- Gross Earnings up 14% y/y – 13% ahead of our estimate
- Loan portfolio contracts further in H1’19 (-1.6% YTD)
- Higher tax rate drags PAT q/q
- ₦0.20 interim dividend per share proposed
Non-interest income boosts H1’19 topline
UBA improved on its impressive Q1’19 financial performance to close the Q2’19 period a notch higher. An 18.5% q/q growth in Operating Income; thanks to a 333.1% q/q surge in Net Trading and Foreign Exchange Income to ₦26.6 billion, lifted Gross Earnings by 23.3% q/q to ₦162.4 billion. In Q2’19, UBA’s Interest Income of ₦106.3 billion was up 7.9% q/q, 11.1% above our estimate; driven by a 44.3% jump in investment securities income, specifically T-bills. Nonetheless, a 34.1% q/q jump in Interest Expense to ₦54.3 billion; caused by a 37.5% spike in interest paid on customer deposits, leading to a 10.4% q/q decline in Net Interest Income to ₦52.0 billion, in line with our estimate. Overall, Operating Income came in 18.5% higher q/q at ₦108.1 billion. PBT also came in 33.8% higher q/q at ₦40.2 billion- this was in spite of an 11.9% q/q rise in Opex to ₦66.5 billion; a result of the sharp rise in Non-Interest Income. However, PAT was down 2.1% q/q to ₦28.1 billion, due to a hike in realized tax expense to ₦12.0 billion vs ₦1.5 billion in Q1’19. Thus, Q2’19 EPS growth tapered slightly to 31.7% (Q1’19 – 34.4%).
Non-interest income to continue to support FY’19 topline
For H2’19, we expect UBA to struggle to surpass its H1’19 Interest Income scorecards due to the yield environment and a dearth of high-yielding dated bills within its portfolio. The bank would need to aggressively grow its loan book in H2’19 to prop FY’19 interest income, a tough task given its 1.6% contraction in customer loans in H1’19. Nonetheless, we have modelled a 6.2% expansion in loan book and as such expect loan loss provisions to print at ₦9.0 billion, based on the sector weighting requirements, in compliance with CBN guidelines. UBA’s non-interest income has continued to grow its contribution to Gross Earnings, from 27.4% in H1’18 to 30.3% as at H1’19 (Q2’19 – 34.5%). We believe UBA can maintain its H1’19 run rate for fees & commissions and remittances but view the superlative q/q growth in foreign exchange income as a one-off.
Lower provisions, higher deposits support cost-income ratio
UBA’s focus on growing low-cost deposits should continue to yield fruit in FY’19, as H1’19 cost-to-income ratio moderated to 61.5%. A combination of lower than envisaged provisions (Q2’19 – ₦1.4 billion vs Q2E’19 – ₦2.3 billion), reduced trade-related expenses and a 4.8% YTD growth in customer deposits all supported UBA’s improvement in cost-to-income.
Lower provisions, higher deposits support cost-income ratio
UBA’s focus on growing low-cost deposits should continue to yield fruit in FY’19, as H1’19 cost-to-income ratio moderated to 61.5%. A combination of lower than envisaged provisions (Q2’19 – ₦1.4 billion vs Q2E’19 – ₦2.3 billion), reduced trade-related expenses and a 4.8% YTD growth in customer deposits all supported UBA’s improvement in cost-to-income.
