Interest Income Strengthens Growth in Gross Earnings: United Bank for Africa Plc sealed the year’s performance with an 11.44% growth in interest income, muting the 3.53% decline in non-interest income and thus resulting in a 7.04% growth in gross earnings to NGN494.04bn. Interest expense settled higher at NGN157.27bn, owing to increased borrowing cost and high-cost deposit liabilities.
As a result, net interest margin closed the year at 6.20%, pressured by the 50bps increase in cost of funds to 4.20%. Albeit operating expenses nudged higher by 4.05%, the 5.69% decline in operating income resulted in the 6.00% spike in cost-to-income ratio to 64.11%.
Profit Before Tax (PBT) and Profit After Tax (PAT) thus settled at NGN106.76bn and NGN78.60bn respectively, with return on average equity settling lower at 16.07%. Given its recently approved wholesale banking licenses for operations in London and Mali, we expect stronger contributions to global operations. Gross earnings and interest income are thus expected to grow by 10.93% and 7.21% respectively.
Balance Sheet Remains Well Diversified: UBA registered some expansion in its balance sheet in the 2018 financial year. Deposits grew by 22.89%, strengthening the bank’s ability to expand its loan book, which grew by 3.90%. Consequently, its loan to deposit ratio improved to 51.22%.
The group’s efforts at improving the quality of its loan portfolio yielded some positives as net impairment charges declined by 86.23%, shrinking cost of risk to 0.26%, while NPL ratio moderated by 20bps to 6.50%. We commend the improvement in the bank’s CASA mix and liquidity ratio to 76.93% and 50.28% respectively.
UBA’s funding base also recorded further strengthening as the drive for retail deposits continue to yield desired results.
The bank maintained its appetite for a well-diversified balance sheet with c.60.00% in liquid, low risk instruments. For 2019, we expect further improvement in its NPL ratio as its largest black swan asset, 9mobile, has finally been resolved.
Capital Adequacy Ratio (CAR) Increases Post IFRS 9 Implementation: Despite the NGN48.64bn equity haircut, resulting from the implementation of IFRS 9, UBA’s capital adequacy ratio settled at 23.60% at year end, inching higher by 1.61%, and still comfortably above the regulatory minimum of 16%. We expect CAR to remain at comfortable levels next year as the strategy of maintaining a strong capital base remains unchanged.
African Franchise Yields Desired Results: The contribution of its African operations (excluding Nigeria) to gross earnings increased to 48.00% in 2018. In line with its strategic vision to grow revenue and its franchise across the African continent, deposits from customers across Africa, (excluding Nigeria), also grew by 16.19% to NGN1.24trn, as the drive for retail banking penetration across Africa continues to yield desired results. With the recent branch opening in Mali London, we expect improved contributions to gross earnings from operations in Africa and the rest of the world.
Recommendation: We expect an uptick in the EPS of UBA to NGN2.46 from N2.20, premised on stronger expectations for profit at the end of the year. With an expected PE of 3.94x, we arrived at a Dec.2019 target price at NGN9.69. Compared to its trading price on the 17 th of April 2019, this presents a 49.10% upside potential. We therefore recommend a BUY.
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Investment Banking/Meristem Capital Limited
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