United Bank for Africa Plc. (UBA) released audited H1 2017 results, wherein gross earnings grew 34.51% y/y, driven by significant growth across income lines – interest income (+44.25%, in line with our estimate) and non-interest revenue (+16.01% and 29.77% above our estimate).
Despite opex pressure (+37.35% and 10.25% above our estimate), PBT and PAT expanded 42.86% (25.21% above our estimate) and 29.79% (7.56% above our estimate) y/y respectively, with EPS growing 29.10% y/y (7.56% above our estimate of N1.15) to N1.24. Consistent with its dividend payment, UBA is proposing an interim dividend of N0.20 (same as previous year) – translating to a payout ratio of 16.15% and a dividend yield of 2.06%.
The y/y growth in NIR was driven by the 238.43% y/y surge in FX trading income (due to fx related gains and derivative transactions) and 170.57% y/y growth in fixed income securities trading, the cumulative impact of which shielded the marginal decline in fee incomes (down 1.27% y/y, and 5.53% behind our estimate) due to a steep contraction in E-banking income (45.92% y/y).
In line with industry peers, the growth in interest income, was driven by improved yields on interest earning assets (+205 bps to 12.32%) from repricing of loans due to the elevated interest rate environment; loans and advances to customers (+49.41% y/y), and investment securities – treasury bills (+52.71% y/y) and bonds (+24.20% y/y).
Still reflecting the high interest rate environment, interest expense rose 23.77% y/y (in line with our estimate) driven by the elevated interest charge on borrowings (+299.01%), a development we attribute to its recently issued USD500 million at a yield of 7.875% and Fed Rates hikes impact on LIBOR linked borrowings. However, the expansion in asset yields outweighed the 38 bps y/y rise in cost of funds (to 3.75%), and as a result, net interest margin advanced 140 bps y/y to 7.30%.
On asset quality, UBA made an additional N8.57 billion provisions on specific credit loss impairment during the period, which by our understanding, relates to its exposure to general commerce, manufacturing, oil & gas, and power. Accordingly, loan loss provision (+104.25% q/q and 8.94% y/y) during the period surged, resulting in 129bps y/y uptick in cost of risk to 1.93%, above management’s 1.5% guidance for 2017F. NPL came in ahead of 2016 level (3.90%) at 4.20% in H1-17.
We believe gross earnings will be impressive in 2017F, given the surge in FX related and derivative gains, which will be further supported by the higher yields on interest earning assets. However, the deterioration in asset quality, with cost of risk already ahead of management’s guidance of 1.5%, portends a major risk to our earnings outlook. Based on our last TP of N11.25, which is at 15.58% discount to the current market price of N9.71, we have a HOLD recommendation on the stock. Our estimates are under review.
Management will be hosting a conference call for investors and analysts on Tuesday 29 August, 2017 at 15:00hrs Lagos time to discuss the H1-2017 results.
