UBA PLC FY’17 – Persistent Earnings Track Estimates, PAT Up 9% Y/Y

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  • Gross Earnings up 20% y/y – 9% ahead of our estimate
  • Higher 9mobile provisioning caps bottom line growth
  • Strong balance sheet growth to drive earnings going forward
  • Target price revised marginally higher to N14.21 (Previous: N13.74)

Strong y/y performance despite higher provisioning

UBA released its FY’17 results, posting impressive top and bottom line performances – driven by strong balance sheet growth. With Interest and Non-Interest Income coming in 23% and 13% higher y/y (4% and 6% better than our estimates) respectively, Gross Earnings rose 20% y/y to ₦462 billion vs. our ₦424 billion estimates. Notably, despite the relatively lower interest rate environment in the last quarter of the year, we highlight that top line was buoyed by a 3% q/q loan growth in Q4’17 as well as a strong 42% q/q rise in Non-Interest Income. On a quarterly basis, the top line beat earlier run rate with Q4’17 accounting for c.28% of annual Gross Earnings. Although Interest Expense rose 19% y/y (tier 1 average y/y rise: 38%), the expense line came in lower than we had estimated – having stayed flat q/q in the last quarter of the year despite an 8% q/q rise in Customer Deposits. However, in line with the trend we have observed across the industry, UBA reported significantly higher loan loss provision of ₦20 billion in Q4’17 (Q3’17: ₦3.5 billion) – bringing FY’17 provisioning to ₦32.9 billion and translating to a cost of risk of 2.1%. We understand that the bank has made a c.38% provision on its ₦40 billion exposure to the telecoms giant – 9mobile. Despite this, Operating
Income rose 21% y/y to ₦294 billion – marginally higher than our ₦291 billion estimates. However, with Operating Expense moderating 16% q/q in the Q4 period, the expense line came in at ₦188.6 billion – slightly better than our ₦191.3 billion estimates. Consequently, PBT rose 16% y/y to ₦105 billion – 5% better than our ₦100 billion estimates. However, with effective tax rate coming in at 25% (higher than our estimate and prior year’s 20%), PAT came in ₦78.6 billion – marginally below our estimate of ₦79.8 billion. Overall, the Board of Directors declared a final dividend of ₦0.65 per share (interim: ₦0.20), translating to a dividend payout ratio of 37% and a dividend yield of 7%.

TP revised to N14.21 (Previous: N13.74)

We highlight that earnings came largely in line with our estimates. As such, we maintain our forecasts across most line items. Although we forecast an above average loan growth of 10% for UBA in 2018, we expect moderating interest rate to cap its impact on Interest Income and estimate a mild 2% y/y growth in FY’18. Also, despite our decent deposit growth forecast for FY’18, our Interest Expense growth forecast is contained at 4% y/y. Amidst this, we estimate a 20bps improvement in margin. With asset quality deteriorating faster than expected in FY’17, we are cautious going into FY’18 and forecast a loan loss provision of ₦26.3 billion – translating to a 1.5% cost of risk. Also, we estimate an 8% y/y rise in Operating Expense (₦203 billion), keeping efficiency stable with a Cost to Income ratio of 58%. Overall, we forecast a PAT of ₦90.4 billion for FY’18 – translating to an EPS of ₦2.64 and a RoE of 16.7%. With our dividend payout ratio estimate of 34%, we forecast a dividend per share of ₦0.90 for FY’18. UBA continues to trade at a discount to peers – priced at an FY’18 P/E and P/B of 4.4x and 0.7x vs. tier I averages of 5.8x and 1.0x respectively.

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