UBA’s Q2 19 bottom-line trend was strong, as PAT rose 39% yoy to NGN27.5bn (moderately below our NGN29.3bn forecast), driven by a 63% decline in net impairment charge on loans and other assets, as well as increases in trading income (up 94% yoy) and net fees and commissions (up 10% yoy). These offset a 10% yoy drop in net interest income due to margin weakness and a 7% yoy increase in operating expense. Relative to Q1 19, although PBT was 31% higher due to increases in non-interest revenues, net income was 5% lower due to a spike in the effective tax rate from 9% to 30%. Unchanged interim DPS of NGN0.20 was declared as expected, implying a yield of c3.4%. We note that UBA's Q2 bottom-line trend was much stronger than peers, which have posted earnings growth in the -18% (FBNH) to +25% (FCMB) range.
We reiterate our BUY rating with an unchanged TP of NGN14.50 (165% ETR), as we remain attracted to UBA's discounted valuation, high dividend yield and regional diversification. That being said, we note that recent regulatory changes in Nigeria present some risk for the banking group, particularly CBN’s recently-introduced 60% minimum LDR benchmark, as UBA closed H1 19 with a headline LDR of 48% for Nigeria. UBA trades at 0.4x FY19f P/B vs frontier peers’ 1.0x. Our top Nigeria bank stocks are Zenith and GTB.
Gross loans were flat but non-performing loans picked up relative to Q1 19, resulting in a 0.2ppt qoq increase in the NPL ratio to 5.4%. NPLs provisions coverage fell 0.4ppt qoq to 73% following some loan write-offs, however the group CAR improved by 5.4ppts to 29.0% (20.5% for Nigeria) which gives some comfort. Although total deposits were flat qoq, term deposits shot up by 24% qoq while current and savings deposits fell by 7% qoq, resulting in a 5ppt decline in the CASA ratio to 74%. This trend might explain the increase in cost of funds from 3.0% in Q1 19 to 4.6% in Q2 19, and could contribute to further margin pressure in subsequent quarters.
Nigeria was the major driver of group earnings in H1 19, as a 68% yoy increase in the region's net attributable profit resulted in an 8ppt yoy rise in its contribution to 58% of group (net interest income and non-interest revenues improved, while effective tax rate fell). For the rest of Africa and the world, PBT rose 35% yoy on aggregate; however a higher tax rate limited net income growth to 24% yoy. We also note that the rest of Africa led the decline in group margins, particularly Ghana (11% of PBT) where total income fell 21% yoy in H1 19 following a 25% yoy drop in its investment securities balance, which accounted for 61% of total assets in H1 18.
Table 1: Financial results summary
| NGNmn | Q2 19 | Q2 18 | yoy | Q1 19 | qoq |
|---|---|---|---|---|---|
Net interest income (NII) | 52,048 | 57,523 | -10% | 58,075 | -10% |
Non-interest revenues | 46,878 | 33,375 | 40% | 25,638 | 83% |
Total income | 98,926 | 90,898 | 9% | 83,713 | 18% |
Total opex | 57,643 | 54,025 | 7% | 51,944 | 11% |
Pre-provision profit | 41,283 | 36,873 | 12% | 31,769 | 30% |
Net attributable profit | 26,715 | 19,271 | 39% | 27,999 | -5% |
Net loans | 1,687,506 | 1,543,865 | 9% | 1,689,668 | 0% |
Total deposits | 3,510,237 | 2,901,204 | 21% | 3,530,890 | -1% |
NII / assets | 4.08% | 5.37% |
| 4.65% |
|
Cost / income | 58% | 59% |
| 62% |
|
ROA | 2.09% | 1.80% |
| 2.24% |
|
NPL ratio | 5.62% | 7.20% |
| 5.40% |
|
*NPL provisions coverage | 73% | 94% |
| 77% |
|
Source: Company accounts, Tellimer Research. *excluding any statutory reserves