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)
1. UBA Issues an Update on the Publication of 2016 Half Year Interim Results
2. UBA Declares N32.62bn PAT in Q2 2016 Result Proposes 20k per share Interim Dividend SP N4.45k
3. United Bank for Africa (UBA) re-admitted into FOREX Market
4. UBA Plc Has No Involvement in Recent Event in Turkey
5. UBA Market Reaction Likely to be Neutral to Negative Loan Loss Provisions Decline by 57 in Q1 16
6. UBA Declares N16.99bn PAT in Q1 2016 Result SP N3.20k
7. UBA Records Strong Q4 15 Results Outperform rating maintained
8. UBA: Asset quality defies trend, but still hazy earnings outlook
9. UBA’s PBT Declines by 39.5% QoQ in 2015 Audited Result
10. UBA Grows Gross Earnings by 9.8% as Loan Loss Expense Increases by 58% in Q4’15
11. UBA Records Weaker than Expected Non-Interest Income in Q4 2015 Results
12. UBA Proposes 40kobo per share Dividend in 2015 Audited Result,(SP:N3.41k)
13. UBA Board Approves 2015 Audited Financial Statements; Awaits CBN Approval for Official Release
14. UBA Board Appoints Mr. Kennedy Uzoka as MD/CEO Designate
15. UBA declares N48.56 bln Profit in Q3'15 Result,(SP:N4.18k) – Proshare
16. GUARANTY UBA and ZENITH Are Top Picks in Banking Sector - Afrinvest