August 28, 2017/InvestmentOne Research
UBA released its Q2 2017 results on Thursday, which showed a +25.9% q/q jump in PBT to N32.1bn, its highest quarterly performance over the last three years. Furthermore, PBT was +21.7% higher than our estimates largely due to the non-interest income performance.
The bank’s jump in PBT was largely driven by the +87.9% q/q spike in non-interest income, which more than outweighed the +104.3% q/q jump in loan impairment charges, +15.4% q/q increase in opex and the -3.5% q/q decline in net interest income.
In dissecting the result, we point out that the non-interest income was largely driven by the +136% q/q surge in FX trading income, which was largely in line with the recently released scorecards from other Tier 1 names; Zenith and Access bank.
Also, comparable to the Q2 2017 results of other Tier 1 banks was the q/q slide in net interest income performance, which may not be unrelated to the high interest rate environment and UBA’s recently issued USD500m Eurobond, which may have pressured the bank’s cost of funds.
Although the increase in loan impairment charges followed the trend seen in the Q2 2017 results of other Tier 1 banking names, the majority of the provision taken was specific, which may not be unconnected with the bank writing off c.N16bn worth of non-performing loans (NPL) in Q2 2017.
Nonetheless, the bank’s NPL ratio continued to move closer to the regulatory threshold (5%), inching up +20bps q/q to 4.2% as at Q2 2017. Furthermore, NPL coverage fell to c.115% as at Q2 2017, from 136% as at Q1 2017.
Similar to GTB, Zenith and Access bank’s audited Q2 2017 results, the q/q rise in opex was partly due to UBA taking the whole FY 2017 AMCON levy in Q2 2017. However, opex is up just +8.1% q/q once adjusted for the AMCON levy, against the performance of Zenith and Access bank, which showed a +29.0% q/q and +25.8% q/q rise in opex respectively.
We believe the stringent cost management by the bank in the current inflationary environment, combined with the growth in earnings contributed to the decline in the bank’s cost to income ratio to 58.6% as at Q2 2017, from 60.7% as at Q1 2017. This compares favourably against Access bank (c.63%) but still significantly higher than GTB (c.40%); which is the best in class.
On a y/y basis, PBT jumped +80.1% largely due to the lower base effect of Q2 2016. The performance was the result of the +61.5% y/y jump in net interest income, on the back of the higher interest rate environment, and the +11.8% y/y increase in non-interest income, which combined to offset the +19.8% y/y rise in opex and the +8.9% y/y uptick in loan impairment charges.
While we believe UBA’s earnings should continue to benefit from the high yield environment and the increase in FX availability in the economy, we remain concerned on its power sector exposure (c.10% of loan book) given the liquidity challenges in the sector. This could see loan impairment charges stay high, potentially weighing on PBT and ROE in FY 2017.
The company announced an interim dividend of 20kobo per share representing a c.2% dividend yield on Friday’s close price.
While our models are under review, we rate UBA shares HOLD.
UNITED BANK FOR AFRICA Q2 2017 figures (N’millions) | |||||||||
Q2 2017 | Q/Q | Y/Y | I-one est. | Actual vs I-one est. | H1 2017 | Y/Y | I-one est. | Actual vs I-one est. | |
Interest Income | 78,190 | 1.9% | 45.9% | 75,584 | 3.4% | 154,954 | 44.3% | 152,348 | 1.7% |
Interest Expense | (28,400) | 12.8% | 24.7% | (25,455) | 11.6% | (53,575) | 23.8% | (50,630) | 5.8% |
Net Interest Income | 49,790 | -3.5% | 61.5% | 50,129 | -0.7% | 101,379 | 58.1% | 101,718 | -0.3% |
Non-interest income | 39,420 | 87.9% | 11.8% | 22,375 | 76.2% | 60,398 | 16.0% | 43,353 | 39.3% |
Profit before provisions | 89,210 | 22.9% | 35.0% | 72,504 | 23.0% | 161,777 | 39.2% | 145,071 | 11.5% |
Loan Impairment charges | (6,338) | 104.3% | 8.9% | (5,355) | 18.4% | (9,441) | 38.4% | (8,458) | 11.6% |
Operating Expenses | (50,781) | 15.4% | 19.8% | (40,799) | 24.5% | (94,804) | 27.2% | (84,822) | 11.8% |
PBT | 32,061 | 25.9% | 80.1% | 26,337 | 21.7% | 57,531 | 65.5% | 51,807 | 11.0% |
Tax | (12,072) | 286.9% | 84.2% | (3,998) | 202.0% | (15,192) | 98.6% | (7,118) | 113.4% |
Tax rate | 37.7% | 2540.4bps | 84.0bps | 15.2% | 2163bps | 26.4% | 440bps | 13.7% | 1267bps |
PAT | 19,989 | -10.6% | 77.7% | 22,339 | -10.5% | 42,339 | 56.2% | 44,689 | -5.3% |
Source: NSE, Investment One Research
