Tuesday, October 17,
2017 9:19AM/ Vetiva Research
· Gross Earnings up 26% y/y – 7% ahead of our estimate
· Strong FX trading income masks high costs, amidst improving FX liquidity
· We maintain our 8% loan growth forecast, Ytd 6%
· Target price revised marginally lower to N9.32 (Previous: N9.74)
Strong y/y performance misses estimate slightly
UBA maintained the strong earnings run rate in 9M’17 with top and bottom line rising 26% and 23% y/y respectively. Whilst Gross Earnings came in 7% better than our estimate at ₦334 billion, PAT (₦60.9 billion) marginally lagged our ₦63.6 billion estimate – largely due to OPEX and funding cost pressure. According to management, the bank continues to benefit from the strategic diversification of its businesses with Non-Nigerian operations accounting for a third of revenue and c.40% of PAT in Q3’17. Amidst the strong interest rate environment and better pricing on loan and treasury portfolio, Interest Income rose 30% y/y (up 6% q/q) – 4% ahead of our estimate.
Consequently, margins remained strong with Net Interest Margin stable at 7.3% despite a 10bps uptick in cost of funds with Interest Expense rising to ₦86 billion (9M’17: ₦71 billion) - largely due to higher foreign borrowings. Thus, Net Interest Income rose 36% y/y to ₦152 billion – much in line with our ₦151 billion estimate. Notably, whilst fees and commission remained flat y/y, earnings was supported by the strong 82% y/y growth in FX trading income following improved liquidity since the introduction of the I & E FX window.
UBA’s NPL ratio remained contained at 4.2% with loan loss provision coming in at ₦12.9 billion – better than our ₦14.8 billion estimate albeit higher than the ₦9.1 billion recorded in the prior year. This translated to a Cost of Risk of 1.1% (Vetiva FY’17E: 1.3%). However, Operating Expense (up 26%) came in 4% higher than our estimate - a trend management had earlier attributed to higher inflation, currency devaluation, and higher personnel costs. With this, PBT registered 33% up y/y to ₦78.3 billion vs. our ₦79.8 billion estimate. Overall, PAT rose 23% y/y to ₦60.9 billion, with annualized run-rate on-track to beat FY’16 record.
TP revised to N9.32 (Previous: N9.74)
We have revised our estimates marginally across most line items to reflect the deviations highlighted above. Given the current credit growth run rate (Ytd: 6%), we maintain our 8% loan growth forecast for FY’17 (management guidance: 10%). However, we raise our Interest Income forecast to ₦312 billion (Previous: ₦307 billion) to reflect the impact of loan pricing. Also, we cautiously raise our Non-Interest Income estimate to ₦112 billion (Previous: ₦110 billion) following the modest outperformance in 9M’17 and the stronger than expected income from FX trading.
Amidst stable FX environment and relatively stronger oil prices, we are more positive about NPL formation in the last quarter and cut our loan loss provision to ₦17.3 billion (Previous: ₦19.8 billion). That said, we expect Interest and Operating Expenses to be the key pressure points in Q4’17 as inflation remains sticky and interest rate environment elevated. Consequently, we raise our estimates higher across both line items.
Overall, we estimate a record high
PAT of ₦81 billion (Previous: ₦85 billion)
for FY’17 – translating to an EPS of ₦2.24. UBA
continues to trade at a discount to peers – priced at an FY’17 P/E and P/B of
4.1x and 0.7x vs. tier I averages of 5.6x and 1.1x respectively.
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