in 2020 (2019: 64%). Income from this key revenue stream remained impacted by the COVID related disruptions to overall economic activity, within both the domestic franchise as well as in the GCC region. However, business activity picked up in the second half of the year, as all fee lines are now at pre COVID levels, with the domestic bank reporting strong quarter on quarter growth of 25%. Customer fees from branch banking operations were recorded at Rs. 1.6 billion in 2020, down 17% year on year, owing to lower branch footfall in the early part of the year. The bank remained the market leader in the home remittance business as it recorded an average market share of 23.3% in 2020. Resultantly, fee income from home remittances stood at Rs. 1.6 billion for 2020 (2019: Rs. 1.7 billion). Income from trade and guarantees was recorded at Rs. 1.3 billion, down 10% year on year, as the slowdown affected global trade for much of the year. However, commissions from guarantee business recorded a 35% year on year growth, led by the bank’s Financial Institution’s desks, both within domestic and International. Bancassurance commissions were recorded at Rs. 1.2 billion in 2020, down 27% over 2019, with premium volumes of Rs. 2.6 billion in 2020 (2019: Rs. 3.7 billion). However, in line with the pick up in business momentum, bancassurance commissions recorded a 48% growth Q4’20 versus Q3’20. During the year, the bank added 681 k new debit cards with a strong active base of 2.1 million at Dec’20. Consequently, income from debit and credit cards stood at Rs. 1.6 billion, largely in line with 2019 levels. Consumer finance fees was recorded at Rs. 877 million in 2020 (2019: Rs. 983 million) as the bank continued its momentum, particularly within the autos lending segment. Commissions from Directors’ Report FY 2020 P a g e | 3 UNITED BANK LIMITED DIRECTORS’ REPORT TO THE MEMBERS cash management recorded a growth of 8% year on year, being recorded at Rs. 846 million, with throughput volumes of over Rs. 3.0 trillion processed in 2020. The bank earned foreign exchange income of Rs. 3.7 billion in 2020 (2019: Rs.