Expectation of strong earnings an insurance for stock YTD return: Ahead of the third quarter 2019 earnings season, banking stocks have continued to trade cautiously. However, there is high expectation for market rally as third quarter results are expected to reset the tone.

Meanwhile, at the early trade hour on Tuesday, United Bank for Africa Plc www.ubagroup.com stock open the floor at N6.00, the share price has declined more than 23% year to date  (YTD). At its peak, it had traded at N8.20, though it opened the year at N7.70.

The Pan-African Bank has a well-diversified assets book; and analysts target price for bank stock has been set at N14.14 down the line in 2019. This indicates that there is a strong upside to the current price if the assumptions in the estimate were to be right.

Though, analysts’ forecast revealed that the bank third quarter earnings is expected to be pressured by incidence of rising cost but they see the stock as compelling BUY for long term investors.

While analysts have identified points that would push third quarter results. Equity analysts’ notes indicate they don’t expect earnings to disappoint, largely.

Vetiva analysts think that in the third quarter of financial year 2019, UBA Plc. would deliver gross earnings of ₦164.6 billion, which translates to a 1% increase from ₦162.3 billion reported in Q2 driven by a 6% quarter on quarter increase in interest income to ₦112.6 billion.

Vetiva reckoned this as a consequence of an improved yield environment in Q3 and a 7% decline in non-interest income to ₦51.9 billion, mainly driven by a projected decline in Foreign Exchange Income.

Analysts stated that for the 9 months period in financial year 2019, interest income is expected to increase by 18% year on year to ₦317.6 billion.

Also, non-interest income is projected at ₦141.1 billion, which represents 33% year on year increase, giving a 21% increase in operating income to ₦309 billion for the period.

Conversely, operating expenses is forecasted to grow by 5% in the third quarter compare to previous quarter to ₦69.5 billion, driven by elevated cost of risk, with Q3 Operating profit coming in at ₦41.2 billion, to record a marginal decline in profitability.

Vetiva analysts noted that PBT has been forecasted to decline 4% in the third quarter against Q2 to ₦38.6 billion, but still comes in 38.6% higher year on year at ₦108.9 billion compare to ₦79.1 billion in 9 month period in financial year 2018.

While taxation is projected at ₦22.6 billion, rising 30% year on year to give a final PAT figure of ₦86.3 billion, with an EPS projection of ₦2.52.

Analysts expect UBA to struggle to surpass its H1’19 interest income scorecards due to the yield environment and a dearth of high-yielding dated bills within its portfolio.

They estimated that the bank would need to aggressively grow its loan book in H2’19 to brace FY’19 interest income, which Vetiva considers as a tough task given its 1.6% contraction in customer loans in H1’19.

The analysts nonetheless have modeled a 6.2% expansion in loan book and as such expect loan loss provisions to print at ₦9.0 billion, based on the sector weighting requirements, in compliance with CBN guidelines.

UBA’s non-interest income has continued to grow its contribution to gross earnings, from 27.4% in H1’18 to 30.3% as at H1’19.

Though analysts think UBA can maintain its H1’19 run rate for fees & commissions and remittances but view the superlative quarter on quarter growth in foreign exchange income as a one-off.

UBA’s focus on growing low-cost deposits should continue to yield fruit in FY’19, as H1’19 cost-to-income ratio moderated to 61.5%, Vetiva analysts reckoned.