Vetiva Downgrades UBA Plc.’s Estimates over Core Earnings Pressure
Analysts at Vetiva Capital have downgraded United Bank for Africa Plc.’s (UBA) estimates over weak earnings expectation in 2021, slashed the stock 12-month target price to N13.13 from N13.52.
Profit expectation for the financial year 2021 was reduced by Vetiva Capital, citing inability of the bank to earn more from its interest income line, the bank core earning line.
Meanwhile, UBA is noted to have lost 18.5% of its opening share value from the beginning of the year, possibly due to shareholders negative reaction to dividend cut for the financial year 2020.
Following the UBA Board of Directors decision to reduce dividend payment to shareholders in 2020, analysts said they are expecting a lower dividend per share in 2021, from N1.50 to N1.40.
So, due to weaker than expected earnings outlook, Vetiva analysts reduce the bank earnings per share (EPS) to N3.46 from N3.78 the firm had projected for 2021.
At the market capitalisation of N241 billion, Heir holdings remain majority shareholders in the bank with 5.09% of the share outstanding of 34.2 million.
In the first quarter of 2021, UBA posted a 6% year on year growth in gross earnings to ₦155 billion, underperforming Vetiva’s estimate of ₦169 billion.
Analysts said the growth was driven by non-interest income, which grew 23% year on year to ₦47 billion on the back of a 24% rise in fees and commissions,
In addition to that, the bank interest income came flattish at ₦109 billion, below ₦119 billion estimated by Vetiva Capital analysts for the period.
However, lender’s net interest income swelled up 14% year on year to ₦74 billion, representing a tiny shy away from ₦73 billion projected by analysts, thanks to a 22% slump in interest expense, which printed at ₦34 billion as against Vetiva expectation of ₦45 billion.
Analysts said the drop in interest expense was particularly significant as it was driven solely by a 30% year on year drop in interest paid on deposits to ₦19 billion. Amid this, it was noted that impairment charges booked by UBA fell 23% year on year to ₦2 billion – 20% below analysts at Vetiva Capital estimate.
The bank operating expenses thus expanded by 16% year on year to ₦79 billion, driven by a 33% year on year increase in Asset Management Corporation (AMCON) charges to ₦7 billion.
Consequently, the lender’s delivered an improved bottom line as profit before tax payments obligations jerked up by 24% year on year to ₦41 billion. Meanwhile, profit after tax declared by the bank grew 27% year on year to ₦38 billion, underperforming Vetiva’s ₦40 billion projection, yielding an annualized return on average equity of 23.8%.
Gross Loans and Advances
In the first quarter of 2021, UBA gross loans and advances grew by 8% year to date to N2. 9 trillion. Although impressive, analysts said, this was lower than the growth recorded in a similar period last year. In the first quarter of 2020, despite the pandemic, the bank expanded gross loans and advance 9%.
Vetiva said UBA eventually reported a 24% growth in gross loan assets in the financial year 2020 amidst a favourable interest rate environment and debt restructuring. However, analysts said they do not expect this to be repeated in 2021 because of the uptick in borrowing cost and less aggressive credit expansion.
In addition to that, there appears to be a weak customers’ appetite for debt amidst tepid economic growth performance and uncertainties. Thus, analysts at Vetiva Capital said they forecast 15% year on year growth in gross loans and advance to N3 trillion for the financial year 2021.
FY2021 profit forecast lowered despite solid Q1 performance
Vetiva Capital recognise that the bank’s Q1 performance was impressive across several line items, most especially the 23% rise in non-interest Income to ₦47 billion and 14% increase in net interest income to ₦74 billion.
However, the bank’s interest income fell significantly short of expectations, as income from investment securities declined 7% year on year to ₦38 billion, saved only by the steep decline in interest expense.
Going forward, analysts at Vetiva Capital said they expect to see slightly higher interest expense charges, especially on customer deposits, as interest rates are expected to trend higher.
Therefore, analysts said they have lowered net interest income forecast to ₦288 billion from ₦293 billion and also revised the full-year estimate for the bank’s operating expenses to ₦309 billion from ₦304 billion.
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This translates to a net profit after tax estimate of ₦123 billion for the financial year 2021 from an initial estimate of ₦131 billion.
Vetiva Downgrades UBA Plc.’s Estimates over Core Earnings Pressure
