United Bank for Africa – Strong Interest Income Growth in Q3’2020 Lifts Earnings

Must Read

FG, States, LGAs share N528.39bn FAAC allocation in Jan 2021

The Federation Account Allocation Committee (FAAC) disbursed the sum of N619.34bn to the three tiers of government in December...

List of Access Bank Sort Codes & Branches (with addresses) in Nigeria

The sort code is a number which usually identifies both the bank and the branch where an account is...

How To Block Your Bank Account And SIM Card In Case Of Emergency

Losing your phone and wallet or having them stolen can be very frustrating. However, in case that happens to...
- Advertisement -

United Bank for Africa (UBA), in its 9M’2020 financial results, reported an improvement in performance, driven by a solid Q3’2020 earnings growth. Gross earnings grew by 6% YoY from N428.22bn in 9M’2019 to N453.67bn in 9M’2020.

The Group’s gross earnings growth was driven by an 8% YoY interest income growth. Non-interest income growth was relatively weak, as it grew by just 1% YoY from N107.08bn in 9M’2019 to N107.76bn in 9M’2020.

United Bank for Africa’s cost-to-income ratio rose materially from 62% in 9M’2019 to 68% in 9M’2020, majorly induced by higher staff-related cost. Consequently, profit before tax declined by 8% YoY from N98.23bn in 9M’2019 to N90.37bn in 9M’2020.

United Bank for Africa - Strong Interest Income Growth in Q3’2020 Lifts Earnings

Steepened Yield Curve Boost Net Interest Income

United Bank for Africa interest income grew by 8% YoY to N317.14bn in 9M’2020, spurred by a 20% YoY interest income growth in Q3’2020. We attribute the significant Q3’2020 interest income growth to a steepening of the Group’s asset yield curve.

- Advertisement -

Based on our analysis of the Group’s numbers, we note that the Group strategically optimises earnings by borrowing for short-term, and lending in the long-term. We believe that the model resulted in an expansion of net interest margin for the Group, thus enhancing earnings.

Additionally, the 27% YoY growth in interest-yielding assets from an average of N4.03trn in 9M’2019 to an average of N5.10trn in 9M’2020, contributed to total interest income growth despite the low-yield environment.

United Bank for Africa’s interest expense declined by 6% YoY from N138.99bn in 9M’2019 to N131.12bn in 9M’2020. The decline in interest expense reflected a change in the composition of the Group’s deposits from customers, which constitutes the bulk of the Group’s interest-bearing liabilities (c.80% of total interest-bearing liabilities).

Term deposits’ portion rose from 24% of total deposits in 9M’2019 to 25% of deposits in 9M’2020. Current deposits’ portion declined from 54% of total deposits in 9M’2019 to 51% of total deposits in 9M’2020. Savings deposits’ portion grew from 22% of total deposits in 9M’2019 to 24% of total deposits in 9M’2020.

- Advertisement -

Generally, the low-yield environment resulted in the repricing of various financial assets, thus we maintain that these deposits were repriced lower. Also, we posit that the higher portion of savings deposits, relative to others, further resulted in the lower interest expense incurred in 9M’2020.

A simultaneous effect of a 6% growth in interest income and a 6% decline in interest expense, resulted in a 17% YoY growth in net interest income from N158.92bn in 9M’2019 to N186.02bn in 9M’2020. Meanwhile, a significantly high impairment loss on loans and receivables (+72% YoY from N6.66bn in 9M’2019 to N11.48bn in 9M’2020) limited the net interest income upside to 15%.

Read Also:  Mastercard Enables Luxury Shoppers To Purchase With Confidence

Non-Interest Income Growth Weakened by Poor Fee and Commission Inflows.

United Bank for Africa fee and commission income declined by 2% YoY from N86.53bn in 9M’2019 to 85.01bn in 9M’2020. On the other hand, fee and commission expense rose by 24% YoY, thus resulting in an 11% YoY decline in net fee and commission income from N63.29bn in 9M’2019 to N56.25bn in 9M’2020.

‘Other operating income’ also declined by 28% YoY from N8.07bn in 9M’2019 to N5.79bn in 9M’2020. The decline in net fee and commission income and ‘other operating income’ were, however, offset by a 28% YoY spike in net trading and FX income from N35.72bn in 9M’2019 to N45.72bn in 9M’2020.

- Advertisement -
Read Also:  Manufacturers, PDP Denied The Moves Against Planned Hike In VAT

Overall, United Bank for Africa non-interest income grew by 1% YoY from N107.08bn in 9M’2019 to N107.76bn in 9M’2020. Operating income, thus, advanced by 9% YoY from N259.33bn in 9M’2019 to N282.31bn in 9M’2020.

Operating expense grew by 19% YoY from N161.62bn in 9M’2019 to N192.66bn in 9M’2020, driven by higher personnel cost (+21% YoY from N55.20bn to N66.62bn).

Owing to the higher operating expense incurred, relative to the operating income earned, the Group’s profit before tax dipped by 8% YoY from N98.23bn in 9M’2019 to N90.37bn in 9M’2020. Profit after tax declined by 6% YoY (from N81.63bn to N77.13bn) due to a lower effective tax rate during the period.

Financial Statement Summary

United Bank for Africa - Strong Interest Income Growth in Q3’2020 Lifts Earnings
Source: Company Accounts, WSTC Research

Outcome and Valuation

We revised our FY’2020 EPS forecast to N2.73 (previous: N2.39), on the back of higher expected net interest income in Q4’2020. We also expect to see a recovery in fee and commission income, on the back improved economic activities. In addition, we expect earnings to improve due to a low-base in Q4’2019.

In the medium to long term, we lowered our growth expectations for the Group. Our lower growth expectations were informed by regulatory risks, increased competition, and weak macroeconomic fundamentals.

We estimate a fair value of N13.80 for the Group, which effectively implies a justified P/E of 5.26x. The stock currently trades at a forward P/E of 2.92x. Therefore, we believe that the stock is grossly undervalued at current market price.

Based on our expected dividend yield of 13%, we posit that the stock offers a dividend return that is significantly higher than other opportunity costs.

Hence, we recommend a BUY.

- Advertisement -
United Bank for Africa - Strong Interest Income Growth in Q3’2020 Lifts Earnings - Brand SpurUnited Bank for Africa - Strong Interest Income Growth in Q3’2020 Lifts Earnings - Brand Spur

Subscribe to BrandSpur Ng

Subscribe for latest updates. Signup to best of brands and business news, informed analysis and opinions among others that can propel you, your business or brand to greater heights.

- Advertisement -

LEAVE A REPLY

Please enter your comment!
Please enter your name here

This site uses Akismet to reduce spam. Learn how your comment data is processed.

United Bank for Africa - Strong Interest Income Growth in Q3’2020 Lifts Earnings - Brand SpurUnited Bank for Africa - Strong Interest Income Growth in Q3’2020 Lifts Earnings - Brand Spur

Latest News

Average Price of 1kg of Yam Tuber Increased by 18.77% in March 2021 – NBS

Prices of selected food items including eggs, tomatoes, yam, rice increased year-on-year in February data from the National Bureau...
- Advertisement -
BrandsPur Weekly Cartoons
- Advertisement -United Bank for Africa - Strong Interest Income Growth in Q3’2020 Lifts Earnings - Brand SpurUnited Bank for Africa - Strong Interest Income Growth in Q3’2020 Lifts Earnings - Brand Spur