Culled-Proshare

April 25, 2018/FBNQuest Research

15% upgrade to our price target due to 100bp cut in risk free rate

UBA’s Q1 2018 PAT beat our forecast by a significant margin. However, the surprise was driven by other comprehensive income (OCI) of N11.2bn. Further up the P&L, PBT was slightly behind our forecast, largely because of a negative surprise in non-interest income. We prefer not to make sweeping conclusions on individual revenue lines, as well as on opex and provisions this early in the year, especially given that these are not audited results. 

Notwithstanding, on the back of the results, we have increased our 2018E EPS forecast 9%. However, our new price target is around 15% higher because we have reduced our risk free rate to 13% from 14% previously, to reflect the declining yields on FGN bonds. Year-to-date, UBA shares have returned 10.2% (vs. 6.7% for the ASI). However, in the last three months, they are down -5.4% (ASI: -7.2%). 

On a relative basis, they are trading on a 2018E P/B multiple of 0.7x for 16.8% ROAE in 2019E. These compare favourably with the 0.9x 2018 P/B multiple for 15.8% ROAE that our universe of bank stocks is trading on. Our new price target of N15.0 implies a potential upside of 32% from current levels. The recent sell-off provides an entry opportunity in our view. As such, we upgrade our recommendation on the shares to Outperform from Neutral.

Q1 2018 PAT up 45% y/y, largely driven by OCI gains 

UBA’s Q1 2018 PAT grew by 45% y/y to N33.0bn, largely driven by a positive result of N11.2bn in other comprehensive income (OCI). Further up the P&L, the growth on the PBT line was more modest at 4% y/y. The growth in PBT was underpinned by a -53% y/y reduction in loan loss provisions and a 7% y/y growth in pre-provision profits. The positives on both lines were strong enough to offset opex growth of 13% y/y growth. 

Moving back to preprovision profits, although both revenue lines grew y/y, non-interest income which grew by 14% y/y was the stronger of the two revenue lines. Funding income managed single digit growth of 4% y/y. Sequentially, PBT declined marginally (-1.4%) q/q mainly because of negative surprises in non-interest income and opex. However, PAT grew by 20% q/q, thanks to the OCI gains.