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United Bank for Africa - Reiterating Outperform rating after strong Q4

Proshare

Wednesday, April 05, 2017/1:46 PM/FBNQuest Research

13% increase to our price target
Following UBA’s better-than-expected Q4 2016 results, we have increased our 2017-18E earnings forecasts by 14% on average and our price target by 13% to N6.5. By all accounts, these are UBA’s strongest results ever.  
 

Even if we ignore the OCI gains, the full year results show double-digit y/y growth for both revenue lines and the PBT. The full year ROAE works out as 34%.  

Excluding the OCI, it is close to 19%. After gaining 33% in 2016 (ASI: -6.2%), the shares have added a further 15% ytd (ASI: -6%). To our minds, the concerns that the market has had about UBA’s turnaround from the 2008/09 crisis are clearly dissipating.  

Our forecasts assume that asset quality will worsen further, with the NPL ratio rising to 5% (from 3.9% in 2016), in contrast to management’s guidance of a slight improvement to 3.9%.
 

Notwithstanding, and while we expect a more subdued year (due to the absence of one-off fx gains), improved fx liquidity in general bodes well for UBA’s earnings outlook.  

Our new price target implies the shares still have some healthy upside potential left in them despite their remarkable run over the last 15 months. We retain our Outperform recommendation.  

Very strong y/y earnings growth
UBA reported very strong Q4 2016 results with both PBT and PAT growing triple digits y/y; 162% for PBT and 114% for PAT.   
 

Both revenue lines contributed to the strong results: net interest income of N53bn grew 69% y/y while non-interest income of N34bn was up 164% y/y – thanks to fxrelated and derivatives gains - to leave profit before provisions of N88bn up 97% y/y.  

Although loan loss provisions were up significantly y/y (largely due to base effects) and opex also grew by 25% y/y, the impact of the strong revenue results was dominant, leading to the strong earnings.  

Sequentially, while PBT grew healthily, by 37% q/q, PAT showed a decline of -18% q/q because UBA had booked a significant other comprehensive income in Q3 compared with the loss of –N3.0bn in Q4.  

Returning to the PBT line, again the revenues were strong enough to more than offset the q/q increase in provisions; to a lesser extent, an -8% q/q reduction in opex also helped.  

When compared with our forecasts, the results exceeded our expectations significantly, and across the board. Only the loan loss provisions line showed a negative surprise: the provisions were around 3 times our forecast.  

But given how strong the underlying results were, this negative surprise on the provisions line pales in significance.

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