UBA Attracts Flood of Buy Ratings After Earnings Beat
Largely undervalued, Pan African lender, United Bank for Africa Plc (Ticker:UBA) attracts a flood of buy ratings from equity analysts representing various investors after earnings beat in the third quarter of the financial year 2021.
UBA optimised its statement of financial position as balance becomes cleaner with write-back of about N1 billion as against impairment on expected credit losses that ran to about N4 billion in the prior year.
The group also exhibit excellent performance in terms of costs of funds. A higher portion of funding sources was of low cost due to a heavy ramp-up in deposits amidst solid costs optimisation – which some analyst attribute to the management deliberate efforts.
Value at about N284 billion by investors in the local bourse, UBA share price closed at N8.10 on Thursday as against a fair value estimate of N14.63 placed by WSTC Securities Limited as analysts led by Abdulrauf Bello anchored growth expectation on the group’s fast-growing digital business.
Vetiva Capital analyst Joshua Adebisi sets N13.29 as the target price for the Pan Africa lender from N11.82 and revised expected earnings per share for the group to N4.03 from N3.31, a strong uptick from the group’s improved earnings profile.
Analysts now see a dividend payout ratio of 25% to click at N1 compared with N0.80, according to Vetiva capital equity analysts’ note.
For the financial year 2021, analysts at CardinalStone expected UBA group’s earnings to expand 6.6%, premised on higher quarterly yields following interest rate normalization from last year’s weakness and higher net fee income for local banks.
In its equity note on the Ticker: UBA, analysts at WSTC Securities expect two core value creation hinged on efficient customer acquisition which is positive for deposit growth and innovative financial products leading to increased retail penetration.
UBA 9-month financial scorecard shows that the Group’s current account, savings account grew markedly.
“We expect to see continued growth in funding and loan book over the medium term”, WSTC Securities analysts projected with a further expectation that there will be a marginal uptick in rates of risk assets in the near to medium term.
Based on the group position, WSTC keeps earnings per share (EPS) forecast for 2021 relatively unchanged at N4.04. Analysts said given the Group’s potentials for earnings growth and expected returns, they believe that the stock is significantly undervalued.
“In our view, we estimate the justified price-to-earnings at 3.62x. Therefore, we posit that the stock currently trades at a 70% discount to our fair value estimate, recommend a BUY”, WSTC affirmed.
United Bank for Africa sustained its growth trajectory in Q3 2021, with a 13% year on year gross earnings growth to N173.87 billion. Profit before tax witnessed a sky-high jump of 42% year on year to N47.17 billion in Q3 2021, while profit after tax rose 35% to N44.02 billion in Q3 2021.
Solid balance sheet growth was noted to be a key earnings driver in the period amidst increased regulations and pressures on Industry’s cash reserve ratio debits.
Despite the low-yield environment, UBA’s interest income grew by 9% year on year to N121.08 billion in Q3 2021, according to analysts’ reviews.
WSTC analysts said the bank interest income growth was achieved due to a 34% year growth in average interest-earning assets to N6.45 trillion as of 9M 2021 from N4.79 trillion as of 9M 2020.
Notably, analysts spotted that loans and advances to customers grew by 22%, in efforts to push volumes to offset the impact of weaker pricing, adding that improved current account, savings account ratio further support the group earnings.
According to WSTC Securities, the composition of the Group’s funding base improved materially from a current/saving ratio of 75% as of 9M 2020 to 82% as of 9M 2021.
The implication of this development is that the portion of the Group low-cost funding base grew on a year-on-year basis, analysts explained.
Therefore, interest expense declined by 11% year on year to N39.88 billion – translating to a 22% year on year growth in net interest income to N81.19 billion.
Given an improved outlook of key macroeconomic variables, the output of expected credit losses (ECL) assumptions resulted in an improved expectation of risk-asset performance, said WSTC Securities analysts.
Hence, the Group recorded an impairment reversal of N732 million in Q3 2021 versus an impairment loss of N3.67 billion in Q3 2020, its 9-month financial statement submitted to the local bourse as part of the requirement for listing shows.
Accordingly, UBA net interest income after impairment saw a meteoric growth of 30% year on year to N81.93 billion in Q3 2021. Equity analysts take a special view of the bank digital business which appears to have seen an improvement following a massive capital spend on its digital architecture.
Increased Investments in digitisation was noted to continue driving value as non-interest income grew by 23% year on year to N52.89 billion in Q3 2021, led by a 27% year on year growth in fee and commission income – which analysts said reflected the growth of the Group’s ebusiness.
In addition, net trading and foreign exchange gains grew by 73% year on year to N18.23 billion gain in Q3 2021 versus a N10.51 billion gain in Q3 2020.
In assessing the financial services boutique performance, equity analysts at WSTC Securities Limited spotted that the group cost optimisation efforts also boost its bottom line.
On the back of double-digit growth in net interest income (after impairment) and non-interest income, UBA’s operating income grew by 28% year on year to N119.97 billion in Q3 2021.
Meanwhile, operating expenses grew by 21% to N73.18 billion.
Effectively, the cost-to-income ratio declined by 400 basis points to 61% in Q3 2021. Accordingly, profit before tax spiked by 42% to N47.17 billion. In a similar trend, profit after tax grew by 35% to N44.02 billion.
“We lowered our impairments estimate to reflect the writebacks in Q3-2021, arriving at a new figure of N11 billion for the financial year 2021 from N20 billion previously set”, Vetiva Capital hinted.
Also, the firm moderated its operating expenses estimate to N246 billion from N253 billion to arrive at a pretax figure of N179 billion from an initial expectation of N147 billion and a profit after tax projection of N143 billion from N118 billion.
This translates to a return on average equity of 18.5% from 15.4%, with expected earnings per share of N4.03 from N3.3. In its equity report, Tellimer commented that UBA group’s net profit was better than expected, growing 34% year on year to N43 billion, ahead of the firm N35 billion estimate.
Analysts at Tellimer concluded that although the group did not disclose its results by geography, we believe its Africa (ex-Nigeria) operations contributed significantly to its positive performance, which has been the case for the past three years, while its Nigerian operations have slowed due to regulatory hurdles.
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