United Bank for Africa Plc. (12 months ended December 2014)
Forex boosted NIR drives revenues higher
- United Bank for Africa Plc. (UBA) reported 9% YoY growth (9M 14: 12%YoY) in gross earnings to N283billion for the 12 months to December 2014. PBT was flat YoY (9M 14: -2%YoY) at N56.2billion while PAT rose 3% YoY to N47.9bn (9M 14: -10%YoY). On a FY basis, topline and PBT were in line with estimates while PAT was 11% ahead on a tax credit (N622million) in Q4 14.
- UBA declared a dividend of N0.10 which represents a payout ratio of 6.6% (FY 13: 28% on N0.50) and translating to a dividend yield of 2.5% at current price.
- After reaching a new quarterly high in Q3 14 our expectation for a further modest climb in interest income failed to materialise in Q4 14. Whilst earning assets grew in line with expectations, a sharper than expected cutback in asset yields to 7.6% (FY14E: 7.9%) was primarily responsible for interest income declining 7% QoQ to N47.3billion, 11% short of our estimates. However, in a recurring industry pattern with Q4 14 results thus far, trading gains which doubled from 9M levels to N32.6billion significantly boosted non-interest revenue. As with other banks, we believe the surge largely reflected forex gains as ‘other income’ maintained the quarterly run-rate while fee income dipped 2% QoQ. Overall, the 54% QoQ surge in NIR in Q4 14 overcompensated for interest income weakness and helped boost gross earnings 10% QoQ to N77.2billion, 6% above our estimates.
But costs pressures escalate even further though tax credits protect bottomline
- Though UBA’s interest expense shed 4% QoQ to N23.1billion, the elevated levels overall after jumps in the preceding two quarters meant that aggregate YoY growth far outpaced that in funding base (+4% both QoQ and YoY to N2.4trillion). Accordingly, WACF climbed a further 100bps to 5%. Q4 14 interest expense was 7% ahead of our estimates and helped put WACF above our FY 14 4% estimate.
- Operating expenses rose 12% QoQ to N36.2billion, 7% above our estimates primarily driven by a 19% QoQ jump in personnel expenses. Nonetheless the operating cost pressures were across board as dep. & amortization rose 12% to N1.5billion on new fixed asset acquisition while ‘other opex’ rose 8% to N20billion for Q4 14, largely reflecting the elevated regulatory cost environment, in our view. However, underpinned by topline expansion cost-to-income ratio was unchanged (-10bps) from 9M level at 67.4% (FY 14E: 67%).
- Provisions also rose some 14-fold after the surprising Q3 14 collapse. The recent rebound is more in line with our expectations for unsustainability of the benign Q3 charge, a view hinged on ongoing modest asset creation efforts and historical patterns of asset creation efficiency. Nonetheless, the N4.2billion charge in Q4 14 was still 16% behind our estimates and helped put FY 14 cost of risk of 0.6% (9M: 0.3%) 10bps behind our estimate.
- These diverse cost pressures jointly nullified the NIR-driven topline expansion and left PBT flat QoQ at N13.7billion, 7% ahead of our estimates. A N622million tax credit in the quarter helped PAT fare even better with the N14.3billion recorded in the quarter being 33% higher QoQ and 50% ahead of our estimates which had factored in an 100bps expansion in tax rate from 9M levels. Accordingly, while FY PBT margin of 20% is 100bps behind 9M level PAT margin of 17% is 100bps ahead. YoY, PBT margin is 200bps behind while PAT margin is 100bps behind.
Model revisions likely to see FVE cutback but rating unaffected
- In many ways, after concluding its right issue in Q4 14 the decision to drastically slash dividends reflects the need to be fortified against the generally tough operating environment although evidently to different extents for banks. Whilst we believe growth opportunities persist, the loss of cheap public sector funding means banks will have to find alternatives to drive growth even though regulatory restrictions on distributions also play a role. Adjusting for the narrower margins, whilst our expected topline improved still appear justifiable bottomline expectations are somewhat less sanguine.
Buy, sell or hold?
- Whilst this means potential cutback in our FV estimate, current PE of 2.6x and P/Bv 0.5x are very compelling and represent greater discounts from the time of our last report, in line with the contraction in market price. Hence, despite likely downward revisions to FVE we expect upside to market price to remain significant and for our BUY rating to remain intact.
Source: ARM Research