UBA Profit Jumps 27% as Foreign Exchange Gains Rise
Kennedy Uzoka, UBA Plc.'s Chief Executive

UBA Profit Jumps 27% as Foreign Exchange Gains Rise

United Bank for Africa profit jumps 27% as FX gains rise. However, shareholders dividend expectation was slashed by 56% despite the strong earnings outing in financial year 2020.

For the financial year 2020, UBA proposed N0.35 final dividend as against N0.80 in 2019 though profit jumps 27% amidst tough operating environment and pandemic-induced macroeconomic stress.

That means, shareholders will receive 44% of 2019 dividend payment amidst rising inflation rate and bearish outing in the equity market.

Analysts at Vetiva Capital Management Limited said they expect the bank to return to regular dividend payout in 2021, forecast dividend per share of N1.41 for the year.

Though the investment firm revised 12-month target price for UBA share to N13.52 from N13.73 with 88% potential upside, it noted lender has lost 17% of its share price from beginning of the year to date.

In 2020, the Pan-African lender’s profit after tax printed at N113.765 billion in the pandemic year from N89.502 billion in the corresponding year in 2019.

A slew of equity analysts recognised that the bank’s outstanding profit scorecard was driven by solid gains foreign exchange (FX) income.

Banks with strong net foreign exchange positions are expected to report gains through the profit or loss accounts, and this pattern feature strongly among Tier-1 capital class.

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Despite the impressive profit performance, UBA management declared a final dividend payout of ₦0.35 per ordinary share ranked for dividend.

This translated to a 56% reduction when compare with ₦0.80 dividend per share in 2019; payout ratio of 16.3% compared to the bank’s historical average of 39.6%.

High Provisioning

In its equity note, Vetiva Capital hinted that the bank’s Q4-2020 provisions provide clue to management’s dividend reduction decision.

In Q4-2020 result, the group recorded a steep rise in provisioning, and analysts at Vetiva Capital considered this as a clue as to why dividend payout was so low.

UBA group reported a 201% jump quarter on quarter provisions to ₦16 billion in Q4-2020, which accounted for 58% of the bank’s total provisions for the year.

After the restructuring of loans which took place in Q2-2020, analysts said UBA was able to limit most of its provisioning and maintain steady momentum.

Explaining further, Vetiva Capital said with many of the restructured loans coming due in Q4-2020, many were written off or added back to stage 3.

“The bank’s decision to increase its retained earnings by 38% to ₦255 billion, after historical average increase of 13% could indicate a more cautious approach in anticipation of further loan losses in 2021”, analysts added.

In its audited report for 2020, UBA Plc reported a modest 5.7% year on year growth in interest income to N427.9 billion despite low interest rate environment in Nigeria.

Loan Growth Dynamics

Following the struggle to meet 65% loan target requirement by the apex Bank, UBA’s net loans to customers expanded 24.0% while interest on loans to customers grew 8.2%.

Meanwhile, analysts at CSL Stockbrokers highlighted that some of the loan growth may be attributable to local currency devaluation.

In the fourth quarter of financial year 2020, Pan-African lender reported 0.7% drop in interest income compared with Q3-2020.

At the time, the bank’s investment securities skyrocketed by 64.2% year on year while interest income on such securities went up only by 7.5%.

In its equity note, analysts at CSL Stockbrokers Limited explained the outturn is reflective of the depressed yield environment.

Consequently, the bank’s interest expense payment to providers of funds dropped off 8.0% year on year and 16.9% in the Q4-2020 compared with Q3-2020.

“While interest bearing liabilities were up 38.8%, interest expense on such loans declined 8.0% year on year”, analysts explained. 

Overall, the lender reported a net interest income growth of 16.9% year on year and 10.1% in the Q4-2020 compare with Q3-2020 result.

Non-Interest Revenue

In the audited financial statement, UBA reported that its net fee and commission income grew 3.3% and 49.3% quarter on quarter.

While fee and commission income jerked up 14.8% year on year, fee and commission expense grew strongly, up 45.1% on the back of growth in trade related and e-banking expenses.

Analysts noted the year on year growth in fee and commission was on the back of a 35.4% growth in credit related fees and commission.

This include a 14.1% growth in electronic banking income, a 35.4% growth in trade transactions income, a 25.0% growth in funds transfer fees and 18.1% growth in account maintenance fee.

So, other income – net trading and foreign exchange income and other operating income grew strongly, up 47.6% year on year and 10.5% in Q4 2020 compared with Q3 2020.

This growth was on the back of growth in gains and losses arising from trading and fair value change on fixed income securities which surged 84.6%.

In addition, foreign currency revaluation gain hits N6.2 billion in December 2020 compared with a loss of N10.2 billion in 2019 and growth in FX trading income went up 15.1%.

Impairment Charges

Impairment charge grew significantly, coming at 48.0% year on year to N27.0 billion in December 2020 from N18.3bn in December 2019.

This lifted annualised cost of risk to 1.1% compared with 0.9% in the same period of 2019.

“In our view, 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”, CSL Stockbrokers said.

The lender’s operating expenses however grew moderately at 15.0% year on year but declined 5.5% in Q4 compared with Q3-2020.

In the past 17-month, headline inflation rate in Nigeria has been on ascendancy and a slew of analysts have factored this in operating expenses estimates in the sector.

Analysts said the milder increase in operating expenses when compared with the modest growth of 17.7% in total operating income led to a marginal improvement in cost to income ratio (ex-provisions) to 61.3% in 2020 compared with 62.7% in 2019. 

Profitability

UBA Profit Jumps 27%: UBA pre-tax profit grew 18.5% year on year to N131.9 billion in 2020 while Profit after tax grew 27.7% to N113.8 billion.

This translates to annualised return on average equity of 17.2% reported compared with 16.2% for 2019.

CSL Stockbrokers said the bank’s management proposed a disappointing final dividend of N0.35k, bringing the total dividend to N0.52k.

This implies a dividend yield of 7.2% based on a closing price of N7.20 as the stock is down 10%.

Analysts at CSL Stockbrokers advised investors to buy UBA stock as they have a target price of N16.00/s, with an upside potential when compare with the current price of N7.20/s.

Top down analysis shows that the bank achieved 11% year on year  growth in gross earnings to ₦620 billion, falling behind ₦631 billion  projected by Vetiva capital.

This impressive growth in topline was actually spurred by a 6% growth in interest income to ₦428 billion, again falling behind ₦460 billion projected by Vetiva

This was in addition to a 24% jump year on year in non-interest income to ₦193 billion, beating Vetiva’s ₦171 billion forecast.

Analysts explained that the rise in non-interest income came as a result of a 15% increase in fees and commissions to ₦127 billion.

It also include85% year on year gains in fixed income securities and 161% uptick FX revaluation gains.

Explaining the increase in impairment charge, analysts observed a 48% increase as UBA booked ₦27 billion above ₦18 billion projected by Vetiva Capital.

This was mainly due to a 264% year on year spike in write-offs on loans during the year, which was most likely caused by the pandemic-induced economic decline.

Furthermore, UBA recorded 19% increase in operating expenses to ₦294 billion, with maintenance costs and AMCON charges contributing the largest portion of this increase.

As stated above, despite tough operating and regulatory pressures, the bank’s pretax profit expanded 18% to ₦132 billion, while profit after tax grew 27% to ₦114 billion.

Invariably, UBA earned ₦3.20 on every shares deployed in operation in 2020, which was 10% above ₦2.52 reported in 2019.

Also, its return on average equity settled at 18.0% as against 15.9% in the corresponding year in 2019.

However, Vetiva noted that despite the impressive profit performance, management declared a final dividend payout of ₦0.35/share.

This means a 56% reduction on when compare with ₦0.80/share in 2019, translating to a dividend payout ratio of 16.3%, compared to the bank’s historical average of 39.6%.

Vetiva Capital hinted that the bank’s Q4-2020 provisions provides clue to management’s dividend decision.

Analysts said Q4-202 results indicate a steep rise in provisioning for the bank, giving Vetiva Capital a clue as to why the dividend payout was so low.

In Q4-2020, the bank reported a 201% jump quarter on quarter provisions to ₦16 billion, which accounted for 58% of the bank’s total provisions for the year.

After the restructuring of loans which took place in Q2-2020, analysts said UBA was able to limit most of its provisioning and maintain steady momentum.

However, Vetiva Capital said with many of the restructured loans coming due in Q4-2020, many were written off or added back to stage 3.

“The bank’s decision to increase its retained earnings by 38% to ₦255 billion, after historically only increasing it by an average of 13% could indicate a more cautious approach in anticipation of further loan losses in 2021”, analysts added.

Furthermore, the firm noted the pandemic—induced slump caused a 1000% jump in impairment losses for the group’s subsidiaries to almost ₦6 billion from a net-positive return of ₦651 million in 2019.

“Due to the increase in loan losses, we expect hypothesize that the jump in retained earnings and lower dividend payout are a preemptive measure to shore up the bank’s position ahead of this year’s performance.

“However, we also note that PAT from these subsidiaries did improve by 25% year on year to ₦30 billion”, Vetiva Capital explained.

UBA Profit Jumps 27% as Foreign Exchange Gains Rise