November 6, 2023/United Capital

United Bank for Africa Plc (UBA or the Group) published its 9M-2023 earnings last week, recording a basic Earnings Per Share (EPS) of N12.93 in 9M-2023, up 295.0% y/y, compared to the N3.27 recorded in 9M-2022. The Group posted a 115.3% y/y growth in gross earnings from N608.0bn to N1.2tn, supported by increases in net trading and foreign exchange income. This, coupled with higher interest income, resulted in a whopping 287.2% y/y surge in Profit After Tax (PAT). Below is our review of UBA’s latest financials and expectations for the rest of the year:

Growth in Derivative Assets Drove Profitability
UBA reported a 58.6% y/y growth in its interest income from N420.2bn in 9M-2022 to N666.bn in 9M-2023 following the volume of interest-bearing assets amid an elevated interest rate environment. This is due to the 79.9% y/y increase in interest earned on investment securities to N297.2bn (previously, N165.3bn). The bulk of this came from bond instruments trading as the returns on the instruments climbed by 117.1% y/y, given the upward trajectory of the yield curve for the period under review, compared to the same period in 2022.

Additionally, UBA recorded a whopping 335.6% y/y climb in its non-core operating business. Non-interest income settled at N574.5bn in 9M-2022 compared to the N131.9bn recorded in the first nine months of 2022. The huge growth was driven by the 1072.0% y/y growth in net trading and foreign exchange income. Unlike its peers, the bulk of this growth came from UBA’s net fair value gains on derivatives assets trading to the tune of N340.0bn in 9M-2023 compared to the loss of N22.6bn incurred in 9M-2022.

However, the Group’s interest expense grew at a faster pace compared to the growth in interest income. UBA’s interest expense expanded by 62.1% y/y from 137.7bn in 9M-2022 to N223.2bn in 9M-2023 due to the 48.9% y/y growth in customer deposits. Customer deposits settled at N13.4tn (previously, 9.0tn) owing to improvements in customer acquisition and retention strategies across the Group’s countries of presence. As a result, Net Interest Margin (NIM) climbed marginally from 5.89% to 6.19%.

In the operating environment, UBA posted an impressive outing as the Group’s operating income grew by 145.6% y/y from N414.4bn in 9M-2022 to N1.0tn in 9M-2023. Consequently, UBA’s Cost-to-Income Ratio (CIR) printed at 36.4%, down 269bps, compared to the 63.4% print in the corresponding period of 2022. This reflects the Group’s intense efforts to ensure operational efficiency during the review period. Notably, the 41.2% y/y growth in operating expenses (owing to the increase in fuel, repairs, and maintenance costs) was insufficient to weigh on the Group’s efficiency.

Consequently, UBA posted a Profit Before Tax (PBT) of N502.1bn in 9M-2023, up 262.5% y/y compared to N138.5bn in 9M-2022. Although income tax expense for the period climbed by 135.2% y/y, the Group’s PAT grew by 287.2% y/y to settle at N449.3bn in 9M-2023 from the N116.0bn recorded in the corresponding period of 2022. Thus, the trailing 12-month Return on Average Equity (ROAE) climbed to 37.3% in 9M-2023 (previously 16.1% in 9M-2022).

Sustained Credit Risk Management
UBA’s total Assets increased by 49.5% YTD from N10.9tn in FY-2022 to N16.2tn in the period under review. This was buoyed by the 39.5% YTD and 57.4% YTD growth in investment securities held by the Group and loans & advances to customers, respectively. Cash and bank balances also expanded by 58.2% YTD from N2.6tn in 9M-2022 to N4.0tn in 9M-2023. Despite the growth in the loan book, the Group’ failed to meet the Central Bank of Nigeria’s 65.0% Loan-to-Deposit Ratio (LDR). Notably, UBA’s LDR settled at 37.8% in 9M-2023 as deposits received outweighed loans given due to the Group’s approach to reducing risk exposure. Nonetheless, the Group’s shareholder’s fund grew by 92.8% YTD to N1.8tn in 9M-2023 (previously, N922.1bn in FY-2022). In terms of asset quality, the Group continued its strong drive for proper risk management in covering credit risks as UBA’s Non-Performing Loan (NPL) coverage ratio rose to 131.5% (previously, 115.6% in FY-2022). Lastly, the Group’s Cost of Risk (COR) climbed to 4.1% in 9M-2023 from 0.7% in the same period in 2022, following the 964.4% y/y increase in net impairment charge on loans and receivables.
 
Outlook: Strong Outing Expected to Continue..
This solid performance demonstrates UBA’s resilience and commitment towards delivering value and enhancing the confidence of its customers, stakeholders and the wider public, notwithstanding the competitive landscape and current global trend in the industry.

Hence, we expect UBA to continue its upward trajectory. This will be supported by sustained contributions from interest and non-interest incomes for topline and bottom-line growth. This is due to our belief that the elevated global interest rate environment will continue till the end of the year. Also, the Group’s solid operational environment management, despite challenging macroeconomic conditions, will ensure overall profitability for UBA. This, coupled with the Group’s solid dividend payment history, will drive positive investor sentiments towards the listed corporate.

Thus, we see real value and growth for the United Bank for Africa Plc as it improves its products and service offerings across the African and global markets. As a result, we project a N25.0/share Target Price (TP), with a 22.2% upside from the current price of N20.45. Thus, we maintain a BUY rating on the ticker.