October 24, 2017/Cordros Research
In its recently released Q3-17 results, UBA recorded decline in gross earnings (8.46% q/q), driven largely by 38.60% q/q decline in NIR (+26.55% y/y), which muted the growth in interest income (6.33% q/q and 10.01% y/y). However, over 9M-17, gross earnings grew by 25.75% (against our 29.20% y/y growth estimate), driven by growth across income lines – interest income (+30.11%, in line with our estimate) and non-interest revenue (+18.84%, below our 29.75% y/y growth estimate).
We have raised our gross earnings growth forecast slightly higher to 49.73% (previously 49.44%) in 2017F to N471.40 billion, on expected higher growth in interest income. That said, following an upward revision to our 2017F cost of funds, downward revision of NIR, and the expectation of a higher opex, we now forecast PBT and PAT growth of 66.29% and 13.24% (previously 74.51% and 14.28%) to N104.69 and N81.83 billion respectively. However, following the adjustment of our weighted average number of shares to reflect the complete cancelation of the 2.08 billion shares under the Staff Share Investment Trust scheme, our 2017F EPS is now 4.94% higher than previous estimate at N2.38.
We revise asset yield estimate for 2017F higher to 12.35% (previously 12.15%), on expected continued elevated yields on interest earning assets over Q4 (expanded 131 bps to 11.62% in 9M-17). Overall, we look for interest income growth of 27.25% (previously 22.18%) to N335.89 billion. On NIR, we believe the gains on FX trading (due to FX related gains and derivative transactions) and growth in fixed income securities trading will persist for the rest of the year. That said, we had earlier expected 24.9% growth in H2, but given the significant drop in Q3-17, we have revised growth estimate lower to 14.03% (previous 24.90% y/y), equating to N120.55 billion for 2017F.
On funding cost, we have reviewed our 2017F cost of funds estimate higher by 11 bps to 4.22%, translating to an interest expense growth of 31.24% (previously 27.82%) to N129.63 billion. Driving our upward revision is the surge in interest charge on borrowings – attributed to the bank’s recently issued USD500 million Eurobond at a yield of 7.875% and a range of bilateral facility secured during the year – and Fed Rates hikes impact on LIBOR-linked borrowings. Note that these drove 39 bps rise in cost of funds to 3.88% in 9M-17. However, we believe the high yields on interest earning assets will outweigh the expansion in funding cost, thus, we estimate net interest margin to advance 118 bps to 7.48% (previously 7.02%).
In Q3-17, UBA made additional provisioning of N3.47 billion for credit loss, which raised total provision for 9M-17 to N12.91 billion, although the impact on cost of risk was masked by the 3.62% y/y growth in loan book. At 4.2% in 9M-17 (the same as H1-17), NPL was already ahead of 2017FY’s c.4.00% guided by management. We maintain our 4.80% NPL forecast, but lower cost of risk estimate by 45 bps to 1.55% for 2017F, translating to additional provisioning of N11.92 billion for Q4 and total credit loss provision of N24.83 billion for 2017F.
The surge in opex in Q3-17 reflects the lagging impact of NGN devaluation on FCY related obligations, and translation impact of subsidiaries’ opex. As such, we forecast 29.36% (previously 22.22%) growth in opex to N197.27 billion, translating to a 234 bps contraction in cost to income ratio to 60.37%, while we expect operational leverage to rise to 5.4x, compared to 4.9x in FY-16.
While noting the (1) flattish growth in funding income over the last three quarters, (2) limited room for any significant growth in FX trading and revaluation gains with the relative stability of the naira, and (3) impact of the adoption of IFRS 9 from 2018F, we now expect PAT to grow lower than previously estimated over 2018-2019F, as FX related and revaluation gains taper and NIR contribution to gross earnings contract significantly.
Accordingly, we cut target price by 19.63% to N10.14 (previous: N12.62) and roll forward our valuation to 2018. Our current 12-month TP implies upside potential of 12.69% from current levels; consequently, we recommend a HOLD on the stock. UBA is currently trading at 2017F P/BVPS of 0.6x (below the peer average of 0.9x and 5-year average of 0.7x) and 2017 FP/E of 3.8x (below the peer average of 5.5x, but above the 5-year average of 3.2x).
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