November 30, 2020/InvestmentOne Report 

·         Net interest income of N66.70.56billion, up 23.73%q/q , 36.70%y/y     

·         Non-interest income of 30.37billion, down 37.83%q/q, 12.11%y/y.

·         Profit before tax of N33.24billion, up 36.23%q/q, 18.90% y/y.

·         Profit after tax of N32.70billion, up 128.20%q/q, 31.99%y/y.

Higher earnings as NII improves

Recently, UBA reported its Q3 2020 result which showed a 36.23%q/q increase in PBT to N33.24billion. This was driven by the 23.73%q/q increase in Net Interest Income (NII), 28.96%q/q decline in Loan Impairment and 17.71%q/q fall in OPEX which offset a 37.83%q/q decline in Non-interest income. We believe the increase in NII may not be unconnected to low cost of fund which could have offset the impact of weak asset yield. According to the Management, low-cost deposits (which accounts for 76.2% of customer deposits) grew 40.8% by the end of the third quarter. This was driven by the sales Agents, Agency Banking Network, and Digital Banking propositions which have positioned the bank at the forefront of financial inclusion across geographies it operates. Similarly, we think the bank’s drive to boost loan book could have supported NII (Gross Loan up to 15.6%ytd from 6.1%ytd at the end of Q2 2020). Elsewhere, Non-Interest income fell on the back of the 11.15%q/q decline in Net fees and Commission and 59.66%q/q fall in Net trading income. 

Stronger NII offsets the impact of the increase in loan impairment

On a y/y basis, Net Interest Income was up 36.70% to N66.70billion while Non-interest income declined by 12.11% to N30.38billion. While the decline in Non-interest income was driven by the 35.16%y/y fall in Net fees and Commission and 49.41%y/y reduction in other operating income, the improvement in Net interest income was due to flattish interest expense as cost funds continued to fall. Resultantly, the bank’s Profit Before Provisions and OPEX rose by 16.46% y/y to N97.07billion.

Despite the 16.33%y/y (down 17.61%q/q) increase in OPEX, cost to income ratio fell to 65.4% at the end of 9M 2020 from 67.0% in H1 2020. As a result of the improvement in NII, PBT rose by 18.90%y/y to N33.24billion in Q3 2020. 

Higher Loan Impairment drags earnings down

For 9M 2020, Net Interest Income (NII) was up 17.06%y/y to N186.02billion while Non-interest income was somewhat flat, rising marginally by 0.64%y/y to N107.76billion. While the increase NII was due to a combination of fall in cost of funds (3.20% from 4% at the end of FY 2019)  and rise in loan book (+15.6%ytd). Resultantly, the bank’s Profit Before Provisions and OPEX rose by 7.70% y/y to N196.71billion. However, as a result of the jump in Loan Impairment Charges (+72.23%y/y) and rise in OPEX (+19.20%y/y), PBT fell by 8.00%y/y to N90.37billion in 9M 2020.  

Outlook

Going forward, despite its regional diversification compared to peers in Nigeria, we expect to see deterioration in asset quality as the impacts of the current pandemic linger in most countries in Africa. However, a continuous recovery in oil price on the back of vaccine hopes could improve banks’ assets in the upstream oil and gas while the current reforms in downstream oil and gas and Power could also have positive impact on banks exposures in these sectors within the medium to long term horizon. Nonetheless, the recent social unrest in the country may slow the pace of recovery in the overall economy in the near term. Although, we believe the bank must have applied for loan restructuring like other banks, we expect the bank to focus on risk management and cost containment to weather the storm from the current pandemic.

Source: Company financials, Investment One Financial Services Research  

Source: Company financials, Investment One Financial Services Research