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United Bank for Africa Plc H1'17 - Earnings Beat as Bank Maintains Strong Earlier Run Rate

Proshare

Friday 25th August 2017 1:30 PM/ Vetiva Research

·         Gross Earnings up 35% y/y – 16% ahead of our estimate

·         Strong FX trading income masks high costs, PAT 10% ahead of estimate

·         We maintain our 8% loan growth forecast, Ytd 4%

·         Board declares interim dividend of N0.20 per share – same as prior year.


Run rate maintained, PAT beats estimates

UBA released its long awaited H1’17 earnings, posting another impressive performance and beating earlier run rates across several line items Particularly, the bank reported strong double digit top and bottom line growth of 35% y/y and 56% y/y respectively with both coming in ahead of our estimates.  

The strong top line growth was driven by impressive performances in Interest and Non-Interest Income. Whilst Interest Income came in largely in line with our estimate at ₦155 billion (4% deviation), Non-Interest Income showed a much higher deviation with the income line coming in at ₦60.4 billion vs. our estimate of ₦43.3 billion.  

In line with the trend observed across most banking names, Non-Interest Income was largely supported by strong FX trading income, following the improved liquidity in the FX market post the introduction of the I&E window. Whilst Interest Expense rose 24% y/y (pressured by tight system liquidity), NIM remain strong at 7.3% - supported by better asset repricing. We highlight that customer deposits remained relatively flat despite the 23% and 5% YTD growth in retail and current account deposits respectively. 

More importantly, loan loss provision came in largely in line with our estimate at ₦9.4 billion (Vetiva: ₦9.8 billion) – putting annualized cost of risk at 1.2%. However, Operating Expense continued to race north, up 27% y/y and 13% above our estimate, a trend management attributed to higher inflation, currency devaluation, and personnel costs. Despite this, the impressive earnings run rate was maintained with PAT up 56% y/y and 10% ahead of our estimate.  

We highlight that the y/y growth was flattered by a prior year restatement of AMCON levy which had been previously capitalized but now treated as an expense (consistent with the treatment observed across the other tier I names that recently released H1’17 results). The Board of Directors declared an interim dividend of N0.20 per share – same as 2016 and in line with our estimate. 

TP revised to N9.74 (Previous: N8.50)

We revise our estimates in our model to reflect the deviations. Whilst we maintain our 8% loan growth forecast for FY’17 (management guidance: 10%), we raise our Gross Earnings estimate to 417 billion (Previous: 385 billion) to reflect the stronger than expected Non-Interest Income run rate for H1’17. 

Despite cutting our deposit growth forecast to 4% (Previous: 11%), we raise our Interest Expense estimate to 105 billion (Previous: 102 billion) due to heightened system liquidity pressure. Similarly, whilst we revise our Operating Expense estimate to 186 billion (Previous: 167 billion), our Cost to Income Ratio (CIR) forecast is little changed at 60% (Previous: 59%) as top line growth cushions the rise in expenses.  

Furthermore, we maintain our loan loss provision estimate at 19.8 billion – translating to a CoR of 1.3%. Overall, we estimate a PAT of 85 billion (Previous: 77 billion) for FY’17 – translating to an EPS of 2.34. UBA continues to trade at a discount to peers – priced at an FY’17 P/E and P/B of 4.2x and 0.7x vs. tier I averages of 5.3x and 1.0x respectively.




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