UBA’s Q1 21 net attributable income rose 25% yoy to NGN36bn, exceeding our NGN27bn forecast. The earnings beat was largely due to lower-than-expected operating expenses (below our forecast by 6%), as we expected inflationary pressures and the waning of cost benefits realised during the pandemic, to limit operating efficiency. The group's impairment charge was also better than expected (42% lower than our estimate), on the back of larger loan recoveries recorded in the quarter. Finally, the effective tax rate was lower-than-expected at 6% vs our estimate at 17%. We expect the tax rate to normalise through the course of the year, going by the historical trend.
Furthermore, the bank's operating income was in line with our forecast (14% yoy actual growth vs 13% expected). The group recorded strong growth in net interest income, owing to lower cost of funds. Non-interest income also drove profit growth, particularly from e-banking revenues (up 50% yoy). Interestingly, GTB (the only other bank in our coverage to have released results so far) also recorded a large growth in e-banking fees. We recall that at the beginning of 2020, the CBN reduced fees the banks could charge customers, causing a downward pressure on e-banking income despite increased transaction volumes. Now that both 2020 and 2021 capture the effects of reduced transaction charges (base prices are the same), we expect increased transaction volumes to translate more directly to higher fee revenue.
Reiterate Buy with a 12M TP of NGN12.00 (71% ETR)
We remain attracted to UBA, given the group's discounted valuation, its geographically diverse operations, profitable subsidiaries outside Nigeria, as well as its increasing focus on retail banking. UBA is currently trading at a 2.2x FY 21f PE and 0.3x tangible PB, a discount to the average 3.1x FY 21f PE and 0.5x tangible PB for our Nigeria banks coverage.
UBA’s net interest income (NII) increased by 14% yoy (1% qoq), due to lower funding expenses associated with its improved deposit mix (low-cost deposits account for 83%, compared to 72% in Q1 20. The group’s NII performance was better than GTB (the only other bank in our coverage to have released results so far), whose net interest income declined on lower yields from debt investment securities.
Non-interest income grew 13%, supported by e-banking fees (up 50% yoy) and FX trading income (up 31% yoy). However, it declined 20% qoq, as fees earned on e-banking, credit-related transactions and account maintenance were lower compared to Q4 20.
Net loan impairment charge was down 38% yoy, as the group recorded lower charges and booked larger recoveries on previously written-off loans. This resulted in an improvement in annualised cost of risk to 0.2% (vs 0.3% in Q1 20).
Cost efficiency improved, as cost/income ratio dropped 2.0ppts to 60%. However, the group’s operating expenses were up 10% on higher AMCON costs (because of a higher total asset base), contract services and ICT expenses. Cost efficiency decreased qoq, although we note that Q4 20 did not include AMCON costs. (UBA tends to recognise the full costs in H1).
Taxes dropped 8% yoy, as the group benefited from favourable changes in Nigeria’s excess dividend tax regime under the new Finance Act.
Annualised ROE improved slightly by 0.5ppts to 19.9%, however annualised ROA weakened 0.1ppts to 1.8%.
Mandatory cash reserves with central banks increased 5.0ppts qoq during the year, which we partially attribute to the continued discretionary CRR debits by the CBN in Q1 21, in spite of the special bills that were introduced.
The group made no disclosures on key ratios or their components, such as its NPL ratio, provisions coverage, capital adequacy and liquidity ratios.
Gross loans/deposits dropped 5.8ppts yoy to 49%, as the 35% yoy growth in customer deposits outweighed the 21% growth in gross loans.