October 9, 2024/United Capital Research

United Bank for Africa Plc (UBA or the Group) published its H1-2024 earnings results last week, announcing an interim dividend payment of N2.00/share for H1-2024, compared to the N0.50k/share declared in the corresponding period of 2023. The Group posted a 39.65% y/y growth in Gross Earnings (GE) from N981.78bn recorded in H1-2023 to N1.37tn H1-2024. This increase was supported by sustained expansion in the Group’s interest income despite a decline in non-interest income earned for the period. We review UBA’s latest financials and highlight our FY-2024 expectations below.

Solid Earnings Profile

UBA reported a 134.32% y/y growth in interest income from N428.29bn in H1-2023 to N1.00tn in H1-2024, supported by the volume of interest-bearing assets and the elevated interest rate environment within the nation. In H1-2024, the Monetary Policy Committee (MPC) hiked the nation’s benchmark interest rate by a cumulative of 750bps from 18.75% at the start of the year
to 26.25% by Jun-2024.

Looking at the components of the interest income, we observed that most of the interest earned was from investment securities, accounting for 51.00%. Interest earned on investment securities increased by 149.10% y/y from N190.48bn in H1-2023 to N474.48bn in H1-2024. The bulk of this came from treasury bills and bond instruments and can be attributed to the upward trajectory of the yield curve during the period under review. This was followed by interest earned on loans and advances to customers andbanks, which contributed 44.00% and expanded by 126.56% y/y to N445.43bn in H1-2024 (previously, N196.61bn in H1-2023), following growth in the Group’s loan book.

On the flip side, we observed a 119.03% y/y climb in interest expense from N278.11bn in H1-2023 to N674.62bn in H1-2024. This is due to the growth in interest-bearing liabilities amid the hawkish monetary policy stance of the Central Bank. UBA expended N204.49bn (62.17% of the total sum) as interest incurred on customer deposits in the first six months of 2024. Notably, the Group’s deposits to customers grew by 34.91% in H1-2024 from the N14.89tn recorded in FY-2023 to settle at N20.09tn in H1-2024.

Nevertheless, the Group’s Net Interest Margin (NIM) rose from 6.80% in H12023to 8.30% in H1-2024 driven by improved earnings on treasury assets as well as improvement in asset pricing. The average yield on the Group’s treasury assets increased in line with market trends, further supporting the overall growth in yield on assets. As a result, UBA’s Net Interest Income increased by 142.57% y/y from N278.11bn to N674.625bn.

For non-interest income, UBA recorded a decline of 48.21% y/y from N505.85bn in H1-2023 to
N261.98bn in H1-2024. We observed that Trading and foreign exchange gains, which account for 27.00% of non-interest income, fell by 76.50% y/y to N98.00bn compared to the N418.00bn
recorded in the corresponding period of 2023. Looking at the sub-components, we noticed that
foreign currency revaluation and fair value gain on derivates lost 96.2% y/y to settle at N14.50bn in H1-2024 (previously, N377.70bn in H1-2023. The decline was largely due to maturities of underlying derivative contracts during the year. Meanwhile, fees and commissions contributed 68.00% to the Group’s total non-interest income for the period, growing by 99.01 y/y to N250.62bn. This growth in key transactional income reflects the Group’s enhanced offering and
robust digital structure. E-banking income accounted for the largest fee income (42.00%) in H1-2024, printing at N106.2bn. This represents a 108.00% y/y growth, underpinned by our sustained emphasis on technology-led innovation and best customer experience.

On operational efficiency, UBA navigated well amid the challenging work environment and macroeconomic woes. The Group’s Operating Expenses (OPEX) grew by 109.75% y/y from N226.37bn in H1-2023 to N474.80bn in H1-2024, buoyed by increases in AMCON levy, fuel, repairs and maintenance expenses, amongst others. Additionally, the depreciation of reporting
currency amid rising inflationary pressures across the different jurisdictions of operations compounded the increase in OPEX. However, the Group’s operating income was insufficient to offset the increases in its OPEX, increasing just by 19.47% y/y during the period. Consequently, the Group’s Cost-to-Income Ratio (CIR) climbed by 2182bps from 28.87% in H1-2023 to 50.69% in the period under review.

In all, UBA recorded a 0.51% y/y growth in Proft Before Tax (PBT) from N403.65bn in H1-2023 to N401.58tn in H1-2024. Following the 235.34% y/y climb in taxes paid for the period, the Group’s Profit After Tax (PAT) settled at N316.36bn, down 16.36% y/y, compared to the N378.24bn recorded in H1-2023. As a result, the Group’s Earnings Per Share (EPS) reduced from N10.95k in H1-2023 to N8.90k in H1-2024. Lastly, the trailing 12-month Return on Equity (ROE) fell to 25.20% in H1-2024 (previously, 41.20% in H1-2023).

Consequently, the Group declared an interim dividend of NGN2.00/share, the highest interim dividend compared to other tier-1 banks. This puts the Group’s dividend yield at 7.75%. Meanwhile, the qualification date for the dividend is 14-Oct-2024, while the payment date is set
for 22-Oct-2024.

Well-Balanced Asset Mix

UBA recorded growth across all its asset lines, maintaining a well-balanced asset mix with a resilient and diversified loan book. The Group’s total assets expanded by 37.21% YTD from N20.65tn in FY-2023 to N28.34tn in H1-2024, reflecting strong traction in the Group’s intermediation business and asset creation. Investment securities, which account for 41.00% of the total sum, grew by 55.20% YTD to N11.50tn in H1-2024, from N7.41tn as of Dec-2023, supporting the Group’s liquidity and overall profitability.

The Group’s loan book also expanded by 26.10% from N5.55tn recorded as of Dec-2023 to N7.00tn as of Jun-2024, while total deposit increased by 33.71% y/y from N17.36tn as of Dec-2023 to N23.21tn as of Jun-2024. As a result, the Group’s Loan-to-Deposit Ratio (LDR) shrank from 31.98% to 30.16%, failing to meet the Central Bank’s regulatory minimum of 65.00%, as the Group sought to reduce its credit risk exposure. The Group’s credit portfolio was well diversified across strategic economic sectors/industries, reinforcing the drive for moderate credit concentration risk and improved credit quality.

In terms of asset quality, UBA’s loan impairment charges declined by 59.32% y/y to print at N58.56bn in H1-2024 from N143.93bn in H1-2023. Also, the Group’s net impairment charge on
financial assets fell by 83.46% y/y to N1.66bn in H1-2024 from N10.01bn in the corresponding period 2023. The Group continued to benefit from the precautionary impairment charge booked
in FY-2023 by way of management overlay, causing an improvement in Cost-of Risk to 1.8% in H1-2024 from 3.1% in FY-2023.

Meanwhile, UBA’s Non-Performing Loan ratio (NPL) rose modestly from 5.8% in Dec-2023 to 6.2% in Jun-2024 due to further classification of some loan exposures. Lastly, UBA maintained its strong capital position. The Group’s Capital Adequacy Ratio (CAR) settled at 28.30%, 1330bps well above the regulatory limit of 15.00%. The robust capital position gives the Group the capacity for future growth.

Outlook: We Recommend a BUY Position

This solid performance demonstrates UBA’s resilience and commitment to delivering value and
enhancing the confidence of its customers, stakeholders, and the wider public, notwithstanding
the competitive landscape and current global trends 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 both topline and bottom-line growths. This is due to our belief that the Group will continue to leverage technology to grow its customer base and efficiently deploy funds to investment-grade assets for yield optimisation.

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 stock.

Lastly, the Group boasts of a robust and growing digital business with different e-banking channels. This is evident in the huge boost of the Group’s digital banking income, which rose by 107.80% y/y to N106.20bn. These gains will enable the Group to optimise its net earnings amid the accelerating inflationary pressure, currency devaluation, and increased regulatory-induced cost. Digital banking adoption will continue to drive digital banking transaction volumes and revenues amid increased technological penetration and adoption across the country.

That said, 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.

Click here to read full PDF copy of report