Equity Analysis /
Nigeria

UBA: Revenues drive good performance; reiterate Buy

    Olabisi Ayodeji
    Olabisi Ayodeji

    Equity Research Analyst, Banks (Africa)

    Contributors
    Rahul Shah
    Ayodeji Dawodu
    Tellimer Research
    30 April 2019
    Published by

    Q1 19 net income rose 22% yoy to NGN28.0bn, exceeding our NGN20.0bn forecast. The earnings beat was largely due to better-than-expected revenues that exceeded our forecasts by 11% and the lower-than-expected tax rate of 5% vs our 15% expectation (which is likely to normalise through the course of the year, going by the historical trend). Headwinds included an increase in operating expenses (which was in line with expectations), an 18% yoy increase in net impairment charges from a low base (as the cost of risk remained under 0.5%), and a slight decline in gross loans versus end-FY18. 

    Reiterate Buy rating with an unchanged TP of NGN14.50 and 126% ETR. The quarterly performance was good, and marked a significant improvement on Q4 18, when earnings were held up by impairment reversals. Overall, we remain attracted by the group’s discounted valuation, high dividend yield and regional diversification, although we continue to prefer names such as Zenith and GTB, which should maintain their top-range revenue generation and operating efficiency. UBA trades at 0.4x FY19f P/B vs frontier peers at 1.3x.

    Revenue growth was better than most at 8% yoy (tier 1 banks have achieved 5% yoy growth on aggregate). The trend for UBA was largely driven by: 1) higher interest income from treasury bills, which contributed to the 8% yoy increase in net interest income; 2) a 12% yoy increase in net fees and commissions due to stronger e-banking income and transaction/account-related fees; and 3) a 20% increase in other operating income. Net trading and FX income held up better than expected, only falling by 9% yoy vs our expectation for a 20% yoy drop.

    Cost-to-income ratio fell 2ppts yoy to 62%, driven by the topline as operating expenses rose by 5% yoy in Q1 19, due to: 1) a 38% yoy surge in regulatory fees similar to the trend for peers; 2) a moderate 4% yoy increase in staff costs; and 3) a 20% yoy jump in depreciation and amortization. These outweighed decreases in other operating expense lines, which fell by 4% yoy on aggregate. 

    NPL ratio declined to 5.4% (down 1.1ppts versus end-FY18) as the NPL stock fell 16% qoq, while the NPLs provisions coverage was broadly flat at 77%. The decline in NPLs reflects the de-classification of UBA’s cNGN22bn exposure to 9 Mobile, which management had guided would occur during FY 19 following the receipt of some payments and the restructuring of the outstanding loan in Q4 18. 

    Total deposits were up 5% qoq, driven by current and savings account (CASA) deposits which rose by 8% qoq to account for 79% of total deposits (up 2.0ppts qoq), as term deposits fell 5% qoq. The 24% yoy improvement was above the sector rate of 11% yoy and was also driven by CASA deposits.