August 31, 2018/InvestmentOne report 

• Net interest income of N57.5billion, up 7.4% q/q; up 15.5% y/y
• Non-interest income of N24.3billion, up 39.1% q/q, down 15.3% y/y
• Profit before tax of N31.6billion, up 18.9% q/q; down 1.5% y/y
• Profit after tax of N20.1billion, down 15.5% q/q; up 0.3% y/y  
  

Late on Wednesday, UBA released its Q2 2018 financial statements which were received with mixed feelings as a quarter on quarter (q/q) surge in impairment charges and a spike in effective tax rate limited the impact of gains recorded in non-interest income and net interest income. 

Nonetheless, the bank reported an 18.9% q/q increase in PBT to N31.6billion, driven mainly by the 39.1% q/q rise in non-interest income to N33.4billion, which was supported by the 103.9% q/q surge in net trading income. However, PAT came in at N20.1billion, representing a 15.5% q/q decline as a q/q surge in effective tax rate eroded profits. The surge in the tax rate in our view, was likely due to the recognition of withholding tax paid on dividend payments of FY 2017, done in Q2 2018, which we envisage would normalized in H2 2018. 

Surge in Impairment Charges 

On a q/q basis, the bank recorded a surge in impairment charges to N5.3billion as against N1.5billion the previous quarter. According to management, “The rise in impairment charge reflects the stricter impairment assessment criteria under IFRS 9 (compared to IAS 39) and our prudence in making relevant provisions for any assessable increase in the credit risk of our portfolio.”  Similarly, Non-Performing Loan (NPL) ratio rose 50bps q/q to 7.2%. This can largely be attributable to the 3.9% rise in absolute NPLs YtD due to the classification of two mid-sized loans in the period and 7% YtD decline in gross loans. We point out that the jump in impairment charges was surprising given the declines seen in peer performances, particularly GTB (-76.1% q/q) and Zenith (-17.0% q/q). 

Coupled with its shrinking loan book size, a 10bps rise in funding costs to 4.3% in H1 2018 resulted in a 20bps q/q decline in net interest margin to 7.4%. However, on a y/y basis, the company was able to grow net interest income by 15.5%, largely attributable to a 45.6% y/y rise in investment securities. 

Foreign Exchange Revaluation Weighs in on Non-Interest Income 

The bank reported a foreign revaluation loss of N2.4billion in H1 2018, and consequently a 27% y/y decline in net trading income. This maybe attributable to the bank’s net short foreign currency balance sheet position and the potential effect of a higher translation rate, as we have seen across other banks (NGN345/USD in Q2 2018 from NGN330/USD in Q1 2018), while we await further clarity from management on this the decline was enough to offset the 12% y/y rise in net fee and commission income, as overall non-interest income came in 5% y/y lower at N57.4billion. 

The bank proposed an interim dividend of 20kobo per share representing a dividend yield of 2.47% based on yesterday’s close price. 

Going forward, management seems upbeat about its continuous marketing and promotional drive for card and electronic banking sales which is already paying off, as steady growth and market share gain have been recorded, as reflected in the rising fee and commission income lines and the 24% growth in e-banking income. This should bode well for non-interest income in H2 2018. 

Management also remains optimistic about the NPL ratio, which it believes should moderate before year-end, as the bank is close to full resolution of some NPLs, such as the 9mobile exposure, which remains the single largest NPL in the bank’s portfolio.  

We shall be looking to management for more clarity during the investor and analyst conference call which however has not been set yet. 

Source: Company financials, Investment One Financial Services Research

Source: Company financials, Investment One Financial Services Research