Wednesday, April 13, 2016 4:15PM /GTI Research
FY -2015: Gross Earnings rose by 9.84%, while net income spiked by 24.52% in the review period
UBA (‘’The Company’’) released its audited FY -2015 result for the period ended December, 31 2015 on 14th March 2016.
The Company reported a 9.84% rise in gross earnings to N314.83billion ($1.57B) from N286.62billion ($1.43B) YoY, which was translated to a 24.52% rise in net income to N59.65billion ($298.27M) from N47.90billion ($239.53M) YoY.
A quarter on quarter analysis of gross earnings performance over the four quarters of 2015, shows that gross earnings expectedly recorded its weakest performance in Q4, contracting by 15.74% to N67.62billion ($338.12M) from N80.26billion ($401.31M) in Q3-2015.
The growth in gross earnings is adduced to the bank’s dexterity in navigating its balance sheet towards areas of opportunity within the review period.
Cash and Bank balances with the CBN which traditionally attracts lesser interest income was down by 19% YoY as the Bank unlocked liquidity for deployment into the higher interest fixed income instrument (investment securities widened by 30% in the review period).
The comparatively lesser impairment charge (among the tier 1 banks in Nigeria) recorded in FY 2015 was as a result of the unwillingness to create risk assets. The Bank’s loan book for FY 2015 recorded a 3% decline compared with FY 2014. The Bank also reduced its inter-bank exposure largely because rates normalized in the fourth quarter after rising strongly following the implementation of the TSA and the resultant liquidity squeeze which drove rates up in the third quarter.
Interest income was consequently up by 18.96% while interest expenses rose significantly slower by 6.06% in the review period. Total operating income widened by 24% while operating expenses only managed a 4.78% rise in the review period. Cost to income ratio (operating expenses/operating income) consequently improved to 67.67% from 80.02% in FY 2014.
Profit before tax advanced by 21.8% to N68.45billion ($342.27M) from N56.20billion ($281.00M) YoY while net income rose slightly stronger by 24.52% to N59.65billion ($298.27M) from N47.91billion ($239.53M). The stronger net income growth compared with the pre-tax income is adduced to the reduced effective tax rate of 12.86% compared with the 14.76% effective tax provision for FY-2014.
Strength in Margins
The lender reported positive YoY margin movements with Net interest income margin strengthening to 58.96% from 53.96% while pre-tax profit margin rose to 21.74% from 19.61% YoY. Net income margin also improved to 18.95% from 16.71%
Balance Sheet dynamics
The bank was very proactive with its balance sheet deployment in the review period. The bank’s defensive strategy was very effective and ensured that the backlash of some regulatory policy changes were mitigated.
Financial assets held for trading (which captures the bank’s exposure to FGN Bond and Treasury Bills) increased by 923.56% YoY, but was constant between 9M -2015 and FY 2015. The bank responded to crashing bond/Tbills prices in 9M -2015 by exiting most its fixed income position.
This situation didn’t improve in FY 2015 as the MPC also reduced its key benchmark MPR rate in its last meeting for 2015. The crash in crude oil prices and the introduction of tight FOREX controls which eventually resulted in the delisting of the FGN Bond from the JP Morgan index as well as the threat of possible delisting from the Barclays index were major catalysts for the crash in bond prices as foreign investors who were traditional heavy bond investors took flight.
Derivative assets (which capture the bank’s currency-swap relationship with international banks) recorded a steep 82.03% contraction between 9M -2015 and FY-2015. The pressured local currency is a major disincentive for UBA to sustain this venture.
Loans and advances to banks declined by 69% YoY and 32.83% between 9M -2015 and FY -2015 while loans and advances to customers depreciated by 3.29% YoY and 2.17% between 9M-2015 and FY-2015. Deposit from customers depreciated by 4.05% YoY and 4.32% between 9M-2015 and FY-2015. Loans to Deposit came 49.80% in the FY- 2015, same as was the position in FY -2014.
The bank was clearly risk averse as far as creating risk assets went in FY-2015. The tight economic conditions especially since the crash in oil prices and the resultant pressure this piled on disposable income may have been the major restraining factors for the creation of risk assets during the review period.
ROE was 17.93% in FY-2015 down from 18.05% in FY-2014 while ROA experienced an upward swing during the same period to 2.17% from 1.73% YoY.
Based on our analysis, the stock is currently trading at a 93.33% discount to our estimate fair value of N6.09, with a 12Month investment horizon. In arriving at our fair value for the stock, we focused on the historical financial performance of the stock and our expectations for FY 2016.
Our fair value for UBA shares was calculated using the Price to Book Value method of valuation as well as the Dividend Discount Model comprising our expected dividend estimate for the Bank and a GTI Securities customized tweak to adjust for the risk of investing in the Nigerian Financial Services sector.
Our Required Rate of Return (RROR) factors in a risk premium of 10% and the yield for the most recently issued 20-Year FGN Bond was applied as the risk free rate of return.
We have placed a POSITIVE rating on the stock of UBA
Our FY 2016 gross earnings forecast for UBA is N341.80 billion ($1.709B) representing an 8.56% improvement relative to FY 2015, while our net income estimate for FY 2016 is N67.03 billion ($335.13M) and translates to a 12.36% improvement from FY 2015. This yields an EPS of N1.85 and a forward P/E of 1.66X.
The banking sector still remains in the eye of the storm even in 2016. We expect more loan loss provisions as oil prices remain pressured.
The pass through effect of the implantation of the TSA is still evident in the rising cost of borrowing and the pressure on net interest margins.
Our net book value estimate for FY 2016 is N337.05billion ($1.68B), which brings forward price to book value 0.34X
We also expect sluggish growths in both deposit from customers and loan book for FY-2016, which means that the lender’s success in 2016 will be determined by the efficiency of balance sheet deployment and the potency of its risk assessment framework.
Investment Conclusion/Outlook for UBA
The shares of UBA is undervalued with focus on our FY 2016 estimates. The stock is currently trading at a 93.33% discount to our fair value estimate of N6.09
We are mildly optimistic that despite the tight operating environment in Nigeria with the implementation of the Treasury Single account policy by the Federal Government which tightened the liquidity condition in the Nigerian financial system, the steep tank in oil prices which posed a major threat to asset quality for most Nigerian banks as a result of their exposures to the sector and the tight currency control policies of the CBN which has weakened the earnings capacity of banks in the country, UBA has the capacity to wither the storm.
Although we expect major headwinds at least all through the first half of 2016, the bank, it is our opinion that the massive drop in share prices will adequately compensate for any unexpected down side risks.
We are also impressed with the steady rise in the company’s book value position over the last few years. However the bank must be proactive with its ROE growth.
We have a BUY recommendation on the shares of UBA.
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