UBA Records N58bn Other Comprehensive Income Line; Shares Outperform Market by 36%

Proshare

Friday, August 26, 2016 10:32am /FBNQuest Research

Event: United Bank for Africa (UBA) reports Q2 2016 results

Implications: Market reaction likely to be positive

Positives: Strong non-interest income growth; significant (N58bn) positive result on the other comprehensive income line

Negatives: Net interest income down -12% y/y

Late yesterday, United Bank for Africa (UBA) reported Q2 2016 results which were very strong, thanks to the bank booking N58.4bn in other comprehensive income. Fx translation gains and fair value gains contributed to this OCI result, and they explain why PAT was up 281% y/y compared with PBT growth of 7% y/y. 

The PBT growth may look modest but it masks what was actually a strong performance because the 2015 comparable was very strong. As with many of its competitors, UBA’s non-interest income was the stronger of its two revenue lines. It grew 46% y/y to N35.2bn; not only was that figure greater than the net interest income result of N29.7bn, the latter posted a -12% y/y decline.

That said, fx trading / gains were not unusual in magnitude, unlike what we saw for competitors. On a H1 basis, trading and fx income was up by around 8% y/y. We believe the market was probably expecting fx revaluation gains to be significant in UBA’s results. In contrast the bank booked an fx revaluation loss of –N4.2bn, but this was more than offset by fair value gains on derivatives (N15.9bn) and fx trading income of N5.8bn.

Notwithstanding, the strong overall performance in non-interest income overshadowed N5.8bn in loan loss provisions (vs. a net recovery of N126m a year ago); opex was flattish. Although the trends look similar, the q/q movements on the P&L were more pronounced, magnitude wise.

Compared with our estimates, although net interest income, loan loss provisions and opex surprised negatively, by 16%, 110% and 12% respectively, non-interest income came in 136% ahead of our forecast and proved to be more meaningful, leading to PBT beating our forecast by 52%. Further down the P&L, the extent of the positive surprise was extreme (507%) because of the N58bn result in OCI (note that the OCI is almost three times the PBT). We had forecast zero for OCI.

We suspect that the market will be slightly surprised and disappointed initially that UBA booked a loss on fx revaluation on the non-interest income line. However, this has to be put into the right context, given the derivatives gain. Further still, the scale of the translation and fair value gains on the OCI line carry significant weight.

Although the loan loss provisions figure was very high (up 480% q/q), base effects contributed, along with fx translation impact (we suspect) on previously provided for FCY loans. Although we still need to hear management’s comments on this, we do not believe the increase in provisions signals a marked deterioration in the loan book.

The bank’s NPL ratio is still below 3% by our calculations, though up from 1.7% in December, and the coverage ratio remains over 100%, though down from 143% in December. Again, we reiterate that the positives on the non-interest income and OCI line far outweigh the negatives, including that of asset quality.

Year to date, the shares have gained 31.7%, an outperformance of 36% relative to the market. On the back of these results, we would expect a marked increase to consensus 2016E earnings, but limited changes to 2017E and beyond earnings forecasts.

The bank is proposing an interim dividend of 20kobo, implying a yield of 4.5%. The dividend is flat y/y but is better than our 15kobo estimate. We rate UBA shares Outperform. Our estimates are under review.

UBA Q2 2016 results: actual vs. FBNQuest Research estimates (N millions)


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