LAHORE (PPI) - Despite difficult credit environment,we expect UBL to post handsome earnings growth of 24 percent in 2011, thanks to better earning yields and significant reduction in cost of funds. Last year, the bank posted earnings growth of 21 percent, significantly higher than last 4 years (2007-2010) average earnings growth of 5 percent. However, asset quality remains a big concern for UBL as NPL ratio in last 2 years (2009-2010) has almost double to 13.2 percent. With fourth largest branch network, UBL enjoys one of lowest cost of deposit, thanks to growing CASA deposits which stood at 69 percent in 2010. Interestingly, the banks continues to focus on cost reduction strategy as in 2010 UBLs average cost of funds stood at 4.7 percent down 70 bps YoY. Thus, with low cost of funds and higher yield on advances, the bank is in a better position to yield higher returns specially when average 6M KIBOR is standing close to 13.8 percent, up 168bps. Thus, net interest margin (NIM) is expected to remain higher in 2011. Last year the Banks NIMs stood at record high of 7.1 percent. With almost 20 percent of the assets employed in UAE business, the bank continues to enjoy 15 percent of the profits (before tax) through its UAE operations. However, the profits are still 27 percent lower than what it used to be in 2008 primarily due to slowdown in financial industry post 2008 crisis. Despite the fact that gross advances reduced by an average 2 percent during last 2 years, Non performing loans (NPLs) grew by an average 32 percent to Rs49bn in 2010 (net infection ratio 13.2 percent). Though last year (2010) net provisioning against NPL stood lower by 29 percent to Rs6.8bn, however, we believe it would be higher in 2011 to approx Rs8.6bn as coverage ratio remained lower at 69 percent in 2010. Moreover, the banks advance portfolio is mainly concentrated towards Agri business (14.4 percent) and production and transmission of energy (10.6 percent). We believe that NPL accretion from these two sectors would remain lower considering better farm income and lower chances of default due to government guarantees.