March 12, 2021/InvestmentOne Report

·         Net interest income of N74.50billion, up 9.94%q/q , 42.17%y/y     

·         Non-interest income of N78.26billion, up 37.29%q/q, 3.84%y/y.

·         Profit before tax of N78.58billion, up 24.41%q/q, 17.08% y/y.

·         Profit after tax of N71.25billion, up 28.40%q/q, 22.59%y/y.

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Higher Non-interest Income Drives Earnings

Recently, UBA reported its Q4 2020 result which showed a 24.80%q/q increase in PBT to N41.49billion. This was driven by the 10.12%q/q increase in Net Interest Income (NII), 33.05%q/q jump in Non-interest income and 5.53% decline in OPEX which offset the jump in loan impairment (N15.53billion in Q4 2020 vs N3.67billion in Q3 2020). 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. In the same vein, we believe an increase in the bank’s Net loan (up by 24.00% in 2020), partly driven by an extensive rollout of ‘Click Credit’ – the bank’s innovative retail lending proposition according to the management, could have supported the improvement in the bank’s interest income.  

Elsewhere, Non-Interest income rose on the back of the 49.26%q/q improvement in Net fees and Commission and 30.59%q/q jump in Net trading and FX income. We believe the growth in volume of online transactions could have supported the improvement in net fees and commission while the rise in Net trading and FX income may be due to the bank’s FX revaluation gain similar to what we saw in Zenith Bank.   

FX Revaluation Gain Supports y/y Performance

On a y/y basis, Net Interest Income (NII) was up 16.65% to N73.45billion and Non-interest income jumped to N40.42billion from N17.34billon in Q4 2019. While the improvement in the bank’s loan book could have supported the increase in NII, Non-interest income was driven by the 57.77%y/y increase in Net fees and Commission and jump in Net trading and FX income to N13.73billion from N1.92billion in Q4 2019. Resultantly, the bank’s Profit Before Provisions and OPEX rose by 41.80% y/y to N113.86billion. 

As a result of the strong income growth which offset a marginal 2.96% increase in OPEX (down 5.53%q/q) and a 34.03%y/y increase in loan impairment, PBT jumped to N41.49billion in Q4 2020 from N13.05billion in Q4 2019. 

Impressive FY result

For FY 2020, Net Interest Income (NII) was up 16.94%y/y to N186.02billion and Non-interest income rose by 19.10% to N148.18billion. While the increase in NII was due to the rise in loan book (+24.20%y/y) as Net Interest Margin (NIM) fell to 5.40% from 6.00% in 2019 in line with interest rate direction in 2020, the improvement in the Non-interest income was driven by a 58.00% increase in Net trading and FX income on the back of a revaluation gain of N6.17billion from revaluation loss of N10.17billion in 2019. Resultantly, the bank’s Profit Before Provisions and OPEX rose by 17.72% y/y to N407.65billion. Loan impairment rose by 47.98%y/y on the back of the impact of the current pandemic on loans while OPEX increased by 15.05%y/y due to the increase in fuel, repairs and maintenance expenses which according to the management was driven by increase in energy cost and FX driven cost on maintenance and spare parts. Nonetheless, cost to income ratio fell to 61.30% from 62.70% in 2019 on the back of the improvement in the bank’s income. As a result of the jump in Loan Impairment Charges and rise in OPEX, PBT only rose by 18.49%y/y to N131.86billion in FY 2020.

In terms of asset quality, NPL ratio fell to 4.70% from 5.30% in 2019 on the back of a significant improvement in the bank’s gross loans in 2020. Despite the jump in loan impairment, Cost of risk remained flat at 0.9% in 2020 on the back of the increase in the bank’s loan book.

Despite the decent performance of the bank, investors seem not to be happy with its final dividend of N0.35 per share (vs N0.80 per share in 2019), judging from the performance of the company’s share on the exchange (-11.95% WTD). According to the management, the lower dividend payout was due to a conservative stance of the bank to build a sufficient buffer to improve its capacity for the future. In the same vein, the management stated that its lower dividend declaration was due to regulatory dividend restriction across the continent.

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, we expect the loan restructuring programme of the CBN to reduce the impact of the pandemic on assets. In terms of earnings, we expect the bank’s initiative on credit growth (click credit) to support its loan book expansion (forward guidance of 20% in 2021) while we believe recent increase in interest rate should improve NIM in the near term. We also expect the improvement in the bank’s online and digital transaction to support its fees and commission income. Similarly, we believe the bank is well positioned, due to its Pan African exposure, to enjoy the trading benefit under the African Continental Free Trade Area (AfCFTA). We also expect the better than expected improvement in oil price and Nigeria economy to support the bank’s asset quality and loan growth. Overall, we believe the bank remains resilient to survive the impact of the current pandemic given its strong capital base (22.40%, well above regulatory level of 15%) and geographical diversification.

Nonetheless, we expect the bank to continue its drive to boost transaction volume on its e-channels platform in order to support earnings while its strong capital base should support its ability to survive in the current challenging macroeconomic environment. Similarly, we think the bank’s diversified assets to other African countries should support its long term growth.

Source: Company financials, Investment One Financial Services Research

Source: Company financials, Investment One Financial Services Research