United Bank Limited UNCONSOLIDATED FINANCIAL STATEMENTS AS AT DECEMBER 31, 2014 U N I T E D B A N K L I M I T E D Directors’ Report to the Members On behalf of the Board of Directors, I am pleased to present to you the 56th Annual Report of United Bank Limited for the year ended December 31, 2014. Financial Highlights Rs. in Billion UBL, has achieved profit after tax of Rs. 33.40 Rs.Billion 27.81 21.93 billion which is 18% higher than last 21.93 year and translates into earnings per share 18.61 of Rs. 17.91 (2013: Rs. 15.21). On a consolidated basis, UBL posted a profit after tax of Rs. 24.02 billion, an increase of 22% over 2013. PBT PAT 2013 2014 UBL has earned a pre-tax profit of Rs. 33.40 billion, a growth of 20% over 2013, despite a challenging year for the economy that still remains in transition towards an improving business environment. The growth has been achieved through balance sheet expansion with improved asset yields, despite margin compression. The international operations continue to provide the Bank with diversification benefits and growth within captive markets. Focus on non-funded income remains a key revenue driver along with marginal loan loss provisions, resulting in strong earnings in 2014. The Board of Directors is pleased to recommend a final cash dividend of Rs. 4 per share i.e. 40% and a bonus share issue of nil for the year ended December 31, 2014, bringing the total cash dividend for the year 2014 to 115%. Net Interest Income In 2014 margins have remained restricted 45 7.0% Rs. in Billion due to the linking of the minimum rate on 42 6.5% savings accounts to the repo rate since the last quarter of 2013. Despite the 39 5.7% 6.0% 5.4% overall low interest rate environment 35 5.5% 44.97 keeping spreads tight, margins have 32 5.0% expanded by 34 bps to 5.7% this year. 37.94 28 4.5% Net interest income has grown by Rs. 7.03 billion to Rs. 44.97 billion driven by a 25 4.0% 2013 2014 11% growth in average assets. Expansion Net Interest Income Net Interest Margin 1 U N I T E D B A N K L I M I T E D within the corporate loan book at stable credit spreads, along with a buildup in the high yielding bond portfolio over the year has resulted in an improved earnings profile. Acquisition of core deposits has funded the larger balance sheet, mainly through growth in current accounts. Domestic cost of deposits was 4.41% (2013: 4.11%) with the increase restricted to 30bps, despite the impact of a higher savings floor. Non-Interest Income Non-interest income has grown by Rs. 1.18 billion to reach Rs. 19.30 billion, forming 30% of the Bank’s revenues and maintaining its contribution through sustainable and growing avenues. Fees and commissions have grown by 11% to reach Rs. 11.15 billion as value added services are contributing a larger component of revenues. UBL Omni’s footprint, product offering and customer portfolio continues to evolve with 36% growth in revenues. The Home remittance business has maintained its leadership channeling volumes ahead of the market with an increase in commission income of 22% this year. General banking fees remains a core component of the retail business segment and along with the growing cross sell of Bancassuarance is leveraging the large branch network. The equity portfolio gradually acquired within an improving market since last year continues to yield stable dividend yields. Foreign exchange income has increased significantly by 40% to reach Rs. 3.02 billion through active trading during the year on larger flows amidst volatility in the exchange rate. Market opportunities were seized on a timely basis to generate sizeable capital gains of Rs. 1.85 billion arising from both the bond and equity portfolios. Provisions and loan losses Provisions for the year were Rs. 1.16 billion having reduced by 20% as recovery and restructuring efforts continue, led by corporate and special asset management 1.50 0.5% teams. New NPL formation remains Rs. in Billion restricted, as asset quality considerations 1.45 0.4% direct credit expansion. The overall level 1.00 1.16 0.3% of coverage remains strong at 81% with 0.3% an improvement in the asset quality from 0.2% 0.50 12.1% in Dec’13 to 11.2% in Dec’14. 0.1% Overall NPLs have increased by 2% over 0.1% the year due to the classification of a 0.00 0.0% large customer against which currently no 2013 2014 Total Provisions NCL Ratio provision is required. 2 U N I T E D B A N K L I M I T E D Cost management Administrative expenses have increased by 11% in 2014 and reached Rs. 29.03 billion. The rise is a result of variable costs which move in line with related transaction revenues and due to higher business development expenditure this year. Staff costs remained well controlled with an 8% increase overall, mainly as a result of normal salary increases, with effective manpower planning controlling headcount levels. However utilities continue to impact the cost base mainly due to escalating power costs and higher alternate fuel consumption across the branch network. In 2014 the focus has been on managing the expense base across business and support functions in order to maintain service levels along with cost consciousness within the organization. Balance Sheet Management Balance sheet expansion continues Rs. in Billion to drive core earnings as spreads 895 remain under pressure. In 2014 the 828 58 56 balance sheet has crossed Rs. 1.1 Trillion, a growth of 10%. Retail Banking remains the corner 837 772 stone of business growth as the wide spread network across the country is leveraging its penetration across Dec'13 Dec'14 rural and urban geographies. The Core Deposits Non Core Deposits domestic deposit base has grown by 12.8% in 2014, ahead of market growth of 10.8%. Distribution continues to focus on a steady increase in stable core deposits, targeting deeper access through liability sales teams and branch relationships. Average current deposits have increased by 19%, resulting in a strong CASA ratio of 85% (83% in 2013) improving the profitable portfolio mix further while funding asset growth. Loan and advances increased by 11% to reach Rs. 434.3 billion as at December 2014 with fresh disbursements targeted at quality assets mainly within the corporate segment and higher commodity financing. The international loan portfolio has grown by 9% as we maintain our focus on trade related financing across the non oil sectors within the GCC. The investment portfolio has been steadily built up during the year to reach Rs. 497.3 billion as at December 31, 2014. Liquidity was mainly deployed within Pakistan Investment Bonds providing strong yield enhancement to the earnings asset base along with stable and consistent 3 U N I T E D B A N K L I M I T E D margins. The balance sheet remains highly liquid and well positioned to capitalize on lending opportunities in the future. Strong Capital Ratios UBL’s capital ratios remained strong as the unconsolidated Tier-1 CAR was 10.0% with the overall capital adequacy at 13.9% as at Dec’14 compared to 10.0% and 13.3% in Dec’13, respectively. Risk weighted assets have grown by 11.8% over the year in line with credit expansion and larger exposure towards long term investments leading the enhancement in core earnings. The interim dividend payout during the year has been enhanced to Rs. 2.5 per share per quarter while maintaining optimal capital levels. Based on an assessment of future capital requirements in accordance with the applicable Basel III regulations the existing capital structure comfortably supports future growth. Economy Review Most of the key macro indicators have started showing signs of improvement during 2014. The economic policies of the PML–N government remained directed towards rebuilding the climate for investment and growth. While this has renewed domestic and foreign investor confidence, it is imperative that key reforms are undertaken to sustain the recovery momentum. Although resolution of the energy crisis has appeared to be a key priority for the government, continued leakages in the power system along with government’s tight fiscal position has deterred them from any further cash injection to the sector. The overall outlook has improved during the latter part of the year amid significant fall in the international oil prices thereby slowing down the pace of energy sector circular debt accumulation. Large Scale Manufacturing (LSM) has remained contained at 2.48% during the first 5M FY15 with some signs of improvement during the last couple of months. The trade deficit during 1H FY15 has widened significantly by 34.0%, as exports have declined by 4.3% while imports increased by 11.7% on a year on year basis. As a result of the sizeable trade gap, the current account deficit for 1H FY15 has increased to US$ 2.4 billion despite growth in home remittances of 15.2% during 1H FY15 as well as receipt of two tranches of the Coalition Support Fund(CSF) during the period. Despite a weaker current account performance, the financial account has largely supported the country’s reserves position with a net inflow of US$ 2.4 billion taking the balance of payments into a surplus of US$ 485 million during 1H FY15.