April 21, 2021/Proshare

by FBNQuest Research

3% cut to our price target due to 150bp increase to the risk-free-rate

UBA’s Q1 ’21 earnings came in ahead of our forecast mainly because of a positive surprise in impairment for credit losses. Although pre-provision profits were broadly in line with our forecasts, the positive surprise in funding income was offset by negative surprises in non-interest income. Following the positive earnings surprise, we have increased our ’21-22f EPS forecasts by c.4% on average. Nonetheless, our new price target of NGN14.2 is c.-3% lower because we have increased the risk-free-rate driving our DDM valuation by 150bps to 12.5%. The upward revisions to our earnings forecasts are underpinned by i) a 5% average increase to our funding income forecasts, and ii) a -9% average cut to our forecasts for credit loss impairments.

The upgrades on both lines offset an -8% average cut to our non-interest income forecasts over the same period. We are encouraged to see that UBA’s cost of risk improved by 20bps y/y to 0.3%. However, given the slow pace of economic recovery, we would like to see the audited numbers for H1 ’21 before drawing a firm conclusion. Consequently, we have cut our cost of risk assumption by a mere 10bps to 1.0%, in line with guidance, but above the 0.3% annualised rate implied by the Q1 ’21 results. With respect to funding income, we are pleased to see that the improvement in deposit-mix over 2020 carried on into 2021. The bank’s CASA ratio (low-cost deposit to total) improved to 82.6% from c.72.4% in Q1 ’20 (81.8% Q4 ’20). The bank’s asset quality (NPL) ratio also remained stable at c.4.76% vs 4.7% Q4 ’20.

We expect UBA to deliver PBT of NGN137.8bn or an implied PBT growth of c.4% y/y in f2021. Our forecasts also imply a ’21f ROAE of 14.1%, less than the 18% ROAE that management has guided to. Our lower ROAE forecast is mainly due to an 11% increase to our book value forecast. On a relative basis, UBA shares are trading on a ’21 P/B multiple of 0.3x for 14.1% ROAE in ’22f. These compare with the 0.5x multiple for 14.9x ROAE that the sector is trading on. Year-to-date, the shares have shed -17.9% vs the -3.1% return on the NSE ASI. At current levels, we see an upside potential c.100% in the shares. We keep our Outperform rating on the shares.

PAT up 27% y/y, thanks to strong revenue growth and reduction in credit impairments

UBA’s Q1 PAT (from continuing operations) grew 27% y/y to NGN38.2bn. Underpinning the double-digit earnings growth were increases of 13-14% y/y on both revenue lines and a -23% y/y reduction in credit loss impairments. These positives underpinned PBT growth of 24% y/y. Further down the P&L, PAT growth after other comprehensive income and minorities accelerated by 275% y/y because OCI improved to NGN70m vs -NGN15bn Q1 ’20.