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Edited Transcript of UBL.KA earnings conference call or presentation 27-Apr-20 9:00am GMT

Q1 2020 United Bank Ltd Earnings Call

Apr 28, 2020 (Thomson StreetEvents) -- Edited Transcript of United Bank Ltd earnings conference call or presentation Monday, April 27, 2020 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Aameer Mustaaly Karachiwalla

United Bank Limited - CFO

* Arif Akmal Saifie

United Bank Limited - Contact person for IR

* Imran Sarwar

United Bank Limited - Group Executive of Risk & Credit Policy

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Conference Call Participants

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* Ameet Doulat;Universal Brushware Investments

* Fahad Rauf;Ismail Iqbal Securities (Pvt.) Limited

* Farhan Rizvi

Crédit Suisse AG, Research Division - VP in the Asia Frontier Markets Research Team

* Irtiza Hassan;Maple Leaf Capital Limited

* Muhammad Tahir Saeed;ABL Asset Management

* Muhammad Waseem;UBL Fund Managers

* Murad Ansari

EFG Hermes Holding S.A.E., Research Division - MD of Financials for Pakistan and Sri Lanka

* Raza Jafri

Intermarket Securities Limited, Research Division - Executive Director of Research

* Sohail Tai;Amin Tai Securities (Private) Limited

* Suleman Soorani;Tricap Investments

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Presentation

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Operator [1]

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Good day, and welcome to the United Bank Limited Q1 2020 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Murad Ansari. Please go ahead, sir.

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Murad Ansari, EFG Hermes Holding S.A.E., Research Division - MD of Financials for Pakistan and Sri Lanka [2]

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Thank you, Krissy. Good day, everyone, and welcome to UBL's First Quarter 2020 Results Call. We are pleased to have Mr. Aameer Karachiwalla, Group CFO; Mr. Imran Sarwar, Chief Risk Officer; and Mr. Arif Saifie, Financial Controller and Head of IR, from the UBL joining this call.

Similar to previous calls, I think that the format is going to be fairly similar. And Arif will run through some of the key highlights from the results through his presentation and then we'll open the floor for Q&A. So without any further ado, Arif, over to you.

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Arif Akmal Saifie, United Bank Limited - Contact person for IR [3]

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Thank you, Murad, and we'd like to thank everybody who's joining the call this afternoon.

So we'd like to start with the key performance highlights of the bank's performance for the first quarter of 2020. So the driver of the performance for this quarter, while we've essentially tried to maintain a sound capital base, stand-alone profit after tax stood at PKR 5.1 billion, which is up by 21.5% versus same quarter last year. And PAT for the stand-alone bank is up by 7% over the last quarter of 2019. On a pre-provisions basis, the PBT stood at PKR 12.1 billion in the first quarter, which is up by 16% versus the first quarter last year and is up by 26% versus the last quarter of 2019.

And then out of this, the domestic bank's PBT, which is the Pakistan operations, was up by rupee -- stood at PKR 10.8 billion and are up by 22%, led by 16% growth in revenues. The domestic deposit base led the way overall for the earnings profile with the average domestic deposits at PKR 1.17 trillion, with a growth of 8% versus last year. Our domestic net interest income, which is 70% of the bank's revenue, is up by 23% versus last quarter of the previous year.

The provisions for the first quarter stood at PKR 3.7 billion. And this includes essentially a charge in the international business of the bank of PKR 3.76 billion, which includes the IFRS 9 general provision of PKR 1.6 billion. The domestic bank posted a net reversal in the provisions line of PKR 62 million for the first quarter. The administrative expenses of the bank stood well below inflation and were up by 6% year-on-year and 14% below the last quarter of 2019, in line with our attempt around a leaner business model.

Cost-to-income ratio has improved to 43% in the first quarter of 2020, improving from 45.6% in the first quarter of '19. The CAR has improved further to 19.5%, up 60 basis points from 18.9% in December '19. The risk-weighted assets of the bank remain flat at PKR 837 billion versus the December '18 levels. Our derisking on the international balance sheet continues where we reduced the average loan book by 27% in Q1 '20 versus Q1 '19.

In terms of the revenue base, the average balance sheet of the bank stood at PKR 1.86 trillion, which is up from the PKR 1.69 trillion in the first quarter of 2019. Interest income remained strong at PKR 17.3 billion with a growth of 18% year-on-year. The net interest margin improved to 4.6% in the first quarter of '20 versus 4.3% in the first quarter of 2019.

The deposit base remained the cornerstone of the earnings profile with the average deposits up 8% year-on-year, which is an PKR 85 billion incremental volume while CASA growth was 5%. Current account growth was 4% year-on-year while the current-to-total deposits ratio stood at 41.6% in the first quarter. Average CASA for the period remained close to 85%, marginally lower than the 87% we had last year. And cost of deposits, in line with the increase in the interest rates over the last 9 months, obviously is up to 6.4% versus 4.7% last year.

In terms of advances, we remained prudent. Domestic advances stood at PKR 483 billion in March '20, lower than the PKR 500 billion number we had in December '19, while international advances stood in dollar terms at $838 million as at 31st of March 2020, which is substantially lower than the $1.2 billion portfolio we had in December '18 and marginally lower than the $882 million we had in December '19.

In terms of the investment portfolio, the mix stood as follows. We have 1/3 portfolio composition in fixed income PIBs of PKR 256 billion, yielding close to 9.4%. Our floating rate portfolio stood at PKR 190 billion, yielding close to 14% and is up by about PKR 100 billion in the current quarter. And the T-bill portfolio at PKR 359 billion in March '20, yielding close to 12.6%.

So in terms of the fee base, the fee base was -- stood at PKR 3 billion, down 17% versus last year. And domestic fee was at PKR 2.4 billion, 15% below the first quarter last year. Major impact there is through trade commission, stood at PKR 224 million; banca at PKR 314 million; UBL Omni clocked in at about PKR 105 million; and home remittances commission stood at PKR 322 million. International fees stood at USD 3.5 million for the quarter, 35% lower than last year, in line with our strategy to derisk the business across our 3 major jurisdictions.

We did make a capital gain of PKR 342 million in the current quarter, which includes disposal of certain foreign government securities and on shares. Dividend income remained consistent with PKR 394 million, which includes mainly a large dividend from one of our subsidiaries. Exchange income for the current quarter stood at PKR 732 million, 19% lower than last year. Domestic income, nevertheless, stood at PKR 863 million, up PKR 76 million versus last year, while the international FX, there was a loss of less than $1 million in the current quarter.

Moving on to the NPL side and the provisions. Like we mentioned, the domestic charge is essentially a net reversal position of PKR 62 million for the current quarter. The domestic asset quality still remains lower, 6.1%, although there was 1 or 2 classifications in this quarter. The major charge for this quarter is international provisions of $24 million. The overall NPL for the bank is at PKR 86.3 billion versus PKR 76 billion last year, which also includes the devaluation impact on our -- the international NPLs of close to PKR 4 billion. International NPLs overall stood at $332 million, up from $319 million we had in December '19.

Overall coverage for the international book was 75%. And international coverage with the benefit of forced sale valuation of collateral stood at 86% in March '20. Overall asset quality for the bank is at 12.4% versus 10.9% in December. And the specific coverage at bank level is close to 78% while domestic coverage is at 81.5%.

Admin expenses stood at PKR 9.5 billion, up 6%. Property expenses were up -- recorded at PKR 1.6 billion and remained in line with last year while IT expenses increased by 13% year-on-year as the bank continues to invest in its technology platforms and digital banking strategy. Other costs stood at PKR 3 billion for the period under review, which remains largely consistent with what it was last year.

This covers the overall highlights for the first quarter's performance. I'd like to hand over back to you, Murad, for further questions from your side and from the participants. Thank you so much for attending.

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Murad Ansari, EFG Hermes Holding S.A.E., Research Division - MD of Financials for Pakistan and Sri Lanka [4]

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Thank you, Arif, for the presentation. Krissy, can you please repeat the instructions for participants who are wishing to put a question in the call?

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will now take our first question from Sohail Tai from Amin Tai Limited.

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Sohail Tai;Amin Tai Securities (Private) Limited, [2]

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Sir, my first question is regarding provisions. And I want to break it up between domestic and international. The domestic NPLs have gone up about PKR 3.7 billion. If you can comment whether there were any subjective provisions against this and any guidance for the near future? And related to this, international provisions have gone up about $13 billion. If you can give us some guidance regarding this?

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Imran Sarwar, United Bank Limited - Group Executive of Risk & Credit Policy [3]

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Yes, sure. This is Imran speaking. So from the domestic one, it's essentially one big name, which is a very well-known name in the local industry in the power sector. So that has gone into NPL. Other than that, it is really from SME, 1 or 2 small ones, so nothing big over there. As to the fate of this particular name, it's a bit difficult to predict as of now. There are restructuring discussions ongoing. If that happens, then it will be a different outcome.

Slight outlook on the domestic side, we are watching our SME space very carefully as a result of the COVID situation. And we do feel that what has happened in the last 4 weeks, and as it is continuing into the following weeks, there will be stress on corporates and the smaller entities, which could translate into NPLs. So yes, we are watching that space. It's difficult to predict what those numbers, et cetera, are going to be. But there will definitely be an uptick on our NPLs.

Sorry, on the international side, it is predominantly UAE. There was one big conglomerate that pretty much went bankrupt overnight. So we decided to take part provisioning for that particular group. And the rest is just increasing of our coverage for the existing NPLs.

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Aameer Mustaaly Karachiwalla, United Bank Limited - CFO [4]

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And the effect of devaluation as well is actually -- on the NPL side, I mean, the entire growth is not because of the addition of NPLs, but because of the 8% devaluation has also contributed, something like PKR 3.4 billion. So it's just a devaluation impact.

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Sohail Tai;Amin Tai Securities (Private) Limited, [5]

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Just to clarify. This one big name that you talk about in UAE, is the entire exposure classified but not provided? Is that true?

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Imran Sarwar, United Bank Limited - Group Executive of Risk & Credit Policy [6]

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No, no, no. It's not the entire exposure. We've started taking provisions on that. It's at substandard level at the moment.

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Sohail Tai;Amin Tai Securities (Private) Limited, [7]

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Okay. Sir, regarding fee, commission and brokerage, it's down about 15% year-on-year. Do you expect this trend to worsen in the remaining 9 months?

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Arif Akmal Saifie, United Bank Limited - Contact person for IR [8]

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Well, I think fee and fee commissions are essentially the major number why we are down versus last year because of BISP. It used to be 9% to 10% of our fees was from Omni as a bank. As BISP contract is no longer with UBL, then obviously that impact has come in the first quarter. Although, if you compare the fee numbers versus Q4 of 2019, they will not -- they're not substantially down over there. Of course, in terms of the impact on our guidance for the remaining quarters on fees, there is bound to be a slowdown because of the COVID impact. And that will, of course, impact branches in our transactions.

But even as we speak today, we have close to about -- more than 18% of the branch networks opened. Of course, the transactions are slower because people are obviously facing what is a partial or a complete lockdown in various parts of the country. But I think the right guidance in fees will come through when we see the month of April, and we see potentially the second quarter being completed. But yes, there will be a slowdown.

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Sohail Tai;Amin Tai Securities (Private) Limited, [9]

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And sir, finally, do you have any views on the discount rate?

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Aameer Mustaaly Karachiwalla, United Bank Limited - CFO [10]

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Well, let me take that. Very -- I mean basically, we believe that there may be a further cut in the discount rate. And we talked about it a lot. But we don't think that the story on discount rate is over. So yes, you may probably see a 100, 200 basis point cut in discount rate.

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Operator [11]

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(Operator Instructions) We will now take our next question from Muhammad Waseem from UBL Fund Managers.

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Muhammad Waseem;UBL Fund Managers, [12]

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My first question is related to the E&P exposure in the Middle East. Can you give us any idea about the bank's exposure in oil and gas sector in the Middle East?

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Imran Sarwar, United Bank Limited - Group Executive of Risk & Credit Policy [13]

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Sorry. You want oil and gas exposure in the Middle East.

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Aameer Mustaaly Karachiwalla, United Bank Limited - CFO [14]

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No, we don't because we don't have oil and gas.

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Muhammad Waseem;UBL Fund Managers, [15]

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Sorry?

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Imran Sarwar, United Bank Limited - Group Executive of Risk & Credit Policy [16]

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Yes. I'm not sure exactly what your question is. You want me to give you a view of the oil and gas? Do you want me give you...

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Muhammad Waseem;UBL Fund Managers, [17]

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I want you to talk about lending to oil and gas sector in the Middle East.

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Arif Akmal Saifie, United Bank Limited - Contact person for IR [18]

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No, no. So there is no major lending specific. I think we've answered this question last many years as well when the oil price was coming down. Of course, it's at its lowest right now. There is no direct exposure because we are a smaller bank in the Middle East and we do not lend. Most of our exposure lending is essentially to [private] institutions, and yes, to certain trading entries which are based over there, okay?

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Muhammad Waseem;UBL Fund Managers, [19]

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Okay. And my next question related to PIBs maturity. How much PIB has matured in the first quarter?

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Arif Akmal Saifie, United Bank Limited - Contact person for IR [20]

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About PKR 50 billion of the PIBs have matured in the first quarter in March.

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Muhammad Waseem;UBL Fund Managers, [21]

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Okay. And can you give us any idea on the maturity in the remaining period of Q1 '20?

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Aameer Mustaaly Karachiwalla, United Bank Limited - CFO [22]

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Next year we expect another PKR 100 billion to mature, PKR 108 billion, PKR 109 billion. And then after that, another 2, 3 years, it will all mature.

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Operator [23]

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We will now take our next question from Suleman Soorani from Tricap Investments.

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Suleman Soorani;Tricap Investments, [24]

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I just wanted to get some color on the potential dividend. I know State Bank has disallowed banks to announce dividends for the next 2 quarters. So what could that mean now? The capital has remained strong, and I see your capital adequacy actually has gone up this quarter. So barring any exceptional development in the next 2 quarters, would the bank go for a base dividend in, say, the fourth quarter to cover up for the 2 quarters that you weren't able to pay out? That's number one.

Number two, on the advances, again I see you've been conservative for the past many quarters. I think 2018, you had a loan book of PKR 754 billion, now it's PKR 682 billion. And again, some of the impact has been because of the international book loan reduction. But other banks, actually the mid-sized banks, have been increasing their exposure. So when do you think this trend will change again? It's probably not the best time to increase exposure, but going forward, are you really preparing to grow the loan book?

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Aameer Mustaaly Karachiwalla, United Bank Limited - CFO [25]

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So let me take the first question, which is on dividend. The dividend strategy continues the way it's been in the past. So we would like to distribute something like 50%, 60%, a little higher of our profits for the year. So it's a State Bank regulation, if we are unable to distribute in the second and third quarter, then yes, our presumption is that if the profits are good in the fourth quarter, we will maintain our overall dividend distribution strategy. So that hasn't changed as a result of the State Bank regulation. So without going to specifics, I think that should answer the question in my view.

As far as the loan disbursement concern, it's unclear. But I can tell you, overall, the bank strategy is really conservative. We are a little risk-averse. So even though the market might develop and we will see the opportunities, but we're not likely to build our book a lot rapidly until there's a clear sign of how the whole economy is moving.

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Operator [26]

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(Operator Instructions) We will now take our next question from Ameet Doulat from Universal Investments.

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Ameet Doulat;Universal Brushware Investments, [27]

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Just a follow-up question on the PIB book. Can you please share the yield of the fixed PIB book that UBL is carrying at the moment?

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Arif Akmal Saifie, United Bank Limited - Contact person for IR [28]

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Yes. So the fixed PIB portfolio, there is a split. The HTM book is at a yield of 10.2% and the AFS portfolio is at a yield of close to 8.5%. So the blended yield is about 9.4% on the PIB book.

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Ameet Doulat;Universal Brushware Investments, [29]

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All right. And I mean I saw in the director's report that you mentioned that the floating PIB is around PKR 140 billion as of March. Is that the correct number?

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Arif Akmal Saifie, United Bank Limited - Contact person for IR [30]

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PKR 190 billion as at the end of March, yes, that's the floating book.

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Ameet Doulat;Universal Brushware Investments, [31]

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All right. Okay. Secondly, just wanted to get a color on the deposit growth because, of course, this is a scenario where we're seeing whatever is happening in the world and Pakistan as well. So what are the deposit targets that the bank is targeting for the next 1 or 2 years, let's say? And of course, the interest rates have also gone down. So you -- the industry saw a slowdown in the growth of current account deposits. Does the bank see this growth coming back overall for the industry and for UBL as well, given that interest rates are now starting to go down?

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Aameer Mustaaly Karachiwalla, United Bank Limited - CFO [32]

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Overall, our view is that the -- obviously, the deposit growth will slow down with the whole economy closed in the last quarter or last month. And then next quarter is going to be no different. But going forward, we believe that the more stimulus that the government is giving to the economy and to businesses, that the currency circulation is likely to increase. And as a result of that, there will be a higher M2 growth and banks actually will benefit from that. So the growth numbers will be in line with the currency circulation, M2 growth. And we see that M2 growth actually going into double digit actually, given that the amount of currency that the State Bank is pumping into the system.

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Operator [33]

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We will now take a follow-up question from Suleman Soorani from Tricap Investments.

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Suleman Soorani;Tricap Investments, [34]

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I'm sorry, I forgot to ask one question. On the investment portfolio, I saw that the international borrowing book saw some major repricing and your, I think, total unrealized loss during the quarter was close to PKR 14 billion, from positive PKR 3 billion it moved to negative, I think, PKR 11 billion. And I understand the whole credit market has been impacted. Just want to get some color if there are any permanent impairment that you see in your bond portfolio? Or is it just mark-to-market losses that everybody had seen?

I also understand post March, after Fed announcement of buying, say, higher yield bonds, the prices significantly improved for a large number of bonds. So have you also seen improvement? So 2 things. Firstly, is there any permanent impairment? And also, what is the nature of the bond book? Is it mostly towards sovereign and investment-grade bonds? Or is there high-yield stuff in there?

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Imran Sarwar, United Bank Limited - Group Executive of Risk & Credit Policy [35]

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Yes. So bulk of our bond portfolio are sovereigns, of which a very large portion is Government of Pakistan Eurobonds. So we don't actually foresee a permanent impairment if we hold them to maturity on any of these bonds. These are all well-known sovereigns. And once they reach maturity, we have no doubt that they will honor their commitments. In terms of the short term, yes, we have also -- as the markets plunged, we saw our mark-to-markets go negative. But they have been steadily improving ever since the so-called stability has returned to the markets.

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Arif Akmal Saifie, United Bank Limited - Contact person for IR [36]

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And these are bonds with a weighted average yield of close to about 6%, Suleman. So they are supporting the net interest margins of the UAE business and in Bahrain and Qatar, in all 3.

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Suleman Soorani;Tricap Investments, [37]

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Have you opportunistically taken advantage of some of the crash in bond prices? Or are you steady?

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Imran Sarwar, United Bank Limited - Group Executive of Risk & Credit Policy [38]

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Yes. We have taken advantage. But we're also cautious. Our priority in the international is to preserve liquidity. So we have increased our liquidity buffers to make sure that we remain adequately liquid in all our 3 countries. But beyond that, yes, we have taken selective advantages.

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Operator [39]

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We will now take our next question from Raza Jafri from Intermarket Securities.

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Raza Jafri, Intermarket Securities Limited, Research Division - Executive Director of Research [40]

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This is just circling back on a comment, I think, one of the speakers made with respect to liquidity in the system and M2. And just wanted to get your thoughts just for the sector, not UBL in particular, but thoughts on the repayment cycle. I mean I understand PKR 4.7 trillion of principal repayments could be deferred. What are we looking at in terms of liquidity for the system? I seem to gather that you're not too worried about this aspect. Is that right?

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Aameer Mustaaly Karachiwalla, United Bank Limited - CFO [41]

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No. So in the bank system because overall, if you look at the overall ADRs of the bank system, it's lower at about 55% and we are even lower. So overall, we don't think that the bank system as a whole has any liquidity issue. And the State Bank is very, very fully on top of all the numbers related to liquidity. And therefore, they're coming up with all the regulation to support the banks even more. So I don't see any liquidity issue at all in the bank system. In fact, there will be surplus. But there will be more sort of currency in circulation as a result of people not being able to work and offices being shut down.

So there will be tendency to hoard a little more cash. And then that comes back. In fact, earlier on, when the lockdown happened, we saw a lot of inflow of cash because people were dumping their soiled notes, as they say, into the banking system and then picking up fresh notes. So there was a lot of turnover at that time, very interesting. But overall, I don't see a liquidity issue at all. In fact, State Bank is very prepared to inject more liquidity if there is a requirement.

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Raza Jafri, Intermarket Securities Limited, Research Division - Executive Director of Research [42]

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Understood. And secondly, I want to -- I mean this is probably maybe 2 questions in 1, a, I mean, digital banking, can we expect -- I mean, obviously, it's early days yet with the pandemic. But can we expect a step increase in digital channels being adopted by the general public because of this? And is UBL well positioned to take advantage of that?

And the follow-up, second part of this question is what does that mean for your costs? I mean I understand maybe a few analyst briefings ago that you guys were actively considering reducing the branch network and maybe shaving costs that way. Is that still a medium-term strategy? Or is that something that can be accelerated due to whatever has happened?

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Aameer Mustaaly Karachiwalla, United Bank Limited - CFO [43]

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Okay. The first question is about digital, right? Yes. I mean basically, digital transformation is certainly a high -- top of our priority list. And we have -- ever since the lockdown, we've actually focused a lot on conversion. We actually implemented sort of -- and added on new additional digital advisers on to our call center to take on and encourage customers to move on to digital channel. We believe we have a very good digital platform, our mobile app and number of registration has also increased. So they have increased about 30%, 35% that we were experiencing in the previous months.

And overall, yes, there is a shift towards digital transaction. I meet a lot of people. And there is certainly an expectation for our customers that now -- in the past, when they were not asking for a digital option of making payments, I think now they are requesting and it's happening. So cash management mandates have been signed, a lot of digital activities happening. So we will see an uptick in UBL and overall industry as well. I think the awareness will certainly increase over the next month or so.

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Arif Akmal Saifie, United Bank Limited - Contact person for IR [44]

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And if I may just add to that, that essentially in the previous years, we've invested close to about PKR 500 million in developing not just a digital app, but also a digital onboarding process, which is quite unique to UBL itself. And we have achieved more than 1 million customers, we did achieve in December of '19. Now where that number can go, it can go as high as 2 million by the end of the year. I mean this is not just guidance, but this is essentially the way to go and the aspiration for the bank.

And we are seeing -- and now what we are looking to do is essentially build the right bridge between the branch network, the staff that are out there, who know these customers, and the app, which is very scalable. So the UBL app is extremely scalable at this point in time. And the first strategy is going to be to bring all our branch banking customers onboard on to the app. And that eventually is going to bring in a lot of cost efficiencies for the bank as well.

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Aameer Mustaaly Karachiwalla, United Bank Limited - CFO [45]

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So answering your other question about branch closures, I don't think we mentioned about branch closures in the past. We -- our number of branches is optimal at the moment. We may relocate some of them to more sort of profitable areas and certain more underpenetrated areas. But generally, we aren't looking at any branch reductions at the moment. But certainly, our cost to serve is something that we monitor quite regularly. And we do track the shift of our transactions from branch counters to our digital. And then we give incentives to our tellers and our call center agents to encourage them to move transactions, where they can, from branch to digital. It's part of their KPI.

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Raza Jafri, Intermarket Securities Limited, Research Division - Executive Director of Research [46]

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Understood. My last question would be on -- I would like to circle back on asset quality. I know you've touched upon this. And just want to maybe get your thoughts on the outlook a little bit more clearly. I mean in the first quarter, we've seen, as you said, some one-offs, a bit of currency deval impact, a bit of IFRS 9 impact in foreign jurisdictions. Is this the new -- I mean I know it's difficult and it's very difficult to say -- give any sort of outlook right now. But in the first quarter, would you say that there was an element of one-offs that should not repeat in subsequent quarters? Or is this now the new normal that we're looking at for the sector that provisions will continue to increase from here? How would you...

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Imran Sarwar, United Bank Limited - Group Executive of Risk & Credit Policy [47]

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Okay. Yes. So what has happened in the first -- what has happened in the first quarter is really not a reflection on how the next 3 quarters might pan out. And I'm talking in specific reference to the COVID situation, the COVID pandemic. In the first 3 months, it was too early. We have not seen the impact of the slowdown come in as yet, barring a few skipped payments on the consumer side. But that again came at a very late part of March. So the first quarter is -- basically, there are 2 one-offs: 1 in the domestic and 1 in UAE. Having said that, we have been pretty much, from the beginning of Feb, we have been tracking our portfolio on a weekly basis. We have set up a COVID committee, which is headed by the President, and we meet once every week, just 1-hour session. We have looked at each and every one of our segments, starting from corporate all the way to consumer. We think we have identified some softer parts, which can have an impact. And those are all driven by how the lockdowns have impacted some industries a lot more than the others.

And we are regularly reviewing those clients. We do evaluations on our segmented portfolios on a monthly basis. We are doing all of that. But I think it's going to -- it's very difficult to say that after all of this, what the world is experiencing and what the country is experiencing, we will not foresee -- we will not see any stress situations in certain industries. I mean I'll give you an example. The poultry industry, for example, is very stressed right now because all the marriage halls and the restaurants and the mass events have been canceled for the last couple of months. So there are industries which are going to be impacted, hospitality, airline, travel, which we think are the last ones that are going to come back. So yes, there will be problems. We are trying to be as proactive as possible. But as you know, this is a bit of a developing story. It will depend -- within Pakistan, it will depend on how long the lockdowns continue and how strict are those.

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Operator [48]

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We will now take our next question from Irtiza Hassan from Maple Leaf Capital.

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Irtiza Hassan;Maple Leaf Capital Limited, [49]

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So I just had one question and it's regarding the repricing of advances because the State Bank had notified earlier that advances will reprice from 1st of this month. So can you please give us some...

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Aameer Mustaaly Karachiwalla, United Bank Limited - CFO [50]

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Okay. Yes, basically, yes, the regulation that requires banks to reprice, early reset, basically, as we call it. So that -- eventually, the PBA and all the banks got together, and it wasn't reset at every level, but only consumer and on newly self-employed consumer plus agriculture and SE, the small enterprises. So only certain segments would allow an early reset. And they will be done as per the State Bank regulation, but not the entire book.

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Arif Akmal Saifie, United Bank Limited - Contact person for IR [51]

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And for UBL, I mean, just about 8% to 10% of the portfolio, it would be in that scope. So most of our portfolio is corporate, and that will be repriced on regular -- original terms.

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Aameer Mustaaly Karachiwalla, United Bank Limited - CFO [52]

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In any case, if you're looking for the impact, we saw -- we worked out basically this was very, very minimal. So it's not even significant in the big scheme of things.

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Operator [53]

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We will now take our next question from Fahad Rauf from Ismail Iqbal Securities.

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Fahad Rauf;Ismail Iqbal Securities (Pvt.) Limited, [54]

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Just want to get some sense on the investment strategy. Floating rate PIBs has increased significantly. Is it just an ALM issue or the bank wasn't expecting yields to go down, obviously excluding COVID-19 rate cut?

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Arif Akmal Saifie, United Bank Limited - Contact person for IR [55]

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Well, I think the objective of the bank is to maintain a ladder which distributes available liquidity between floating rate PIBs, T-bills and the fixed rate PIBs. And floating rate PIBs, we have at a yield of 60 to 70 basis points above the T-bill rate. So that is a healthy spread to carry and there is a mark-to-market surplus on that as well. Over time, we will shift the portfolio composition based on our reading of the market. But right now, I think we will try to ensure that the longer-term section of the portfolio duration is not very significant.

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Operator [56]

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We will now take our next question from Farhan Rizvi from Crédit Suisse.

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Farhan Rizvi, Crédit Suisse AG, Research Division - VP in the Asia Frontier Markets Research Team [57]

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Just a follow-up question. You've discussed a lot on asset quality in the international and particularly the Middle East. I just wanted to sort of get a sense, I mean, if you could share what sort of exposure you would have to commodity traders in the region. I know that's an area where we had issues across the globe. And it would be good if you could maybe give us some sort of color in terms of what sort of exposure you have in the international book.

And also as sort of an add-on to domestic, I saw in the note you mentioned about PKR 7.5 billion or PKR 7.6 billion worth of customers requesting for restructuring. As we sort of -- we have moved into April, I mean, given the way things are, what percentage of portfolio, I mean, you are looking in terms of potentially where we could see a need for restructuring in the domestic book?

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Imran Sarwar, United Bank Limited - Group Executive of Risk & Credit Policy [58]

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So let me start by international. We do have some exposure on commodities, particularly steel in UAE and Qatar. In the Qatar, it's restructured. And so far, they were making payments. Now under the COVID situation, 1 or 2 of them have come back to reapply under the Qatar Central Bank restructuring scheme, and we are reviewing that. Similarly, in UAE, we had 2 or 3 steel-related exposures. They were doing -- I mean they were struggling, but they were doing okay. But they've also come to us for restructuring under the UAE restructure program, and we are reviewing that as well. So the chances are, we are looking at these favorably because the UAE and Qatar have been impacted quite significantly, first, the oil price and then the COVID pandemic. On the domestic side -- was there a question on domestic also?

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Farhan Rizvi, Crédit Suisse AG, Research Division - VP in the Asia Frontier Markets Research Team [59]

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Yes. I think there's a note in the account where you mentioned that about, I think PKR 7.5 billion worth of loans have requested for restructuring under the COVID-19 scheme. So I just want to get a sense. I know it's sort of early days, if you have the latest numbers. But given the way things are evolving, and I think it's -- I mean everything is very fluid, so it's very difficult to say exactly how things will eventually pan out. But when you look the situation as of now, how do you -- and assessing in terms of your stress testing and all that, how do you see potentially this would work out in the next maybe 1 to 2 quarters?

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Imran Sarwar, United Bank Limited - Group Executive of Risk & Credit Policy [60]

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Sure. So listen, as far as the numbers that we reported is concerned, it's now changed, it's changing on a daily basis, as you can appreciate. So while we're quite sympathetic towards individual borrowers and SME, agri, where we are actively looking at it and we are supporting our clients wherever possible, on the corporate side, we do undertake fair minimum due diligence. Because while we would like to help out borrowers who are genuinely impacted, but there is always a chance of people trying to take advantage of the situation. And that's where we would not like to go. I don't have the exact numbers in front of me. But we are approving these restructurings on a daily basis now because the pipeline has built up quite significantly and everybody wants to take advantage of that. We are very keenly looking at the hospital finance and the salary loans because we think those are -- especially in the SME sector, those are really steps which will be very helpful for our borrowers.

Now going forward, we do expect that the market conditions have deteriorated and very, very fast. And we do expect that certain segments and certain industries will face the brunt of it. We are very cautious of it. So far, on the domestic side, we have seen some industries, as I was mentioning earlier, poultry. We don't have any airline exposure as such, so we have not seen that. But on the poultry and the kind of stuff where mass use was happening, that's where we see there's been quite a lot of impact. But those guys have also come back for restructuring under the State Bank provision. So we are considering that as well. But at the end of the day, next 3 quarters, we do expect things to get a bit more difficult and there could be more NPLs.

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Operator [61]

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There are no further questions. I'd like to turn the conference back to the host for any additional or closing remarks. Apologies, we do have another question. Would you like to take this?

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Aameer Mustaaly Karachiwalla, United Bank Limited - CFO [62]

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Yes. Go ahead.

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Arif Akmal Saifie, United Bank Limited - Contact person for IR [63]

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Yes. Okay. Sure.

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Operator [64]

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Okay, perfect. We will now take our next question from Muhammad Tahir Saeed from ABL Asset Management.

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Muhammad Tahir Saeed;ABL Asset Management, [65]

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I have a couple of questions. Since you have talked about your infection ratio, your coverage ratio, your infection ratio has gone up on a quarter-on-quarter basis whereas your coverage ratio has gone down on a Q-on-Q basis. So I just wanted to know what sort of coverage ratio management is targeting for the next 3 to 4 quarters. And secondly, what kind of ADR and IDR mix management is targeting for the next 3 to 4 quarters? And the last question is regarding effective tax rate. Your effective tax rate has elevated around 40% during the last 4 quarters. So shall we expect this to continue in coming quarters?

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Aameer Mustaaly Karachiwalla, United Bank Limited - CFO [66]

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Do you want to take the first?

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Arif Akmal Saifie, United Bank Limited - Contact person for IR [67]

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Yes, I think. So in terms of the coverage levels, so obviously, domestic and international is 2 separate elements there. So the international coverage, of course, will continue to build as necessary and with the passing of time. And obviously, we will look to restructure some of these NPLs to the extent possible. And coverage will be built up according to that.

Well, when it comes to the domestic side, I think, like we mentioned, there has been no significant NPL in the current quarter except for 1 or 2 industry names. And that restructuring will be done by a syndicate. And over there also, we think will only be taken where the syndicate is obviously taking that view. But we do not see any major provisioning requirement in the domestic bank at least for the next 2 quarters. So coverage in terms of guidance will probably remain close to or a little bit higher to where we are right now.

In terms of ADR, I think ADR levels, to be honest, ADR levels, I think for the banking sector will be, by and large, where they are at this point. I mean, we, in the domestic bank, are close to 40%. Overall, we are at 45% ADR. And I think it is going to remain close to this level. But as far any investment or the [vol] ratio is concerned, you might see that building up a little bit more because the bank would like to remain more liquid overall. So that is the guidance on the IDR.

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Aameer Mustaaly Karachiwalla, United Bank Limited - CFO [68]

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Now on taxation, let me take this. You mentioned that the 40% were the higher taxes -- because the 35% tax rate plus 4% super tax, the 39% is average. So if you compare it with the prior quarter, that's when banks were required to take 2 super charge, both the prior year and for the current year. And that's when the tax rate go higher. But other than that, I don't see the tax rate to be higher. And it will be around 39%, given the deferred tax charge that we'd also take if there is any timing difference that comes about.

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Muhammad Tahir Saeed;ABL Asset Management, [69]

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So again, on the coverage side, should we expect it to be around 90% both the domestic as well as the international coverage for the year 2020?

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Aameer Mustaaly Karachiwalla, United Bank Limited - CFO [70]

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So we'll evaluate -- I will say that we'll evaluate our requirements on a quarterly basis. And for the international part, we do take an FSV benefit. And that benefit as we see fit, we have taken it. At domestic, we don't take any FSV benefits, so it's all based on the classification requirements, Prudential Regulation. So international, yes, we intend to increase our coverage ratio as possible. But it all depends on the situation on the ground. We can look at the FSV benefit available at that time and the performance of those industries and the companies itself. So it's a function of quite a few factors, which will determine the amount of provision we'll be taking.

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Operator [71]

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We will now take a follow-up question from [Muhammad Hammad] from Optimus Capital.

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Unidentified Analyst, [72]

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I would just like to follow up from where we left in the previous question. You just mentioned that we don't take -- UBL doesn't take any FSV benefit on the local exposure, right? So what would be the reason for this?

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Imran Sarwar, United Bank Limited - Group Executive of Risk & Credit Policy [73]

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In our local exposure, we actually haven't historically taken any FSV benefit. Because the problem is, in many, many cases, the security -- the tangible security, we have to go to court and complicated procedures, so we have not historically taken any FSV benefits.

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Operator [74]

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There are no further questions at this time. I'd like to turn the conference back to the host for any additional or closing remarks.

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Murad Ansari, EFG Hermes Holding S.A.E., Research Division - MD of Financials for Pakistan and Sri Lanka [75]

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Yes. I just have one question from my side on margins. Given how strongly (inaudible) interest rates come off over first quarter and (inaudible), when do you think that will start having an impact on margins? How soon could we see margins under pressure? Is that more of a second half or end of the year kind of impact that will start coming through?

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Aameer Mustaaly Karachiwalla, United Bank Limited - CFO [76]

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I would say with the rates coming down, I think the impact will be felt in third and the fourth quarter. Because as we've seen in the past, when the rates are moving up, it should take about 3 to 4 months before the repricing effect came in. And the same thing will happen here in about 3 to 4 months. So we will see probably the full impact of it in the latter half of third quarter and early fourth quarter in my view.

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Murad Ansari, EFG Hermes Holding S.A.E., Research Division - MD of Financials for Pakistan and Sri Lanka [77]

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We have no more questions at this time. I would like to thank the UBL management team, Aameer saab, Arif and Imran sir for taking the time for this call. We'd like to wish the best for UBL for the coming year. It's going to look like a tough environment as we move forward. But we hope that the best outcome comes through and we are able to get through these tough times.

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Aameer Mustaaly Karachiwalla, United Bank Limited - CFO [78]

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Thank you for hosting it. And thank you very much, Murad.

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Arif Akmal Saifie, United Bank Limited - Contact person for IR [79]

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Thank you, everyone, and goodbye.

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Aameer Mustaaly Karachiwalla, United Bank Limited - CFO [80]

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Goodbye.

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Operator [81]

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This concludes today's call. Thank you for your participation, ladies and gentlemen. You may now disconnect.