UBA’s Q2 21 net attributable profit rose 57% yoy to NGN22bn, exceeding our NGN16bn forecast. The group recorded strong interest income from interbank lending and correspondent banking activities, which were the key drivers of the 37% yoy growth in net interest income. However, like its peers, UBA's trading and FX revenue was woeful, with the group recording a loss of NGN1.4bn – compared with the large gains (NGN26.1bn) recorded in Q2 20 – as a result of declining yields and a devalued naira.
The group's operating efficiency improved, with the cost/income ratio falling yoy to 65%, on the back of cost-cutting initiatives that saw big reductions in salaries, occupancy costs and donations. The management's cost/income goal remains 60% for FY 21.
The group's probability for the quarter also improved, with an uptick in both ROA and ROE, by 2.8ppts and 0.2ppts yoy, respectively, to 12.2% and 1.1%. And UBA declared an interim dividend of NGN0.2/share (up 18% yoy and implying a yield of 2.6%), which is line with the years prior to 2020. Last year's payout was affected by the decision of central banks in some of the group's key regions to restrict dividends due to Covid.
'Rest of Africa' operations becoming the strongest contributor
UBA group's positive performance in H1 can largely be attributed to its African subsidiaries outside Nigeria. Revenues from other African business grew 32% yoy, with PBT also growing 57% yoy. However, revenues for the group's Nigeria business declined by 10% yoy (PBT +15% yoy). The contribution of other African subsidiaries to revenues and profits grew to 44% and 68%, respectively, while Nigeria's contribution declined to 53% and 28%.
Management noted it is taking steps to improve the profitability of its Nigerian business, which has recorded lacklustre growth in profits in recent years (3-year CAGR of 7% as at FY 20) compared with the rest of Africa operations (3-year CAGR of 21%).
Reiterate Buy with a 12M TP of NGN12.00 (67% ETR)
We remain positive on UBA, given the group's discounted valuation, geographically diverse operations, profitable subsidiaries outside Nigeria, strong capital and liquidity ratios, and increasing focus on retail banking.
UBA is currently trading at a 2.2x FY 21f PE and 0.34x tangible PB, a discount to the average 3.9x FY 21f PE and 0.52x tangible PB for our Nigeria banks coverage.
Key management call takeaway: Loan growth and guidance
Management is still targeting ambitious gross loan growth of 20% in 2021, compared with just 2% ytd.
We believe this is far-fetched, given macroeconomic fundamentals remain sluggish and do not support aggressive loan growth without commensurate risks to credit quality.
However, management noted it is seeing a pick up in economic activities in most of UBA's African markets, with increased demand for consumer lending, manufacturing, general commerce and infrastructure.
Q2 21 results: Key positives
UBA’s net interest income grew 37% yoy on the back of a surge in income from interbank activities (up 269% yoy), and stronger income from investment securities (up 24% yoy).
Operating costs dropped 7% yoy, as the group cut back hugely on personnel expenses, occupancy costs and donations. As a result, the cost/income ratio improved by 6.9ppts yoy to 64.6%.
Net loan impairment charges were down 77% yoy in Q2 21, taking the cost of risk down to 0.2%, from 0.8% in Q2 20.
The NPL ratio improved to 3.5%, from 4.7% in FY 20. The group’s provision coverage also improved, to 96% from 89% in FY 20.
The group’s capital adequacy ratio remains robust, with CAR improving 1.5ppts ytd to 23.9%. The liquidity ratio also improved, from 44% in FY 20 to 58.3%.
Non-interest income fell by 34% yoy as the group booked trading and FX losses to the tune of NGN1.4bn. This compares with the strong gains of NGN26.1bn in Q2 20.
Lending activities slowed during the quarter, as the group’s gross loan book declined 4% qoq.