United Bank for Africa Plc recently released its interim report for the first quarter ended March 31, 2019. According to the report, the Group’s gross earnings grew by 12% year-on-year, from N131.67bn in Q1’19 to N147.17bn in Q1’20. Interest income contributed 74% to total gross earnings, while non-interest income contributed 26% to total gross earnings. Operating income increased by 11% year-on-year, from N56.36bn in Q1’19 to N62.78bn in Q1’20. Profit before tax, however, grew at a slower pace (+8% year-on-year, from N30.16b in Q1’19 to N32.73bn in Q1’20). The slower growth rate in profit before tax, relative to the growth rate in operating income, resulted from the 13% increase in operating expenses from N51.94bn in Q1’19 to N58.66bn in Q1’20. Profit after tax grew at an even slower rate due to a higher effective tax rate (8% in Q1’20 vs 5% in Q1’19). Specifically, profit after tax grew by 5% year-on-year, from N28.67bn in Q1’19 to N30.10bn in Q1’20.
Expanded Loan Book Drives Interest Income Despite Lower Yields
Interest income grew by 11% year-on-year, from N98.56bn in Q1’19 to N109.11bn in Q1’20. The growth drivers were interest income on loan and advances and interest income on investment securities. On the back of a 30% expansion in loan book from an average of N1.72trn in Q1’19 to N2.24trn in Q1’20, interest income on loan and advances grew by 25% year-on-year, from N48.87bn in Q1’19 to N61.11bn in Q1’20 although the yield on total loans declined from an average of 11.35% in Q1’19 to 10.92% in Q1’20. We attribute the decline to the price war in the industry, induced by the Central Bank of Nigeria’s (CBN) loan-to-deposit ratio policy directive. The scramble among banks to meet up with the requirement stoked a heightened competition and repricing of assets in the industry.
Interest income on investment securities grew by 2% year-on-year, from N39.73bn in Q1’19 to N40.70bn in Q1’20. The increase in interest income on investment securities was driven by higher investment securities in Q1’20. The volume growth in investment securities made up for the decline in the yield on investment securities from 9.82% in Q1’19 to 9.60% in Q1’20.
Overall, interest-bearing assets grew by 19% year-on-year from N4.72trn in Q1’19 to N5.63trn in Q1’20, largely driven by an increase in loan book in Q1’20. Meanwhile, the average yield on interest-bearing assets declined by 60 basis points from 8.35% in Q1’19 to 7.75% in Q1’20.
Cost of Fund Declines Despite Double-Digit Growth in Interest-Bearing Liabilities
Interest-bearing liabilities grew by 21% year-on-year, from N4.32trn in Q1’19 to N5.23trn in Q1’20. The major drivers of the growth were customers deposits (+18% year-on-year, from N3.44trn in Q1’19 to N4.05trn in Q1’20), and borrowings (+19% year-on-year, from N681.19bn in Q1’19 to N811.26bn in Q1’20). However, despite the double-digit increase in interest-bearing liabilities, interest expense grew by 8% year-on-year, from N40.49bn in Q1’19 to N43.69bn in Q1’20. Consequently, the cost of fund declined to 3.34% in Q1’20 from 3.75% in Q1’19.
The lower cost of fund recorded by the Group supported the 13% year-on-year growth in net interest income from N58.08bn in Q1’19 to N65.42bn in Q1’20. However, impairment charge for credit losses spiked by 54% year-on-year, from N1.71bn in Q1’19 to N2.64bn in Q1’20. Nonetheless, Net interest income after impairment maintained its double-digit growth of 11% from N56.36bn in Q1’19 to N62.78bn in Q1’20.
Trading Gains Provide Support to Earnings
Non-interest income also grew by 11% year-on-year from N25.64bn in Q1’19 to N28.53bn in Q1’20, driven by net trading gains. Trading and foreign exchange income rose by 49% year-on-year, from N6.14bn in Q1’19 to N9.15bn in Q1’20. Although other operating income declined by 75% year-on-year, from N2.74bn in Q1’19 to N680.00mn in Q1’20, it was offset by the 12% growth in net fee and commission income from N16.76bn in Q1’19 to N18.70bn in Q1’20.
On the back of increases recorded on both the interest income and non-interest income lines, operating income grew by 11% year-on-year, from N81.99bn in Q1’19 to N91.30bn in Q1’20. Operating expense grew by 13% year-on-year from N51.94bn in Q1’19 to N58.66bn in Q1’20. The increase in operating expense mainly resulted from a 21% increase in wages and salaries from N17.47bn in Q1’19 to N21.27bn in Q1’20. We note that the Group recently did a review on its staff remunerations. Therefore, the cost-to-income ratio advanced by 100 basis points to 64% in Q1’20 (Q1’19: 63%).
Profit before tax grew by 9% year-on-year, while profit after tax grew by 5% year-on-year from N28.67bn in Q1’19 to N30.10bn in Q1’20.
Outlook and Valuation
The released result is on track with our projections. We anticipated increased pressures in the Group’s net interest margins, owing to the lower yield environment and it reflected in the Group’s Q1’20 performance. We expect to see sustained pressure on the Group’s interest income; however, we believe that the Group will continue to grow volume significantly to compensate for the lower pricing in subsequent periods. We also maintain our expectations of a strong non-interest income to further support earnings.
We leave our EPS to estimate unchanged at N2.74. We believe that the performance of the company in Q1’20 is in line with our estimates. We maintain our HOLD recommendation; however, our fair value estimate is now lower N5.60. The lower fair value estimate reflects increased risk assessment given the macroeconomic and industry fundamentals. Based on the current market price of N5.90, the stock’s earnings yield and dividend yield stand at 47% and 17% respectively. We estimate a price return of -4% and a total return (inclusive of dividend yield) of 13% on the stock. Hence, we recommend a HOLD.