UBA FY2020 Result: Defying A Pandemic, Double-Digit Earnings Vs A Dividend Bust

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Thursday, March 11, 2021 / 03:00 PM / by Adaeze Nwachukwu, Proshare Research/ Header Image Credit: UBA 



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UBA Plc faced a crunchy year in 2020 as a COVID-19-induced economic downturn across African markets had mixed consequences for the bank's continental operations.

 

While most of the bank's revenue came from its Nigerian activities its profit came from its other African operations. The spread of business across the continent has assisted the bank in spreading its operational risks and allowing it to achieve greater flexibility in financial strategy as the credit lender country-risk proofs its balance sheet and diversifies operating profit.

 

 The increasing importance of the African market in its operations across 20 jurisdictions could prove critical to the group's activities given the recently ratified African Continental Free Trade Agreement (AfCFTA) which is expected to build stronger commercial bridges across the continent.

 

Key Highlights/Takeaways

  • Gross earnings increased Year-on-Year (Y-o-Y) by +10.83% from N559.8bn in 2019 to N620.4bn in 2020 (fell by -10.71% in US dollar terms to US$1.63bn in 2020).
  • Profit before tax up by +18.49% Y-o-Y from N111.29bn in 2019 to N131.86bn in 2020 (declined marginally by -4.54% in US dollar to US$346.09m in 2020).
  • Earnings per share increased Y-o-Y by +26.98% from N2.52 in 2019 to N3.2 in 2020.
  • Impairment charges for credit losses on loans up by +37.38% Y-o-Y, from N16.34bn in 2019 to N22.44bn in 2020.
  • Total assets increased Y-o-Y by +36.95% from N5.62trn in 2019 to N7.69trn in 2020 (increased by +10.33% in USD terms to US$20.20bn in 2020)
  • Total equity grew Y-o-Y by +21.10% from N597.98bn in 2019 to N724.15bn in 2020 (fell by -2.44% in USD terms to US$1.90bn in 2020).
  • Return on average equity increased Y-o-Y by +3.61% from 16.6% in 2019 to 17.2% in 2020.
  • NPL declined by -11.32% Y-o-Y from 5.30% in 2019 to 4.7% in 2020.
  • Total borrowing declined Y-o-Y by -8.48%, from N758.68bn in 2019 to N694.36bn in 2020.
  • Deposit contributed 79% of the total funding mix in 2020.
  • E-banking income of N44.2bn contributed 34.9% to total income from fees and commissions in 2020.


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Share Price vs Traded Volume-Spikes and Plunges

The movement in the banking group's share price reflects economic uncertainties associated with 2020. At the peak of the COVID-19 pandemic economic lockdowns caused prices to dip to their lowest contemporary levels. The hope of economic recovery saw an uptick in the share price of the banking group as its price by the end of the year closed higher than pre-COVID-19 levels. In 2020 the Tier 1 banking group's share price rose by +20.98%. Nevertheless, the financial lender's YTD price adjustments showed a -16.76% decline as of 9th March 2021.

 

Traded volume reflected a similar trend. Traded volume declined marginally by -0.13% in 2020. The highest volume of shares was traded in October 2020 while the lowest volume was traded in June 2020. The deposit money banking group's traded volume YTD rose by a massive +230.03% as of 9th March 2021 (see chart 1 below).

 

Chart 1: UBA Share Price and Volume of Share Traded as of 9th March 2021

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Source: NSE, Proshare Research

 

Market Earnings-How the Cake Was Baked

A breakdown of total revenue by geographical region shows that the Nigerian market saw a -7.69% Y-o-Y fall in revenue, the rest of Africa and the rest of the world categories recorded a Y-o-Y growth in revenue of +39.57% and +11.14% respectively. Notably, the Nigerian market contributed 60.0% to gross earnings, while the rest of Africa and the world contributed 37.41% and 3.18% respectively. 

 

A Breakdown of profit before tax (PBT) by geographical region showed that the Nigerian market saw a drop of -19.08% Y-o-Y, while the rest of Africa and the world recorded growths of +44.05% and +3.82% Y-o-Y respectively. The rest of the world and African markets were equally responsible for the growth of the group's PBT for 2020. While the Nigerian market contributed 40.34% to the group's PBT in 2020, the rest of Africa and the world contributed 56.97% and 5.51% respectively (see table 1 below).

The figures presented in table 1 below exceed the total figure presented by the group in PBT and revenue, because of the retention of eliminations at the different periods.


Table 1: UBA: How the Profit Cookie was Baked

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Profitability-Leveraging the Rest of Africa

UBA's gross earnings grew Y-o-Y by +10.83% from N559.8 in 2019 to N620.4bn in 2020, the growth occurred despite the COVID-19 pandemic. The bulk of the increase was driven by a +5.69% Y-o-Y growth in interest income while interest expense declined Y-o-Y by -7.96%. Also, net fee and commission incomes grew marginally Y-o-Y by +3.25%.

 

In US dollar terms, gross earnings dipped Y-o-Y by -10.71% which contradicted the growth in the group's naira-denominated numbers. Gross earnings fell from US$1.82bn in 2019 to US$1.63bn in 2020. The CBN's official exchange rate between 2016 and 2020 was used in translating the lenders' gross earnings to US dollar figures. The decline in the Tier 1 banking groups' gross earnings in US dollar terms was the result of a steady devaluation of the local currency, the naira (see chart 2 below).

 

Chart 2: UBA Gross Earnings 2016 - 2020 (N'bn)

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Source: UBA Financial Statement, Proshare Research

 

Meanwhile, the group's profit before tax (PBT) grew Y-o-Y by +18.49% from N111.29bn in 2019 to N131.86bn in 2020. The growth in PBT was the result of a +58.0% Y-o-Y growth in net trading and foreign exchange income. Foreign currency revaluation gain was the major cause for the growth in foreign exchange income, FX revaluation grew Y-o-Y by +160.70%, while fixed income securities and foreign exchange trading income grew Y-o-Y +84.64% and +15.08% respectively.

 

Translating into US dollars, PBT fell Y-o-Y by -4.54% from US$362.56m in 2019 to US$346.09m in 2020 (see chart 3 below).

 

Chart 3: UBA Profit Before Tax 2016 - 2020 (N'bn)

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Source: UBA Financial Statement, Proshare Research



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Impairment Charge-Measuring Weak Repayment

The group's impairment charges for credit losses on loans in 2020 grew Y-o-Y by +37.38% from N16.34bn in 2019 to N22.44bn in 2020. The growth in impairment charges reflects the macroeconomic challenges in 2020. Impairment charges grew despite a +38.60% growth in recoveries in the allowance for credit loss (see chart 4 below).

 

Chart 4: UBA Impairment Charges on Loans 2016 - 2020 (N'bn)

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Source: UBA Financial Statement, Proshare Research


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Liquidity - Staying Nimble

The liquidity ratio and capital adequacy ratio in 2020 were well above the regulatory minimum. The group's liquidity ratio was 44.3% in 2020 a marginal decline from 43.9% in 2019. Also, the capital adequacy ratio declined marginally in 2020, from 23.4% in 2019 to 22.4% (see chart 5 below).

 

Chart 5: UBA Liquidity and Capital Adequacy Ratio 2016 - 2020 (%)

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Source: UBA Financial Statement, Proshare Research

 

The group's shareholders fund has an upward trend, in 2020 it grew Y-o-Y by +21.10% from N597.98bn in 2019 to N724.15bn. The growth in shareholders' funds was driven by a +38.10% increase in retained earnings and a +16.59% Y-o-Y increase in other reserve segments of the group's equity.

 

Responding to the devaluation of the domestic currency, total equity declined marginally by -2.44% Y-o-Y, from $1.95bn in 2019 to $1.90bn in 2020 (see chart 6 below).

 

Chart 6: UBA Total Equity 2016 - 2020 (N'bn)

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Source: UBA Financial Statement, Proshare Research

 

Return on Equity- Shareholders Standing Smile

Investor's return on average equity has been relatively flat between 2017 and 2020. In 2020, there was a marginal uptick in return on average equity (RoAE), from 16.6% in 2019 to 17.2% (see chart 7 below).

 


Chart 7: UBA Return on Average Equity 2016 - 2020 (%)

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Source: UBA Financial Statement, Proshare Research

 

Cost-to-Income Ratio- An Eye on Operations

UBA's cost management strategies have shown only modest success over the last six years. The group's cost-to-income ratio (CIR) has trended upwards. But on the bright side, in 2020 CIR fell marginally to 61.3 from 62.7 in 2019. The marginal decline in CIR was achieved despite a +12.42% increase in other operating expenses while other operating income slid by -9.83% (see chart 8 below).

 

Chart 8: UBA Cost-to-Income Ratio 2016 - 2020 (%)

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Source: UBA Financial Statement, Proshare Research

 

Asset Quality-the Good, Bad and Halfway

The group recorded a marginal decline in its non-performing loans (NPL) ratio, from 5.3% in 2019 to 4.7% in 2020. This was driven largely by growth in loan books, robust credit risk monitoring architecture, and payment of Past Due Obligations (PDOs) as stated in the financials.

 

NPL decline between 2019 and 2020 was on the back of the introduction of the Global Standing Instruction regulatory guidance and the rollout of BVN also aids in the recovery of loans.

 

The breakdown of NPL by sector shows, the oil and gas sector constituted 37%, while consumer loans and general commerce contributed 23% and 15% respectively (see chart 9 below).

 

Chart 9: UBA Non-Performing Loan Ratio 2016 - 2020 (%)

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Source: UBA Financial Statement, Proshare Research

 

UBA has seen steady growth in total assets between 2016 and 2020. In 2020 total assets grew by +36.95% Y-o-Y from N5.62trn in 2019 to N7.69trn. The growth in total assets was the result of a +34.26% increase in and cash and bank balances and +64.22% growth in investment securities both at amortized cost and at fair value through other comprehensive income.

 

Converting to US dollar terms, total assets grew +10.33% Y-o-Y, from US$18.31bn in 2019 to US$20.20bn in 2020 (see chart 10 below). 

 

 

Chart 10: UBA Total Assets 2016 - 2020 (N'trn)

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Source: UBA Financial Statement, Proshare Research



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Loans and Deposit-The Lending Conundrum

The FY2020 audited result of the group showed that its loan-to-deposit ratio (LDR) fell in 2020, settling below the regulatory minimum of 65%. LDR slipped to 43.2% in 2020 from 52.91% in 2019.

 

Total loans and advances in 2020 increased by +21.34% from N2.17trn in 2019 to N2.63trn in 2020, this was the result of a +23.9% growth in loans and advances to customers while loans and advances to banks tumbled Y-o-Y by -28.46%.

 

Total deposit increased Y-o-Y by +48.64%, from N4.09trn in 2019 to N6.09trn in 2020. Deposit from banks grew Y-o-Y by +56.57% while deposits from customers grew by +48.09% (see chart 11 below).

 

Chart 11: UBA Loan-to-Deposit Ratio 2016 - 2020 (%)

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Source: UBA Financial Statement, Proshare Research

 

The group recorded a strong FY2020 performance despite the years, global health challenge, and a slide in economic activity. As stated by managers of the bank, 2021 appears more inviting with the discovery and distribution of COVID-19 vaccines and the gradual rebound of global and continental economies. Nevertheless, 2021 guidance for the group has taken a conservative tone. The banking group's books showed that interest income from loans to corporate organisations contributed 53.8% to total interest income, contributing to the +23.96% growth in loans and advances to customers in 2020.

 

Investor Stress-A Second Look at Pain

Shareholders of the Tier 1 banking group have expressed some disappointment in the fall in the banking group's total dividend payout of N0.52 for 2020 (down from N1.00 in 2019) despite the rise in its profits. Equity holders had expected a marginal increase in payout above the 2019 payment of N1.00 per share. The declared final dividend represents a dividend yield of 2.98% on the market price of N17.40. The bank's chief executive officer, Mr. Kennedy Uzoka, said the reduced dividend was to allow the bank achieve further headroom in strengthening its capacity expand its operations and deliver stronger earnings in the near term.

 

The effect of the dividend policy was to shift the group's sustainable growth rate (SGR) from 10% in 2019 to 14% in 2020. The improvement in SGR underscores Uzoka's near term earnings growth statement despite the relatively poor recent dividend pay out of the lender (see chart 12 below).

 

Chart 12: UBA Dividends per Share (2016-2020)

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Source: UBA Financial Statement, Proshare Research

 

Investors in UBA may decide to go long on the equity as a stronger prospective earnings per share (eps) and dividend payout (DPS) indicate hidden value opportunities that could punish a near-term short position. The recent dividend payout pain may require a second look in moderated anger.

 


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