Analysts Express Positive Disposition towards UBA Earnings Outlook
Despite multiple pressures facing with virus-impacted Nigerian economy, analysts have expressed positive disposition towards the United Bank for Africa Plc (UBA) earnings outlook.
Equity research reports from a number of leading investment firm are projecting higher earnings expectation for financial year 2020.
The rather bullish analysts anchor their moods on the lender’s profitability performance in the third quarter of 2020, and projected a solid year end result.
Following its positive foreign currency position, UBA’s Pan-African footprint remains key factor that supported its performance third quarter earnings beat.
In the third quarter 2020, UBA delivered growth in pre and post-tax profit by 36.2% QoQ and 128.2% QoQ respectively.
Basically, Q3-2020 standalone PAT was up 31.4% on account of higher net-interest income, higher operating expenses and lower tax expense.
The faster expansion in profit after tax reflected a lower effective tax over the period, having dropped 94.6% between Q2 and Q3-2020.
Precisely, analysts at ARM Securities Limited noted that the higher interest income, lower operating expenses as well as a decline in loan loss provisioning anchored the improvements in quarterly numbers, outweighing the sharp fall in non-interest revenue by 37.8% QoQ.
Interest income expanded 15.6% between Q2 and Q3-2020, operating expenses plunged 17.6% and loan loss provision was reduced 29% in the same period.
On interest income, the bank recorded a 25% increase in earnings on investment securities as well as higher interest income on loans to customers (+6.1% QoQ).
Akin to other banks, ARM Securities explained that the recognition of AMCON levy in H1 2020 in line with the requirements of IFRIC 21 levies, drove operating expenses southward.
Meanwhile, analysts believe that the steep fall in NIR reflects a decline in net fee income and a lower trading income– a fallout of FX revaluation losses (-102% QoQ) and 82% declined in gain on FX derivatives.
Net fee income plunged 11% between Q2 and Q3-2020, trading income slowed down 60% and there was 102% knocked off in FX revaluation in the same period.
Cumulatively, in the 9-month of 2020 the lender reported a decline in pretax and after tax profit by 8% and 5.5% respectively.
UBA profit level equates to 82% and 92% of ARM Securities estimates for financial year 2020.
Precisely, analysts noted that lender’s interest expense came in below estimate, 67% lower than projections while non-interest revenue was higher than expected.
Explaining, analysts stated that key drivers of the lower bottom line were combination of higher operating expenses and loan loss provisioning.
To start with, UBA financials indicated that operating expenses grew by 19.2% year on year reflecting higher AMCON levy (+12%), premises maintenance costs (+20% ), contract services (+52%) and personnel cost (+21%).
So, 19.2% increase in operating expenses, 12% increase in AMCON levy, more than 20% uptick in premises and maintenance cost, 52% growth in contract services and 21% rise in personnel cost impacted UBA Plc performance.
Consequently, cost to income ratio expanded by 482bps to 65.6%.
In the period, lender’s loan loss provisioning expanded by 72.2%, translating to a higher cost of risk of 0.6% over 9M 2020.
Over 9M 2020, analysis showed that lender’s net interest margin remained pressured, declining 69bps to 3.8%, owing to a faster decline in asset yield that plunged 193bps compared to 151bps year on year declined in cost of funds.
It was observed that UBA’s net interest income rose by 17.1% on the back of higher interest income that rose 6.5% and 5.7% reduction in interest expense.
To buttress, ARM Securities Limited stated that expansion in interest income reflects higher interest earnings on loans and advances.
UBA grew loans by 15.6% year to date to N2.38 trillion. On the other hand, 11.4% drop in interest expense on deposits from customers accounted for the decline in interest expense.
Elsewhere, non-interest revenue (NIR) rose marginally by 0.6% as 11% declines in net fee income muted increase across FX trading (+2%), gains on derivatives (+115%), as well as FX revaluation gains (+1997%).
As a result, ARM Securities made adjustment to its expectation for 2020.
The firm said 9M 2020 interest expense is running below its 2020 estimate, therefore analysts made a downward adjustment to interest expense to N177 billion from N194.6 billion.
Also, the firm forecasted a slight increase in non-interest revenue to N131.6 billion from N130.5 billion.
ARM said the impact of its adjustment is an increase in PAT by 9% year on year to N96.9 billion over 2020 as against 6% moderation in PAT previously forecasted.
VETIVA
Vetiva Capital Limited however explained that the higher operating expenses recorded was a holdover from the one-off expenses reported in Q2, as the line moderated 11% quarter on quarter to ₦72 billion.
Consequently, PBT fell 8% to ₦90 billion, while PAT printed at ₦77 billion as against Vetiva estimate of ₦62 billion, yielding a 9M earnings per share of ₦2.16.
Analysts at Vetiva however maintained that UBA is on course for positive Q4 performance on weak Q4-2019 base
Whilst UBA’s Q3-2020 profit performance was weaker than Q3-2019, analysts stated that this was mainly due to increased provisions in Q2 and Q3.
Looking forward, Vetiva Capital anticipates a stronger Q4 this year, as Q4-2019 performance was particularly weak.
UBA had reported only ₦7 billion in PAT in Q4-2019 due to extremely high provisions on the back of aggressive loan growth.
“We forecast milder provisioning in the final quarter of the year, and project ₦18 billion as the final figure”, Vetiva stated.
Furthermore, analysts said following Q3 run rate, Vetiva Capital now expects operating expenses growth to soften, as one-off costs that were recognized in Q4 of 2019, this year appeared in Q4.
Drilling the numbers, Chapel Hill Denham said higher net interest income was supported by the continued moderation of the bank’s cost of funds to 3.2% from 4.0% in 2019.
This was because of low-cost deposits, which account for 76.2% of total deposits grew by 40.8% year on year in Q3-2020.
The firm also observed that lender’s trading income line item improves on accounts of foreign exchange gains.
Specifically noted is the fact that trading income jerked up 253.5% owing foreign exchange translation gains following currency devaluation earlier in the year.
Despite much pressure witnessed in the period, analysts said UBA maintained robust balance sheet growth.
In the period, UBA gross loans grew by 8.8% quarter on quarter and 20.6% year to date in Q3-2020.
In its review, analysts at CSL Stockbrokers said growth in impairment charge was largely due to an expanded loan book and expected deterioration due to the current macro conditions in Nigeria and many other countries it operates in.
“We however expect cost of risk to remain minimal given that many strained loans will be restructured in the near term”, analysts added.
Read Also: UBA Plc: Analysts at GTL maintain BUY rating, say stock trades at discount
On this, CSL Stockbrokers set target price at N16.00/s for UBA with a BUY recommendation.
Chapel Hill Denham hinted that despite this impressive growth, the bank’s loan-to-deposit ratio (LDR) as calculation, still remains weak at 41.9% in Q3-2020 making the bank vulnerable to further LDR penalties during the year.
But, lender’s NPL ratio remained relatively flat at 5.2% in Q3-20 from 5.3% in the financial year 2019.
Stage 3 loans increased by 38.0% quarter on quarter as the expected loan loss allowance increased, due to the weak macro outlook especially for the oil and gas and manufacturing sectors.
