UBA Q1 2021 Results Review: Reiterating Outperform Rating Following Strong Q1 Results

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…3% Cut To Our Price Target Due To 150bp Increase To The Risk-Free-Rate

UBA’s Q1 ’21 earnings came in ahead of our forecast mainly because of a positive surprise in impairment for credit losses. Although pre-provision profits were broadly in line with our forecasts, the positive surprise in funding income was offset by negative surprises in non-interest income.

Following the positive earnings surprise, we have increased our ’21-22f EPS forecasts by c.4% on average. Nonetheless, our new price target of NGN14.2 is c.-3% lower because we have increased the risk-free rate driving our DDM valuation by 150bps to 12.5%. The upward revisions to our earnings forecasts are underpinned by i) a 5% average increase to our funding income forecasts and ii) a -9% average cut to our forecasts for credit loss impairments.

The upgrades on both lines offset an -8% average cut to our non-interest income forecasts over the same period. We are encouraged to see that UBA’s cost of risk improved by 20bps y/y to 0.3%. However, given the slow pace of economic recovery, we would like to see the audited numbers for H1 ’21 before drawing a firm conclusion.

Consequently, we have cut our cost of risk assumption by a mere 10bps to 1.0%, in line with guidance, but above the 0.3% annualized rate implied by the Q1 ’21 results.

With respect to funding income, we are pleased to see that the improvement in deposit mix over 2020 carried on into 2021. The bank’s CASA ratio (low-cost deposit to total) improved to 82.6% from c.72.4% in Q1 ’20 (81.8% Q4 ’20). The bank’s asset quality (NPL) ratio also remained stable at c.4.76% vs 4.7% Q4 ’20.

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We expect UBA to deliver PBT of NGN137.8bn or an implied PBT growth of c.4% y/y in f2021. Our forecasts also imply a ’21f ROAE of 14.1%, less than the 18% ROAE that management has guided to. Our lower ROAE forecast is mainly due to an 11% increase to our book value forecast. On a relative basis, UBA shares are trading on a ’21 P/B multiple of 0.3x for 14.1% ROAE in ’22f.

These compare with the 0.5x multiple for 14.9x ROAE that the sector is trading on. Year-to-date, the shares have shed -17.9% vs the -3.1% return on the NSE ASI. At current levels, we see an upside potential c.100% in the shares. We keep our Outperform rating on the shares.

PAT up 27% y/y, thanks to strong revenue growth and reduction in credit impairments.

UBA’s Q1 PAT (from continuing operations) grew 27% y/y to NGN38.2bn. Underpinning the double-digit earnings growth were increases of 13-14% y/y on both revenue lines and a -23% y/y reduction in credit loss impairments. These positives underpinned PBT growth of 24% y/y.

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Further down the P&L, PAT growth after other comprehensive income and minorities accelerated by 275% y/y because OCI improved to NGN70m vs -NGN15bn Q1 ’20.

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