May 29, 2020 / 10:12 AM / by FBNQuest Research / Header Image
Tangible cuts to our 2020E EPS forecasts and price target
After delivering a stellar ROAE of c.23.4% in 2019, we expect UBA's ROAE to decline to 12.1% in 2020E. Management has not provided guidance for 2020E. However, we have cut our 2020E EPS forecast by 11% because the bank's Q1 2020 PAT missed our forecast by a wide margin due to a negative result of -N15.4bn in other comprehensive income (OCI). Despite the low double-digit cut to our 2020E EPS forecast, the cut to our new price target of N10.1 is more tangible (at -27%) because we have increased the equity risk premium driving our DDM valuation to 7.5% from 6.0% previously.
Similar to most of its tier 1 peers, UBA's loan book expanded by c.9.5% q/q. However, the bank's adoption of a higher fx rate of US$386.5 in Q1 2020 compared with US$364.7 as at end 2019 contributed to loan growth of c.4% q/q. Following the strong loan growth in Q1, we have increased our 2020E loan growth assumption by 100bps to 15%. Although UBA's asset quality (NPL) ratio deteriorated to 6.4% in Q1 2020 from 5.3% as of Q4 2019, slightly above the 5.0% regulatory minimum, its other financial soundness indicators such as CAR of 24.0% and provisions coverage ratio (including regulatory risk reserves) of 100% are amongst the best in the sector. Its liquidity ratio of 46.1% is also one of the highest within our coverage universe.
On a relative basis, UBA shares are trading on a 2020E P/B multiple of 0.4x for 15.1% ROAE in 2021E. These compare with the 0.5x multiple for 16.3% (2020E) ROAE that the sector is trading on. Our new price target of N10.1 implies a potential upside of 50% from current levels. Consequently, we retain our Outperform rating on the stock.
Q1 2020 PAT down 75% y/y post solid PAT in Q4 2019
UBA's Q1 2020 PAT fell by -75% y/y because of a negative result of -N15.4bn in OCI vs. +N12bn in Q1 2019. In contrast to the marked y/y decline in PAT, PBT expanded by 9% y/y, driven by a 12% y/y growth in pre-provision profits. The growth in pre-provision profit was driven by increases of 13% y/y and 11% y/y in funding income and non-interest income respectively. The solid growth in funding income was underpinned by loan growth of 9.5% q/q.
On its part, non-interest income growth was underscored by advances of 49% y/y and 12% y/y in net trading and fx gains, and net income from commissions and fees respectively. In Q4 2019, UBA's PAT improved to N42.0bn compared with an after-tax loss of -N3.7bn in Q4 2018. The stellar growth in PAT was driven by OCI of +N35.0bn vs. a negative OCI of -N21.9bn in Q4 2018. Conversely, PBT fell by -53% y/y because of a spike in loan impairment charges to N11.6bn vs. write-backs of N6.1bn in Q4 2018.