UBA: analysts maintain Buy rating on solid earnings across board in a tricky Q1
In the first quarter (Q1), United Bank for Africa Plc result came strong than expected across the board in what analysts tagged a tricky period. UBA’s gross earnings revved up by 12% to ₦147.2 billion as lender led the industry in interest income growth.
Interest income expanded by 12% year on year, but impairment on credit losses charged increased significantly by 54%. Some analysts told MarketForces that banking sector performance is expected to slide in Q2 2020 to reflect the impact of the coronavirus pandemic.
Listed on the premium board on the Nigerian Stock Exchange, the ticker market capitalisation settled at ₦212.036 billion on May 8, 2020, on 34,199,421,368 shares outstanding.
Joshua Odebisi, analyst Vetiva Capital explained that the lender’s share price has lost 2.1% year to date, and currently trading at price to book ratio of 0.4times compare to the Tier-1 average of 0.5times. In Q1, UBA was able to bolster earnings. On improved earnings beat, Vetiva recommend the stock as a buy, though the equity analyst slashed its price target.
First quarter 2020 review
The group reported a 12% year on year growth in gross earnings to ₦147.2 billion which was significantly below Vetiva’s estimate of ₦151.9 billion. However, this topline performance was driven by an 11% year on year growth in interest Income to ₦109.1 billion and a 15% jump in non-interest income to ₦38.1 billion.
Meanwhile, the lender’s operating expenses jumped 15% year on year to ₦68.2 billion, thus outperformed Vetiva’s estimate of ₦67.6 billion. Then, pretax profit increased 8% to ₦32.6 billion while profit after tax grew 8% to ₦32.6 billion compare with Vetiva estimate of ₦32.8 billion. This scorecard resulted in an annualized return on average equity (ROAE) of 19.9% compared to 16.2% in 2019.
FY’20 forecast lowered despite solid Q1 performance
Analyst at Vetiva Capital recognised that the bank’s Q1 performance was solid across most line items. This was highlighted by the 15% rise in non-interest income to ₦38.1 billion and 11% increase in net interest income to ₦65.4 billion. Interestingly, Vetiva stated that UBA achieved this increase in non-interest income despite recording an 8% rise in interest expense.
Vetiva’s analyst note revealed that the growth in interest expense was mostly due to a 103% rise in interest paid on interbank deposits. This represents a reversal in the trend observed among other Tier-1 banks that recorded moderation in net interest income.
Vetiva explained that this increase in interest income was mainly a result of higher income from term loans to corporates and overdrafts to individuals.
“Going forward, whilst we expect the bank to continue to outperform peers in this regard, the unfavourable economic outlook and weaker yield environment are likely to drag earnings growth in the coming quarters”, Vetiva stated.
NPLs to worse, loan book to moderate
Vetiva’s analysts expect lender’s non-performing loans to worsen, though its loan book is also expected to moderate. UBA reported a growth of 10% year on year in loans and advances to ₦2.3 trillion, matching the trend seen in the industry in Q1, Vetiva noted.
The research equity analyst stated that although NPLs were initially expected to continue to improve. Vetiva expects the downturn in the economy to slow loans growth in Q2 and beyond while the rate of default will continue to rise in the coming quarters.
The firm equity research analyst expected NPL to worsen to a 6.5% level, a steep increase from 5.3% reported in 2019. It is also estimated that impairment will likely match 2019 levels at ₦18.1 billion as against the previous estimate of ₦9 billion.
Target price revised downward
Equity analyst at Vetiva stated that its expectation for 2020 led to a downward review of some key line items for UBA. Firstly, analysts lowered interest income projection for 2020 to ₦405.9 billion compare to ₦436.7 billion. Then, it estimated operating expenses would be settled at ₦264.7 billion compare to ₦270.4 billion the firm has envisaged.
Profit after tax projection was lower to ₦96.9 billion, thus resulted in expected earnings per share of ₦2.75 and dividend per share of ₦1.04. Vetiva downgrades the 12-month target price of the lender by about 8% to ₦12.45, from ₦13.50.
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UBA: analysts maintain Buy rating on solid earnings across board in a tricky Q1
