Analysts Guide on Entry Price for UBA Stock, Expect Dividend Raise
While United Bank for Africa (UBA) stock market price closed at N7.15, equity analysts at Cowry Asset Management Limited suggest N6.50 to N7.50 as entry price for the tickers with a 12-month target price of N9.50.
At the target price set, it could be a hard bite for UBA stock to trade break out but not totally impossible as fundamental continues to improve around investors sentiment.
The group dividend payment has been volatile for the past 10 years. With its low payout ratio, the dividend payment is well covered by its earnings.
In 2020, UBA’s performance score was 73.08% investment grade, and given its consistent positive performance with a long-term average rating of “BB” as well as an upside potential of 29.25% on its share price, analysts graded the ticker buy.
Explaining the rating, Cowry Asset said UBA sustained positive performance for the 7th consecutive year, recognised that 2020 financial performance as quite impressive given the recorded increase in all its income lines.
“The bank which continues to position itself as a leading Pan-African bank successfully grew its profit after tax (PAT) for the seventh consecutive year”, analysts said.
Specifically, United Bank for Africa grew its gross earnings year-on-year by 10.82% to N620.38 billion, according to its audited report for 2020.
Also, it interest income increased by 10.82% to N427.86 billion in 2020, from N404.83 billion in 2019 amid increasing loans to customers.
Notably, net interest income which rose by 16.94% to N259.47 billion in 2020 from N221.88 billion in the financial year 2019, was supported by a 7.96% year-on-year decline in interest expense – despite the significant rise in customer deposit base – to N168.40 billion amid low yield environment.
Perusing the non-interest income figures, analysts at Cowry Asset said they saw net fee and commission income rose by 3.25% to N82.6 billion even as net trading and foreign exchange income increased by 57.96% to N59.45 billion in 2020.
On the cost side, operating expenses surged by 15.05% to N249.85 billion due to higher staff costs and maintenance costs.
Nonetheless, with the all-around increase in the income lines- which drove cost to income ratio lower to 64.08% from 67.42%) and under-tax provision, profit after tax ballooned y-o-y by 27.70% to N113.77 billion in FY 2020.
Strong Balance Sheet
UBA’s return on average equity stood at 19.92% in 2020, rising from 16.37% in 2019 as incomes from investment securities as well as term loans advanced to individuals and corporates grew in the review year.
The group significantly increased its assets in investment securities by 64.21% to N2.58 trillion in 2020, from N1.57 trillion in 2019.
As the bank continued to maximize wealth for its shareholders, the net asset value jumped to N20.32 from N16.92 in 2019 even as its capital adequacy ratio (CAR) stood at 22.4%, well above the regulatory requirement of 15%.
Efficient Operations outside Nigeria Boost Profitability
Analysts said UBA was able to increase its profitability given its growing operations across African countries, it now operates in 20 African countries including the United Kingdom and the United States.
Specifically, revenue from the Rest of Africa subsidiaries rose by 39.57% to N232.06 billion (constituting 37.41% of the group’s gross income) from N166.27 billion in 2019.
Given its relatively efficient operations in the Rest of Africa, profit from this space rose year on year by 43.58% to N59.28 billion -constituting 52.10% of the group’s profit after tax.
Net Long Position Reduces its Risk on Foreign Currency
Amidst the risk of fluctuating local currency, naira, the Pan-African held a long position in foreign currency which technically placed it in a better position against the local currency risk.
In the equity report, Cowry Asset said as UBA further widens its reach in the Africa continent, more of its funds get exposed to foreign currency volatility, especially the third currency US dollars.
Hence, the need to hedge against this risk became necessary, according to analysts. A breakdown from the bank’s books showed that its exposure to a depreciation of the Naira against the USD is minimized given its net long position which stood at USD 671.90 million.
The bank long position at the period comprises SWAP & Forward Contracts arrangement worth USD 500.41 million.
Analysts Expectation
“We expect UBA’s positive performance to be sustained in 2021 amid relatively high yield environment and rising contribution from the Rest of Africa amid operational efficiency”, Cowry Asset said.
It added that e-banking income is expected to increase as the new normal work practice propels electronic transactions. Ultimately, analysts said they are expecting an increase in dividend payout in 2021.
UBA Takes Conservative Stance on Dividend Payout
In what analysts call an unexpected move, UBA lowered its cash reward to investors as it reduced the total dividend payout by almost 50% to N0.52k in 2020 from N1.00k which it paid in 2019.
Cowry Asset said the conservative dividend payout was despite the positive performance it printed in the year under review. According to the bank, Management took a conservative approach to retain cash in order to further strengthen its capacity to deliver better returns amid COVID-19 pandemic uncertainties.
Increased Deposits Driven by CASA, Results in Low Cost of Funds
Notably, UBA’s total liabilities continued to soar at a relatively cheaper rate as more deposits flowed into its Current and Savings Accounts (CASA), analysts said. Explaining, Cowry Asset said CASA, as opposed to term deposits, is usually associated with relatively low-interest expense.
Specifically, customers’ deposits rose by 48.09% year on year o N5.68 trillion as CASA, which constitutes 67.41% of the customers’ deposits, increased to N3.83 trillion in the review period.
Hence, the bank’s cost of funds came significantly lower at 2.9% in 2020 from 4.0% in 2019 despite the significant rise in deposits. The bank’s total funding mix rose by 36.95% to N7.69 trillion from N5.62 trillion it printed in 2019.
Of the total assets, analysts said N2.55 trillion (or 33.19% of total assets) was allocated to risk assets (Loan and Advances) – higher than N2.06 trillion (36.67%) as of 2019 – which translates to a loan to deposit ratio of 38.27% for the bank, down from 43.20%, as it was less aggressive on giving out loans to customers despite growing its deposit base.
Meanwhile, the lender’s cost of risk rose to 1.25% in 2020 from 1.03% in 2019. Given the lower risk assets, the non-performing loan ratio fell to 4.70% in 2020, below the regulatory requirement of 5%, from 5.30% in 2019.
Also, given the lower loan to deposit ratio, analysts at Cowry Asset said they saw more assets sterilized in CBN’s vault as “mandatory reserve deposits with the central bank”. This amount increased by 32.53% to N1.10 trillion in 2020 from N832.11 billion in 2019.
Analysts Guide on Entry Price for UBA Stock, Expects Dividend Raise
