UNITED BANK FOR AFRICA PLC : FY’18 growth a positive sign for the future   

24 April 2019 : United Bank for Africa (UBA) has sustained improvements in funding and liquidity with strong capital ratios and an increasingly diversified funding base through operations across 20 key African markets and London, New York and Paris. In its FY’18 audited results, the bank posted positive growth in Gross Earnings and Net Operating Income, with y/y upticks of 7.0% and 3.4% to N494.0 billion and N303.7 billion respectively. 

Improvement in NPLs bodes well for FY’19 

On the other hand, Net Interest Income declined by 1.0% y/y despite a 3.9% y/y growth in loans and advances to customers, on account of a 50bps rise in cost of funds to 4.2% in FY’18. Analysts believe the bank will be constrained in repricing loans in 2019 given the current MPR and interest rate environment; that said, analysts will monitor H1’19 numbers to make any required adjustments to analyst's FY’19 estimates. Cost of risk slumped by 1.7% to just 30bps, due to a N48billion additional impairment charge on IFRS 9 transition. This haircut had negative impact on Net Assets, as the difference between the Prudential provision and IFRS impairment was N21.5 billion for the Group, requiring a transfer of N20.6 billion from retained earnings to regulatory credit risk reserve for the Group and a transfer of N14.3 billion from retained earnings to regulatory credit risk reserve for the Bank. Consequently, NPLs improved by 25% y/y to 6.5% and will improve further in FY’19 when the 90-day mandatory waiting period to move a restructured loan from stage 3 to stage 2 in the ECL bucket is observed. 

Mild improvements tamed by non interest expenses 

UBA’s Interest income and non-interest income operating lines contributed 73% and 27% to FY’18’s gross earnings respectively; while the former grew by 11% y/y driven by strong interest income on treasuries, the latter declined by 13.8% y/y from the combination of an elevated expense ratio in fees and commissions from 20.5% in FY’17 to 30.4% in FY’18 and a 35.4% decline in net trading and foreign exchange income. Analyst's concern is with the sharp increment in fees and commission expense (68.3% y/y), as peers have demonstrated improved efficiencies in this line item through the use of technology. Analysts do not rule out the possibility of this being a one-off expense (new software acquisition, IT solution etc) and will seek clarity from management in analyst's next engagement with UBA. The bank recorded remarkable growth in deposits, with FY’18 y/y of 23.1% contributing to a 19.7% y/y growth in total assets. 

Outlook and forecast 

For FY’19, analysts expect the bank will focus on improving cost management to tame cost-to-income (FY’18: 64.0%, FY’19 management guidance: 60.0%) and as such have modelled a 7.6% expansion in loan book for FY’19 versus management guidance of 12%. UBA shares are currently trading at P/B multiple of 0.4x, a discount to peer average of 0.8x, while analyst's forward EPS of N2.41 and implied fair value estimate of N9.68 for the bank, presents a potential upside of 45.5% to market price N6.65 and place a BUY recommendation for the stock. 

Reporting for EasyKobo on Wednesday , 24 April 2019 in Lagos, Nigeria

Source: Usoro Essien from Vetiva Capital Management Limited

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