Material increase to our price target due to cut to risk-free rate
UBA's management has not provided ROAE guidance for FY '20. However, following its Q3 '20 results which surprised positively relative to our forecasts, we have revised our '20f ROAE forecast to 17.8% from 16.5% previously. Our new ROAE forecast is just shy of the lower end of management's 18-20% guidance for prior years. Relative to our forecasts, PAT beat by 18% because of positive surprises in funding income and loan loss provisions.
As such, we have increased our '20-21f funding income forecasts by c.10% on average. We have also cut our '20f forecast for loan loss provisions by -4.5%. These revisions underpin the 6% average increase to our '20-21f EPS forecasts. Our new price target of N17.4 is c.48% higher because we have cut the risk-free rate driving our DDM valuation by 650bps to 6% to reflect the sharp compression in government bond yields. Thanks to an 18% q/q decline in opex, UBA's cost-to-income ratio improved to 62.4% in Q3 from 71.5% in Q2.
Despite a 9% q/q expansion in its loan book, UBA's NPL ratio deteriorated to 5.2% from 4.1% in the prior quarter. At current levels, UBA shares trade on a '20f P/B multiple of 0.4x for 12.9% ROAE in '21f. These compare with the 0.7x multiple for 14.9% ROAE that the sector Is trading on. Our new price target implies a potential upside of 111.1% from current levels. In addition to a 13.2% dividend yield, we estimate a one-year total return of 124.2%. Consequently, we keep our Outperform rating on the stock.
Q3 PAT up 42% y/y, driven by y/y growth in funding income and a decline in income tax
UBA's pre-provision profits expanded by 17% y/y on the back of funding income growth of 37% y/y. The y/y growth in funding income was underpinned by loan growth of 9% q/q and a moderation in interest expense. The y/y expansion in pre-provision profits overshadowed a 16% y/y rise in opex and was the major driver behind PBT growth of 19% y/y. Further down the P&L, PAT growth accelerated by 42% y/y, driven by a lower effective tax rate of 1.6% vs. 11.0% in Q3 '19.
Sequentially, PBT advanced by 36% q/q on the back of funding income growth of 24% q/q and a 29% q/q decline in loan loss provisions. In contrast, PAT declined by 50% q/q because of a negative result of -NGN6.3bn in other comprehensive income vs. +NGN35.1bn in Q2 '20.