Action/Event:
UBA‘s 1H18 results showed growth of 3% y/y in PAT to N43.6bn. On an annualised basis, PAT is tracking above our estimates by c.3%. The results showed an improvement in asset quality as credit losses declined y/y by 23%. Notably, operating expenses increased by 9% y/y leading to lower operating efficiency – operating income grew by 4% y/y. 1H18 ROE was 17.6%, improving marginally by 10bps y/y. The bank declared DPS of 50kobo.
Year-on-year net interest income growth:
UBA recorded net interest income growth of 9% y/y in 1H18 to N111bn. NIMs improved by 30bps to 7.8% q/q and NIMs inched 60bps higher to 8.1% for 2Q18. The significant rise in interest expense was driven by the growth in deposits, up 18.5% y/y to N2.9trn. On the interest income side, customer loans declined by 1.1% y/y and 6% YTD, in line with the trend seen across other banks. We link this to cautious lending as well as the possibility of loan repayment. However, the bank grew investment securities by about 15% y/y. On an annualised basis, NII is tracking behind our estimates by c.5% (FY18e NIMs: 7.4%).
NIR growth on a q/q basis:
NIR weakened by 5% y/y but showed 39% growth q/q. This was driven by a +100% growth in net trading income and 17% growth in fees and commissions income, stemming from the e-banking income line amongst others
Improved asset quality y/y:
We calculated cost of risk at 0.9% for 1H18 vs 1.2% for 1H17. This was supported by a 28.7% y/y decline in credit losses and speaks to an improved macro environment in markets like Nigeria. However, we observed a spike in credit losses in 2Q18 from N1.45bn to N5.4bn. While we await more information, we think this relates to the implementation of IFRS 9 regarding some exposures. Similar to 1Q18, the NPL ratio was 6.7%. Our FY18e NPL ratio is 5%.
Increase in cost to income ratio:
CTI increased to 61.6%, up 300bps y/y, currently our FY18e is at 60%. Operating efficiency slowed as opex growth of 9% outpaced operating income. UBA’s CTI compared negatively with GTB’s 38%, Zenith’s 52%, and FBNH’s 56% but better than Access’ 64.9% for the same period.
Valuation:
Currently, we have a BUY recommendation and a TP of N14.20. We would revisit our numbers following engagement with management.
By Stanbic IBTC Stockbrokers