UBA Plc: Investment outlook brightens after beating estimates

As investors get hooked to the investment outlook for the rest of the year, some analysts’ positions would be coming handy, especially as rebalancing and bargain hunting takes center stage in the Nigerian Stock Exchange. One of the key stocks to watch is the United Bank for Africa Plc, UBA. The stock may have done very well so far this year at the backdrop of its first quarter and first half 2017 results, but like all other stocks in the banking sector investors have started swinging on what the future holds in both short term and medium term. Recent analysts positioning on UBA has also been very favourable, but even at that the bank still outperformed estimates. •Kennedy Uzoka, MD/CEO UBA Plc For instance analysts’ estimates on Gross Earnings and Profit Before Tax were for H1’17, were N205.8 billion and N51.6 billion, but the actual performance turned out far more impressive at N222.7 billion and N57.5 billion respectively. Similarly, whilst analysts at Cardinal Stone Finance Limited, a Lagos based investment house, posited an estimate of N51.8 billion for the bank’s ever increasing non-interest income, the actual turned out to be far higher at N67.8 billion, as the bank drove its e-banking platform to new levels. Apparently, at the backdrop of the impressive H1’17 results as well as the competitive advantages enjoyed by the bank as an international player, some other analysts have adjusted their 2017 full year forecast upwards. For instance a detailed investigation by Cordros Capital Limited, another Lagos based investment house, is showing a far more robust UBA in the months ahead. They stated: “Over H2‘17, we believe the improved yields on interest earning assets (which expanded 205 basis points, bps, to 12.32% in H1-17) – from repricing of loans and elevated yields on investment securities – will remain robust. Hence, for 2017F, we forecast 50 bps year-on-year expansion in asset yield to 12.15%, resulting in interest income growth of 22.18% year-on-year to N322.53 billion. “On NIR (Non-interest Revenue), we believe the gains on Forex trading (due to forex related gains and derivative transactions) and growth in fixed income securities trading will persist for the rest of the year (albeit marginal over H2‘17), and as a result, we forecast NIR growth of 24.90% year-on-year to N132.01 billion for 2017F. “Accordingly, we have raised our gross earnings growth forecast higher to 49.44% year-on-year (previously 30.28%) in 2017F to N470.50 billion.” Cordros also appeared optimistic on the bank’s operating efficiency to drive up margins through 2017 full year, despite emerging challenges in the financial market. Thus it stated: “On funding cost, we have reviewed our 2017F cost of funds estimate 43 bps higher to 4.11%, translating to an interest expense growth of 27.82% year-on-year to N126.25 billion. Our upward review is driven by the surge in interest charge on borrowings – a development we attribute to the bank’s recently issued USD500 million Eurobond at a yield of 7.875% and a range of bilateral facility secured during the year – and Fed Rates hikes impact on LIBOR linked borrowings. Note that these drove 38 bps y/y rise in cost of funds to 3.75% in H1-17. “However, we believe the strong yields on interest earning assets will outweigh the expansion in funding cost, thus, we estimate net interest margin to advance 32 bps y/y to 7.02%.” This estimate is clearly in line with UBA’s Management estimate. Still on efficiency, it is believed that despite the impact of both the change in the treatment of AMCOM levy (which resulted in a one-off charge on other OPEX) and the increases in personnel expenses and depreciation expense on total OPEX (37.35% year-on-year), UBA’s efficiency measures still improved in H1-17 (supported by the significant growth in operating income), with Cost-to-Income Ratio (CIR) contracting 80 bps to 58.60%. Consequently, analysts at Cordros Capital are of the opinion that for the rest of the year, cost will moderate across key lines, and is estimated at 22.22% year-on-year growth in OPEX to N186.38 billion, translating to a 593 bps year-on-year contraction in CIR to 56.77%. In UBA’s Management guidance, CIR ex-impairment position is stated at less than 60%. The impact of this on overall profitability of UBA at full year 2017 would be impressive. In fact analyst at Cordros Capital stated: “We forecast PBT and PAT growth of 74.51% and 14.28% to N109.87 and N82.58 billion respectively, equating to 14.28% expansion in Earnings Per Share (EPS) to N2.28.” The analysts further stated: “Following the upward adjustment to EPS, we raised our target price (TP) by 12.17% to N12.62 (previous: N11.25) and rolled forward our valuation to 2018. Our current 12-month TP implies upside potential of 31.59% from current levels; consequently, we recommend a ‘BUY’ on the stock.” Supported by Increased Diversification UBA Group has been witnessing a ground swell in earnings potentials in recent years with its international subsidiaries increasing contribution to the group fortune. Rest of Africa (ex-Nigeria) operations contributed 32% of the gross earnings in H1‘17, justifying early diversification into these captive markets, which helps to reduce earnings vulnerability to macro risks of a single economy. With increasing earnings contribution from the subsidiaries, which accounted for a third of profits during the period (from barely a quarter in 2015), the Group is increasingly extracting the benefit of diversification. Reflecting its growing market share in Africa (ex-Nigeria), the operations accounted for about a third of the Group’s deposits and some 29% of total assets in H1‘17, thus further diversifying the Group’s portfolio risk. Efficiency, Margin Improvements In H1’17 Net Interest Margin (NIM) improved 20bps year-to-date (YTD) to 7.3%, reflecting improved yield on assets and stable funding cost, as the Group continues to leverage its franchise in mobilizing low-cost, stable deposits. The NIM improvement was also buoyed by enhanced balance sheet management, high sovereign yield in Nigeria and Ghana as well as improving pricing on the loan book. Notwithstanding the tight monetary policy environment in most of the Group’s markets, the cost of funds remained stable at 3.6%. Also the return on average assets improved 20bps YTD to 2.4%, thus stabilizing the Return on Average Equity (RoAE), despite balance sheet deleveraging. Diversified Asset,  Stable Funding Structure In spite of economic recession in Nigeria, UBA’s single largest market, the Group’s total assets grew by 5.3% YTD, buoyed largely by the Group’s appetite for high yield sovereign treasuries in Nigeria and a modest growth in loan book. The balance sheet growth has been largely funded by the successful USD500 million Eurobond offering in the period. Leveraging on enhanced customer service, the Group grew retail savings and current account deposits by 5%, at a time when households are dis-saving. The Group maintained its appetite for a well-diversified balance sheet, with half of the assets in liquid, low risk instruments. Focus on Asset Quality,  Cost Efficiency UBA’s vision and financial goals are based on creating a sustainable business which delivers long term value creation This is based on maintaining moderate risk appetite to achieve a good balance between profitability and sustainability Also the Group maintains a well diversified loan book with compelling quality ratios. The Non-Performing Ratio (NPL) is within comfortable level of 4.2%, with 119% coverage ratio (inclusive of regulatory risk reserve) and 1.2% cost of risk