Union Bank Nigeria: Topline Buoyed by Volatile Income Lines

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Union Bank Nigeria Plc (UBN)’s gross earnings inched lower (-1.03% YoY) to NGN37.95bn in Q2:2020. In the first half of the year, however, gross earnings climbed 7.68% YoY to NGN81.86bn due to a relatively stronger performance in Q1:2020.

Foreign exchange revaluation and trading gains were the main drivers of topline growth while fee-based income remained pressured. Growth in interest income was off the back of a significant growth (32.73% YtD to NGN367.98bn) in investment securities particularly treasury bills.

The 5.64% YtD growth in loans did not translate to a growth in interest income from loans presumably due to the restructuring of loans in the wake of the pandemic. Although fee-based income declined, the 41.71% YoY growth in e-business income despite the reduction in e-banking fees, inspires optimism for future growth.

As at H1:2020, Union Bank had achieved appreciable volume and value growth across most of its electronic channels. Sustained volume growth (particularly via agent banking) should bode positively for topline in spite of relatively thin margins.

While we expect further growth in loan book, do not expect much in terms of earnings from loans in H2:2020 due to ongoing restructuring. We also do not anticipate that the growth in interest on investments recorded in H1:2020 will be replicated in H2:2020 while trading gains are expected to remain flat. Thus, we hold a modest revenue outlook for Union Bank in H2:2020, with possible upsides from the swift recovery of the economy and even more significant growth in transaction volumes.

Impairment Charges Bear on Weakened Margins
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The gains recorded from relatively cheaper deposits in H1:2020 were eroded by higher interest expense on borrowings. Union Bank’s interest expense in H1:2020 was pressured by a 46.34% YtD increase in debt. Net-interest margin thus contracted to 5.20% from 5.60% in H1:2019.

The main pressure on bottom-line, however, came from impairment charges which turned from a NGN4.49bn net write-back position in H1:2019 to a NGN4.24bn net write-off due largely to COVID-19 credit risks.

Union Bank managed to keep its OPEX flat at NGN35.51bn (+0.13% YoY) as it continues to implement its Long-term Efficiency Acceleration Programme (LEAP). Cost-to-Income ratio remains elevated at 75.50% notwithstanding the decline from 76.10% in H1:2019. Profitability metrics – Return on Assets and Return on Equity declined to 1.20% and 8.50% (from 1.60% and 10.80%) respectively following the 9.23% YoY fall in Profit after Tax to NGN10.76bn.

We are bearish about the bottom-line outlook in 2020FY due to our modest gross earnings, although we expect a moderation in impairment charges (based on slow loan growth and improved economic conditions) and OPEX (based on the bank’s LEAP).

Liquidity and Asset Quality Adversely Impacted
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Union Bank used up NGN54.38bn in Cash and cash equivalents during H1:2020 compared with a net addition of NGN82.88bn in H1:2019, indicating that liquidity is pressured. We attribute this to the 63.54% YtD increase in CRR to NGN484.15bn although LDR is compliant at 65.10%.

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Expectedly, the group’s asset quality metrics- NPL and Coverage ratios- deteriorated YtD to 6.30% (vs. 5.80% in 2019FY) and 127.50% (vs. 138.10% in 2019FY) respectively owing to the pandemic. Capital adequacy, however, remained strong despite a 50bps decline to 19.20% (vs. 19.70% as at 2019FY).

Recommendation

Based on our earnings outlook, we project an EPS of NGN0.80 and a P/E of 7.64x for 2020FY. This yields a December 2020 target price of NGN6.11 and indicates a upside potential of 24.69%. Hence, we recommend a BUY on the ticker.

Union Bank Nigeria: Topline Buoyed by Volatile Income Lines

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Union Bank Nigeria: Topline Buoyed by Volatile Income Lines

Union Bank Nigeria: Topline Buoyed by Volatile Income Lines
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Union Bank Nigeria: Topline Buoyed by Volatile Income Lines - Brand Spur

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Union Bank Nigeria: Topline Buoyed by Volatile Income Lines - Brand Spur
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