Sept 01, 2016/FBNQuest Research

Limited changes to estimates, price target
On the back of UBA’s Q2 2016 results, we have raised our 2016E earnings forecasts substantially to reflect the fx-related gains which boosted the results. However, our 2017E estimates see modest revisions because the underlying results were in line.

We have also kept our price target unchanged at N5.8 as the combination of the earnings upgrade and our decision to roll over our valuation to 2017 is offset by a reduced ROAE forecast in 2017E (11.4% vs 13.1% due to base effects) and a 200bp increase to our risk free rate assumption to 14.5%.

Concerns about asset quality deterioration in the oil & gas and power sectors were adequately dealt with on the conference call in our view. The steep rise in loan loss provisions in Q2 (480% q/q) was due to several factors: mid-size loans that were classified, fx devaluation and collective impairment as opposed to specific impairment on single large exposures.

That said, our forecasts are still conservative relative to management’s guidance: 2016E NPL ratio of 4% vs guidance of c.2.5% and a cost of risk estimate of 1.3% vs 1.0% guidance.  Although the shares have gained c.29% ytd vs the ASI’s -3.6%, we still see additional upside potential of 33% from current levels. We reiterate our Outperform recommendation.

OCI boosted Q2 2016 earnings
UBA’s Q2 2016 results were boosted by N58.4bn in other comprehensive income (fx translation and fair value gains). PAT was up 281% y/y vs PBT growth of 7% y/y. The PBT growth was modest because of challenging comparables. As with its competitors, UBA’s non-interest income was the stronger of the 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. On a H1 basis, trading and fx income was up by around 8% y/y.

Unlike competitors, UBA booked an fx revaluation loss of –N4.2bn, but this was more than offset by fair value gains on related 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. The results were considerably ahead of our forecasts because of the OCI result and a better-than-expected non-interest income result. These overshadowed negative surprises in net interest income (16%), loan loss provisions (110%) and opex (12%).