- Gross Earnings up 20% y/y
- Interest Income up 12% y/y leading industry
- Impairment charges jump 303% y/y
- Bank declares ₦0.5/share final dividend (FY’19 dividend: ₦1.0/share)
Gross Earnings boosted by better than expected Interest Income UBA recently released its FY’19 results, reporting a 20% y/y growth in Gross Earnings to ₦560.2 billion (Vetiva estimate: ₦547.5 billion), driven by a 12% y/y growth in Interest Income (II) to ₦404.8 billion and a 51% y/y jump in Non-Interest Income to ₦155.4 billion. However, this impressive earnings performance was somewhat dampened by the 303% y/y spike in Impairment charges to ₦18.3 billion (Vetiva estimate: ₦9.0 billion); this was due to a 93% y/y decline in recoveries, as overall credit allowances declined by 59% y/y. Consequently, PBT growth was limited to 4.2% y/y, as PBT printed at ₦111.3 billion, while PAT grew by 13% y/y to ₦89.1 billion (Vetiva estimate: ₦105.2 billion), the result of a reduced tax bill of ₦22.2 billion (Vetiva Estimate: ₦28.9 billion), giving the firm a FY’19 ROAE of 16.2% (9M’19 ROAE: 20.6%) and EPS of ₦2.52 (FY’18: ₦2.20).
Higher impairments, Opex in Q4 dampen earnings momentum
The bank’s Q4 performance showed substantial q/q declines across key line items – highlighted by the 39% q/q drop in Non-Interest Income to ₦25.0 billion. This represents a reversal in the trend observed among other banks that grew Non-Interest Income while reporting moderations in II, whereas UBA’s grew by 15% q/q to ₦106.9 billion. We note that this increase in II was due to a 38% q/q increases in both Income from loans to corporates and Investment Securities- specifically T-Bills. Going forward, we expect the bank to continue outperforming the industry in this regard, mainly due to its asset make-up and corporate banking strategy, thus we forecast FY’20 II of ₦436.7 billion (FY’19: ₦404 billion). Meanwhile, a 33% q/q increase in Other Operating Expenses to ₦126.6 billion, as well as a 227% q/q jump in impairments meant that Q4’19 PAT came in at ₦13.5 billion, 52% weaker q/q. In FY’20 we expect a drag on Non-Interest Income due to the adverse regulatory environment triggered by the CBN’s new policies vis-à-vis bank charges, giving us a FY’20 estimate of ₦170.9 billion (FY’19: ₦155.4 billion).
Asset quality improves despite Loan Book growth
UBA’s NPLs improved q/q to 5.3% from 5.7% despite a 4% q/q and 18% y/y growth in Total Loans to ₦2.1 trillion. However, the bank’s cost of risk worsened q/q to 0.8% from 0.5% as at Q3’19. Looking forward, we expect the bank to adopt a cautious loan growth strategy, thus we forecast a 9% y/y growth in loans and advances in FY’20 (FY’19: 19%), despite the minimum LDR requirement which the bank has thus far been unable to meet (FY’19 LDR: 56%). Based on this, we expect a 30bps moderation in NPLs y/y to 5.0% by year-end.
TP raised to ₦13.78
Overall, UBA’s performance in FY’19, as well as our expectations for FY’20 have led to a FY’20 PAT projection of ₦102.5 billion, a 15% y/y increase (FY’19: 13% y/y), yielding an ROAE of 16%. This gives an expected EPS of ₦2.91 and DPS of ₦1.10. Therefore, we revise our 12-month target price (TP) to ₦13.78 (Previous: ₦13.50), a potential upside of 114%. The bank’s shares have lost 10% YTD and are currently trading at a P/B of 0.4x vs Tier-1 peer average of 0.8x.