Market analysts are reviewing upward their forecasts on United Bank for Africa (UBA) after the bank surpassed consensus estimates in the first half of this year. Already with the second highest year-to-date capital gain of 95.78 per cent within the financial services industry, market pundits believe the well-rounded performance in the first half will set UBA on a higher return by the end of the year. In this report, Capital Market Editor, Taofik Salako, reviews the bank’s performance in the light of investors’ expectations
Yearly all market pundits were unanimous: United Bank for Africa (UBA) Plc exceeded their projections for the first half of this year.
FBN Capital, the investment banking arm of FBN Holdings Plc, said the audited first half results of UBA for the period ended June 30, 2017 built on a stellar performance in the first quarter as the half-year results “showed that earnings grew strongly year-on-year and surprised positively relative to our forecast”.
Cordros Capital Limited stated that it was reviewing upward its full-year forecasts for UBA and raising its investment advisory on the bank to “buy”. At the stock market, UBA’s share price has been one of the lead advancers with average year-to-date return of 95.78 per cent, almost a triple of the overall average return of 33.8 per cent recorded for the entire equities market at the beginning of trading this week. To most analysts, UBA’s share price has potential to rise further, although the degree varies according to each analyst’s methodology and assumptions.
UBA on Monday distributed N7.26 billion to shareholders as interim cash dividend for the first half of the year. Shareholders received a dividend per share of 20 kobo for all shares held as at the close of business on August 30, 2017. The dividend yield further improves the above-average capital appreciation, enhancing investors’ return.
Stronger than expected
UBA recorded a well-rounded performance in the first half of this year with 34.5 per cent growth in gross earnings and 65.5 per cent growth in pre-tax profit. The group report showed considerable growths across the other African markets where the bank operates. Other African subsidiaries, excluding Nigeria, contributed 32 per cent to the group’s top-line earnings.
Key extracts of the audited interim report and accounts for the six-month period ended June 30, 2017 showed that UBA grew its gross earnings by 34.5 per cent to N222.7 billion in first half 2017 as against N165.6 billion reported in June 2016. The top-line growth was driven by 44.3 per cent and 16.0 per cent growths in interest income and non-funded income respectively. Group’s operating income stood at N161.8 billion in first half 2017 compared with N116.2 billion recorded in the corresponding period of 2016, representing a 39.2 per cent growth.
Notwithstanding the impact of Naira devaluation and double digit inflation in Nigeria and a number of other African countries where UBA operates, the group managed through its cost lines to grow profit before tax by 65.5 per cent to N57.5 billion as against N34.8 billion recorded in the corresponding period of 2016. After taxes, net profit also jumped by 56.2 per cent to N42.3 billion in first half 2017 as against N27.1 billion in first half 2016. This profitability further reflects the earnings capacity of the group and its capability to progressively deliver superior returns to shareholders.
The balance sheet of the banking group also emerged stronger. While the group closed the half year with total assets of N3.69 trillion, a growth of 5.3 per cent, it prudently grew gross loans to N1.6 trillion, a four percent growth when compared to the group loan book as at December 31, 2016. Reflecting a strong capacity for internal capital generation, the group’s shareholders’ fund grew by eight per cent to N483.1 billion by June 2017 with an annualised 18.2 per cent return on average equity (RoAE).
Fundamental analysis further showed improvement in the underlying profit-making ability of the bank. Earnings per share rose to N1.21 in 2017 as against 78 kobo in 2016, representing an increase of 55.4 per cent. Pre-tax profit margin increased from 20.99 per cent in first half 2016 to 25.83 per cent in first half 2017. Post-tax margin also improved from 16.37 per cent to 19.01 per cent. Return on assets rose from 0.82 per cent to 1.15 per cent. Return on equities also increased from 6.65 per cent to 8.76 per cent while net asset per share rose by 18.4 per cent from N11.24 in first half 2016 to N13.32 in first half 2017. The higher-than-market price net assets per share underlines the intrinsic value in the group and its potential for capital appreciation.
Analysts’ reactions
FBN Capital noted that the growths in both interest and non-interest incomes of the bank were commendable, although the better-than-expected results were driven by a positive surprise in non-interest income which was underpinned by foreign exchange-related gains and a substantial reduction in foreign exchange revaluation losses. “Compared with our forecasts, profit before tax and profit after tax beat soundly by 54 per cent and 82 per cent respectively. The beat was down to a positive surprise in non-interest income which surpassed our forecast by 112 per cent,” FBN Capital stated.
Analysts noted that UBA’s half year’s pre-tax profit of N58 billion “tracks well ahead of consensus profit before tax forecast of N88 billion for 2017. As such, we expect to see marked upward revisions to consensus profit before tax forecasts and a positive reaction from the market”.
Analysts at Cordros Capital said they believed that the group’s improved yields on interest earning assets, which expanded by 205 basis points to 12.32 per cent in first half of 2017, from re-pricing of loans and elevated yields on investment securities – will remain robust in the second half of the year.
Cordros Capital its gross earnings growth forecast higher from 30.28 per cent to 49.44 per cent in their 2017 full-year forecasts to N470.50 billion.
According to analysts, in spite of the impact of both the change in the treatment of Asset Management Corporation of Nigeria (AMCON) levy-which resulted in a one-off charge on other operating expense, and the increases in personnel expenses and depreciation expense on total operating expense, efficiency measures still improved over the first half period with cost to income ratio contracting 80 basis points to 58.60 per cent.
“For the rest of the year, we believe cost will moderate across key lines, thus, we forecast 22.22 per cent growth in operating expense to N186.38 billion, translating to a 593 basis points contraction in cost to income ratio to 56.77 per cent, while we expect operational leverage to rise to 5.1x, compared to 4.9x in full-year 2016,” Cordros Capital stated in a preview that suggested improved performance in the second half of 2017. Analysts at Cordros Capital stated that pre and post tax profits for the full-year 2017 could rise by 74.5 per cent and 14.3 per cent to N109.9 billion and N82.6 billion. The expected improvement in earnings underlined analysts’ positive review of the bank’s target price to N12.62 with an upside potential of about 32 per cent over a 12-month period. Cordros Capital has placed a “buy” advice on the stock.
UBA’s global spread has been a major cushion and driver of its robust performance. Besides its domestic captive market of Nigeria, UBA operates in 18 other African countries including Ghana, Republic of Benin, Liberia, Cote d’Ivoire, Burkina Faso, Guinea, Senegal, Sierra Leone, Mozambique, Zambia, Uganda, Tanzania, Kenya, Congo DR, Congo Brazzaville, Cameroon, Chad and Gabon. UBA also has presence in United Kingdom, United States and France. Geographical segment analysis showed the group performance was buoyed by above average growths in its foreign subsidiaries. Other African countries contributed 32 per cent of the group’s gross earnings in the first half of the year, justifying early diversification into these captive markets, which helps to reduce earnings vulnerability to macro risks of a single economy. The half-year 2017 report showed that with increasing earnings contribution from the subsidiaries, which accounted for a third of profits during the period as against barely a quarter in 2015, the group is increasingly extracting the benefit of its diversification. Reflecting the pan-African growing market share, the other African countries’ operations accounted for about a third of the group’s deposits and some 29 per cent of total assets in the first half 2017, thus further diversifying the group’s portfolio risk.
Outlook
United Bank for Africa (UBA) Plc Chairman, Mr. Tony Elumelu, has said the bank is focusing on long-term growth. He said the performance of the bank had shown tenacity and enterprise of her management team and the staff and the ability to give customers what they want.
He pointed out that the performance of the bank, notably in capital adequacy and risk management, illustrates the commitment of the board to the best governance principles.
“We wish to focus on long term growth, which is sustainable and we will not sacrifice these goals for short-term gain or advantage. I want you to know that by investing in UBA, you have diversified your portfolio, you have not just invested in a Nigerian bank, but have invested in a bank with diversified reach, given our operations in Nigeria and 18 other African countries,” Elumelu assured shareholders during a recent meeting.
He pointed out that beyond the impressive growths in actual figures; the underlying ratios of the bank are within the best in the industry, assuring that the bank has capacity to sustain its impressive growths.
Group Managing Director, United Bank for Africa (UBA) Plc, Mr. Kennedy Uzoka, said the performance in the first half further demonstrated the strong momentum of the bank, as it continues to deliver improvement across its businesses and key performance metrics.
According to him, UBA’s unwavering focus on customer service excellence is translating to strong operational and financial efficiency gains while it has increasingly achieved better pricing on assets and liabilities, leading to continued improvement in the net interest margin to 7.3 per cent.
“Leveraging our service-focused strategy and treasury management, we grew non-interest income by 17 per cent year-on-year, reinforcing our transaction-banking-led approach towards deepening financial inclusion in Sub-Saharan Africa,” Uzoka stated.
He noted that UBA has made considerable progress in its retail banking penetration, gaining market share in deposits, at a time when a sizeable percentage of households are challenged due to inflationary pressures on disposable income. The bank grew its retail savings and current account deposits by 23 per cent on annualized basis and by five per cent on year-to-date basis.
He described the bank as a unique pan-African franchise with diversified risk and earnings across fast growing African economies and sound governance, risk management and compliance culture, in adherence to international best practice.
He said the bank is leveraging on a robust digital banking platform to serve more than 14 million customers in a cost efficient approach that helps to deepen African banking penetration.
In his remarks, Group Chief Financial Officer, United Bank for Africa (UBA) Plc, Ugo Nwaghodoh, pointed out that the group had a strong start in the year, despite protracted recession in Nigeria, its largest market.
He noted that the profit after tax of N42 billion translated to 18.2 per cent return on average equity, broadly in line with our 2017 full-year guidance.
He added that the bank’s other African subsidiaries contributed 32 per cent of the group’s earnings, leveraging on digital offerings to gain market share across the different markets.
“We maintain our discipline of banking only quality and profitable assets, a conservative stance which reflects on our asset quality. Notwithstanding consistent liquidity mop-up by the Central Bank of Nigeria (CBN), we maintained an average balance sheet liquidity ratio of 42 per cent. Further reinforcing the bank’s capacity is the strong BASEL II capital adequacy ratio of 20 per cent, which underpins our ability to grow, as the macro risks decline,” Nwaghodoh said.
As the benchmark index at the Nigerian Stock Exchange (NSE)-the All Share Index (ASI), contracted by 0.8 per cent on Monday, UBA’s share price rose by 1.14 per cent to N8.91 per share.
With interim cash dividend and strong earnings outlook, most pundits expect that the positive dominant trends will keep the bank on the upside of market valuation during the year.
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