VIS reaffirms entity ratings of United Bank Ltd

July 01, 2025 (MLN): VIS Credit Rating Company Limited (VIS) has reaffirmed entity ratings of United Bank Limited (PSX: UBL) at 'AAA/A1+' (Triple A/A One Plus).

Medium to long term rating of 'AAA' indicates the highest credit quality; the risk factors are negligible, being only slightly more than for risk-free Government of Pakistan’s debt.

Short-term rating of 'A1+' indicates the strongest likelihood of timely repayment of short-term obligations with outstanding liquidity factors.

Outlook on the assigned ratings remains ‘Stable.’

The rating of UBL’s Basel III compliant Additional Tier-1 (ADT-1) TFC-5 has also been reaffirmed at ‘AA+’ (Double A Plus), while the rating of Tier-2 TFC-6 has been finalized at ‘AAA’ (Triple A).

Previous rating action was announced on June 26, 2024.

UBL was established in 1959 as a private sector bank.

It operated in the private sector for the first 15 years until the nationalization of all private banks in Pakistan in 1974.

UBL remained under public ownership for approximately 27 years before being privatized by the Government of Pakistan (GoP) in 2002.

The main sponsor, Bestway Group, holds a 64.04% shareholding in the Bank.

UBL is a subsidiary of Bestway International Holdings Limited (BIHL), which is wholly owned by Bestway Group.

BIHL is incorporated in Guernsey.

As at December 2024, UBL operates a large network of 1,474 branches (2023: 1,356) across Pakistan, including 496 Islamic Banking branches (2023: 209), with two branches in Export Processing Zones and eight international branches.

The Bank has been designated as a Domestic Systemically Important Bank (D-SIB) by the State Bank of Pakistan (SBP), and remains fully compliant with the additional regulatory requirements this classification entails.

During the review period, UBL also completed the merger of former Silk Bank Limited (SBL) with and into itself, further strengthening its market position.

UBL's asset base grew significantly to Rs8.1 trillion by Dec’24 (Dec’23: Rs5.6tr), driven by increased repo borrowings, which were primarily deployed into investments.

This was complemented by a substantial rise in gross advances as the Bank aligned itself with the regulatory directive mandating a minimum Advances-to-Deposit Ratio (ADR) of 50% to avoid additional taxation.

By Mar’25, the asset base reached Rs9.4tr, with a notable shift in liquidity back into investments as maturing advances reduced the advances portfolio by PKR 0.5 tn.

The gross advances portfolio rose sharply to Rs1.6tr by Dec’24 (Dec’23: Rs0.7tr), driven by increased lending across corporate & SME, commodity, and international segments.

Corporate loans remained the largest component at 47% of the portfolio, while international advances formed 26.3%.

Consumer finance remained minimal at 1.7% of gross advances.

Notable sectoral growth was observed in agriculture, financial services, chemicals, and education, among others.

UBL’s NPLs increased to PKR 116.0 bn by Dec’24 and further to PKR 162.1 bn by Mar’25.

The increase in NPLs was primarily due to the merger with Silk Bank and some legacy exposures in the international loan portfolio.

The overall Gross Infection (GI) ratio declined to 7.4% (CY23: 14.7%) in Dec’24, but returned to 14.7% by Mar’25 due to a contraction in the gross loan book and the Silk Bank merger.

Higher provisioning under IFRS-9 was observed, with specific coverage increasing to 96.7% by Mar’25 (Dec’24: 93.0%; Dec’23: 87.5%).

Net infection remained low at 0.6% (Dec’24: 0.6%; Dec’23: 2.1%), reflecting sound loss absorption capacity.

As of Mar’25, UBL’s investments rose to PKR 7.5 tn (Dec’24: Rs5.9tr; Dec’23: Rs4.4tr), with minimal credit risk as 96.9% comprised federal government securities.

The unrealized gain on the investment portfolio stood at Rs74.3tr as of end-Mar’25 (Dec’24: Rs80.9 billion; Dec’23: Rs7.3bn).

A shift toward long-term, floating-rate PIBs was evident, which reduced the average duration of the investment book to under one year, helping mitigate mark-to-market risk amid changing interest rate dynamics.

UBL maintained a healthy liquidity profile.

Deposits increased to Rs3.4tr by Mar’25 (Dec’24: Rs2.6tr), driven largely by current and savings accounts.

The CASA ratio stood at 88.3% in Mar’25 (CY24: 91.5%).

Market share in deposits improved to 8.6% (CY24: 6.8%).

The LCR and NSFR remained well above regulatory thresholds, while the LADB ratio recovered to 74.4% in Mar’25 after dipping in CY24 due to advances expansion.

In 2024, net markup income posted moderate growth, though the net interest margin (NIM) declined on a year-on-year basis due to a shift in the funding mix.

The increased reliance on high-cost borrowings particularly repo financing dampened spread generation, especially as a significant portion of earning assets remained invested in government securities that offered limited yield advantage.

Consequently, the Bank recorded a negative spread on its investment book, compressing margins.

Non-markup income played a vital role in supporting profitability, led by substantial gains from the sale of securities and the divestment of a non-core subsidiary.

These one-off gains cushioned the impact of higher operating costs and rising provisioning charges under IFRS-9.

Fee-based income also showed a positive trajectory, underpinned by growing transaction volumes, particularly in trade and credit card segments.

Administrative expenses increased significantly due to branch expansion, technology investments, and inflationary cost pressures.

As a result, the efficiency ratio weakened during the year, reflecting a faster rise in recurring expenses relative to recurring income.

Provisioning expenses increased materially owing to higher expected credit loss (ECL) charges, aligning with the Bank’s conservative risk management stance under the IFRS-9 framework.

However, profitability metrics such as Return on Average Equity (ROAE) and Return on Average Assets (ROAA) remained strong and improved in the first quarter of 2025, benefiting from expanding current account deposits and improving spreads.

Going forward, profitability is expected to remain stable, supported by easing interest rates, rising fee income, and potential mark-to-market gains from a rebalanced investment portfolio with greater floating-rate exposure.

The Bank’s CAR improved to 20.3% in Dec’24 (Dec’23: 16.6%) and further to 21.2% by Mar’25. This was supported by internal capital generation and a measured increase in RWAs.

Tier-1 capital accounted for approximately 75% of total eligible capital, indicating ample room for future growth through Tier-1 instruments if needed.

The merger with Silk Bank added Rs0.3bn to share capital and Rs10.75bn in CET-1 capital, resulting in a favorable impact on capital adequacy.

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