Tuesday, October 17, 2017/ 9:25 AM /Cordros Capital
United Bank for Africa Plc (UBA) released 9M
2017 results, wherein key lines consolidated on the impressive performance in
the first six months. Gross earnings grew by 25.75% (missed our estimate by
2.67%), driven by noteworthy growth across income lines – interest income
(+30.11%, in line with our estimate) and non-interest revenue (+18.84%, 8.41%
below our estimate). Accordingly, PBT and PAT grew by 27.24% and 16.55%
respectively, but were both below our estimates by 12.58% and 14.79%
respectively – reflecting the variance in NIR and opex – resulting in EPS of
N1.74 (below our estimate of N1.82).
The growth in interest income was driven by
improved yields on earning assets (+144 bps to 12.04%). Interest on loans and
advances to customers and investment securities grew by 33.54% and 29.45% respectively.
Accordingly, net interest margin expanded 197 bps to 7.6%, despite a 20.98%
surge in interest expense (3.55% above our estimate).
While NIR grew double-digit, the variance from
our estimates largely stemmed from significant q/q contraction in net trading
income (-69.92% y/y). Generally, the growth was buoyed by improvement in net
fee income (4.03% y/y), 41.30% y/y surge in net trading income (driven by FX
and T-bills trading income), and growth in other income (79.38% y/y) due to
relatively higher dividend income.
Opex rose 29.46% (8.22% above our estimate),
following hikes across lines – other opex (+45.95% y/y), depreciation and
amortization (+6.38% y/y), and personnel (+10.06% y/y). Noteworthy, the growth
in other opex reflects the lagging impact of NGN devaluation on FCY related
obligations, translation impact of subsidiaries’ opex, and the higher AMCON
levy (computed as 0.5% of total assets on a preceding year basis) relative to
the same period in 2016. Consequently, cost to income ratio and annualized
operational leverage of 61.50% (61.41% in 9M-16) and 5.1x (4.6x in H1-16) beat
our 55.73% and 4.8x estimates respectively.
Specifically, on the performance in Q3-17, gross
earnings contracted by 8.46% q/q (+11.25% y/y), driven largely by 38.60% q/q
decline in NIR (+26.55% y/y), which muted the growth in interest income (6.33%
q/q and 10.01% y/y). Accordingly, total operating income decline by 15.79% q/q
(+12.01% y/y), with the impact on the bottom line further pressured by growth
in opex (16.96% higher y/y but marginal on q/q basis). On the positive, credit
loss provision moderated during the period by 45.28% q/q (52.31% above the
level in previous year). Overall, PBT declined by double-digit (35.14 q/q, and
2.27% y/y) while a lower effective tax rate supported a marginal
contraction in PAT (7.04%q/q and 5.39% y/y).
UBA recorded an additional N3.47 billion in
credit loss provision in Q3-17, which raised total provision for 9M-17 to
N12.91 billion (41.89% y/y), with a large proportion booked as specific charges
– we believe this relates to the bank's exposure to the power sector –
distribution companies (Ikeja & Eko Disco both in Lagos) and generating
companies (Geregu, Shiroro, and Egbin) – and oil & gas sector. Overall,
annualized cost of risk expanded by 131 bps y/y to 1.99%.
While noting the impressive performance over
9M-17, the contraction in NIR in Q3 – which supported gross earnings growth in
Q2-17 – reflects the gradual squeeze in foreign exchange gains and the impact
of the softening yield curve on held for trading securities, a trend that
should persist over Q4. For 2017F, we expect gross earnings will close higher
relative to 2016, given the current gains on FX related and derivative
transactions, and yields on interest earning assets. However, the deterioration
in asset quality portends a major risk to earnings outlook. Based on our last
TP of N12.62, which is at 36.87% discount to the current market price of N9.22,
we have a BUY recommendation on the stock. Our estimates are under review.