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UBA Plc: Q1’17 result puts bank on good year start

FOR one week running investors in the Nigerian Stock Exchange, NSE, have remained bullish on the shares of United Bank for Africa Plc (UBA) on the account of its impressive first quarter 2017 (Q1’17) results announcement previous week. Consequently, the bank’s stock ticked up about 18 percentage point increase in returns year-to-date (YtD), as the share price closed last weekend at N6.27, up from N5.50 pre-result announcement. YtD as at last weekend stood at 80.7%, one of the highest in the stock market. The bank released its unaudited Q1 2017 results, wherein gross earnings grew 37% year-on-year (y-o-y) with pre-tax profit expanding 41% y-o-y. The profit after tax, PAT, also grew by double-digit y-o-y (+62%) to N22.8 billion. The impressive results came on the backdrop of a 43% y-o-y growth in pre-provision profits to N72.6 billion. However, this indicated a significant spike in provision for loan losses by 489% y-o-y. But remarkably, brushing aside the spike in impairment charges and OPEX (+37% y-o-y), the y-o-y expansion in pre-tax profit was significant and completely swallowed the negative impact of the increased provision for bad loans and rise in OPEX. In terms of the split of pre-provision profits, both revenue lines contributed to the strong results. While interest income advanced by 55% y-o-y, non-interest income (NII) increased by 20% y-o-y. The huge jump in interest income to  N76.8 billion is believed to be due to the translation effect of a weaker Naira on interest income from UBA’s African subsidiaries. Also, growth in income from investment securities due to the high yield environment in Nigeria contributed to the rise in interest income. It is observed that the 62% acceleration in PAT was buoyed by a strong positive result of N1.5 billion on the other comprehensive income (OCI) as against a loss of -N2.3 billion in the corresponding period of 2016. Quarterly narratives less impressive However, quarter-on-quarter (q-o-q) gross earnings and pre-tax profit contracted 14.28% and 12.44% respectively. The q-o-q contraction is evident in the two key revenue lines: interest income and non-interest income, receding -5.2% and -39.2% respectively The steep q-o-q contraction in NIR in Q1’17 was driven by the 60.12% q-o-q drop in FX TRADING income. Also, fee incomes were down 2.8% q-o-q, though up 7.86% y-o-y due to improved commission on transactional services, pension custody fees, remittance fee income, credit-related and account maintenance fees. It is observed that interest income trended downward q-o-q due to asset yield pressures. But q-o-q narratives on impairment charges was hugely positive.   Though impairment charges grew substantially by 488.8% y-o-y to  N3.1 billion in Q1’17, it declined massively by 83.3% QoQ. Better deposit mix On the other hand, interest expense declined by 9.62% q-o-q, with cost of fund sliding 30 basis points (bps) q/q to 3.4%. Obviously, the q-o-q decline in cost of fund reflects better deposit mix, with current account and savings account components accounting for about 80% of deposit funding, which largely underpinned a 40 bps q-o-q improvement in net interest margin to 7.1%. The significant uptick in OPEX (10.2% q-o-q) and (37% y-o-y) was stoked by the growth across most line items in other OPEX (+53.12% y-o-y and 27.35% (q-o-q) attributable to banking sector resolution cost, occupancy cost, advertising and promotion, communication related expenses, security and cash handling expenses, and maintenance related expenses. Consequently, cost-to-income ratio expanded 549 bps q-o-q, and with a moderation of 61bps y-o-y to 63.38%. Total assets and net assets increased by 4.3% and 5.3% to  N3.7 trillion and  N472 billion respectively. Analysts excited with UBA No doubt UBA has started the year strongly, and investment analysts give credibility to its Management expectations for the rest of the year. Even analysts from rival group, FBN Merchant Bank, a member of the First Bank Group, had this to say about UBA’s 2017 first quarter: “The Q1 2017 PBT and PAT grew very strongly y-o-y and came in ahead of our expectations. As such we have increased our 2017-18E (expected) earnings forecasts by an average of 11% and our price target by 10% to N7.2. “Our earnings upgrades stem mainly from slight upward revisions to our income forecasts. Our forecasts imply an ROAE (Return on Assets Employed) for 2017E of 14.3%; though 180bps higher than our previous forecast, itis still some way below management’s guidance of 20%. “Even though we continue to see management’s guidance as aggressive, the gap between our forecast and guidance implies there is room for additional positive surprises over the course of the year. Positive surprises “Ytd (year-to-date), UBA shares have gained 29.3% (ASI – All Shares Index: -4.1%) but are still trading on a current P/B multiple of just 0.45x. Given the strong Q1 2017 results and the favourable outlook we see for the rest of the year, we continue to believe the shares are undervalued at these levels. “Our new price target implies upside potential of 23%. We reiterate our Outperform recommendation.” Some other analysts believe UBA’s Q1’17 was a positive surprise in many ways, outperforming consensus estimates. Analysts at Cardinal Stone Finance, a Lagos based investment house, stated: “UBA’s gross earnings increased markedly by 37.5% to  N101.2 billion, in line with our estimate of  N97.9 billion (+3.4% deviation). “After tax earnings rose by 31.6% to  N22.4 billion, in line with  our estimate of  N21.4 billion (+4.4% deviation) but outperformed consensus estimate of  N16.3 billion (+37.4% deviation).”


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