UBA Reaps Benefits of Pan-African Expansion

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Combining efficiency with robust digital offerings, United Bank for Africa Plc has started reaping the benefits its operations across the African continent, ending the first half of 2017 with N222 billion in earnings and N43 billion as profit, writes Goddy Egene

Doing business in African countries is very difficult due to challenges such as poor infrastructure and policies inconsistencies. While poor infrastructure makes it highly expensive to do business in most countries on the continent, inconsistent policies make planning difficult and rubbish even the most effective strategy.

These challenges have made many companies to restrict their operations to either one country or expand to a very few countries. However, United Bank for Africa (UBA) Plc, took the bull by horn some years back and expanded its operations to many countries across the Africa.

UBA has subsidiaries in about 19 countries. They are: UBA Ghana; UBA Cameroon SA; UBA Cote d’ivoire; UBA Liberia, UBA Uganda; UBA Burkina Faso; UBA Chad SA; UBA Senegal SA; UBA Benin; UBA Kenya; UBA Tanzania; UBA Gabon; UBA Guinea; UBA Sierra Leone; UBA Mozambique; UBA Congo DRC; and UBA Congo Brazzaville.

With these subsidiaries across Africa, UBA has become a true Pan-African financial institution, empowering many economies on the continent. Going the audited results for the half year (H1) ended June 30, 2017, UBA has started reaping the benefits of its bold move to expand to other African countries. According to the financial institutions, the other African subsidiaries (ex-Nigeria) contributed 32 per cent of its earnings in H1 of 2017.

Half-year financial performance
The audited 2017 H1 results showed improved growth across major performance indicators. UBA grew its gross earnings by 34.5 per cent to N222.7 billion in 2017, from N165.6 billion recorded in corresponding period of 2016. Interest income rose from N107 billion to N155 billion, while net interest income grew by 58 per cent to N101.4 billion, compared with N64.1 billion posted in 2016. Fees and commission income stood at N36.5 billion, showing a margin decline compared with N36.9 billion in 2017, while net trading and foreign exchange income improved from N19.6 billion to N28.3 billion in 2017.Impairment charges were N9.44 billion, showing a rise of 38 per cent from N6.8 billion in 2016.

In spite of 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 deliver a Profit Before tax (PBT) of N57.5 billion, showing a growth of 65.5 per cent over N34.8 billion recorded in the corresponding period of June 2016.
Similarly, profit after tax (PAT) rose by 56.2 per cent to N42.3 billion, as against N27.1 billion recorded in the half-year of 2016.

UBA closed the H1 with total assets of N3.69 trillion, a growth of 5.3 percent, while gross loans stood at N1.6 trillion, showing a four per cent growth when compared to the N1.5 trillion recorded 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, whilst it delivered an annualized 18.2 per cent return on average equity (RoAE).Net margin improved from 16.4 per cent to 19 per cent in 2017. Based on the improved performance, the directors recommended an interim dividend of 20 kobo per share for the H1.

Bank Explains Performance
Commenting on the performance, the Group Managing Director/CEO, UBA, Kennedy Uzoka, said: “The results again demonstrate the strong momentum of the bank, as we deliver continuous improvement across our businesses and key performance metrics.”
He added: “Unwavering focus on customer service excellence is translating to strong operational and financial efficiency gains. We have 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.”

According to him, 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 and five per cent year-to-date (YTD) respectively.

Speaking in the same vein, the Group Chief Financial Officer, Ugo Nwaghodoh said that the bank had “a strong start in the year, despite protracted recession in Nigeria, our largest market. Our profit after tax of N42 billion translates to 18.2 per cent return on average equity, broadly in line with our 2017FY guidance.”

He said the bank’s African subsidiaries (ex-Nigeria) 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,” he said.

Analysts’ Assessment
Reviewing the H1 results, analysts at Cordros Capital Limited said UBA recorded a significant growth in gross earnings, driven by impressive growth across income lines – interest income (+44.25 per cent) and non-interest revenue (+16.01 per cent).

“Over H2, we believe the improved yields on interest earning assets (expanded 205 bps to 12.32 per cent in H1-17) – from repricing of loans and elevated yields on investment securities – will remain robust. Hence, for 2017F, we forecast 50 bps y/y expansion in asset yield to 12.15 per cent , resulting in interest income growth of 22.18 per cent y/y to N322.53 billion. On NIR, we believe the gains on FX trading (due to fx related gains and derivative transactions) and growth in fixed income securities trading will persist for the rest of the year (albeit marginal over H1), and as a result, we forecast NIR growth of 24.9 per cent to N132.01 billion for 2017F. Accordingly, we have raised our gross earnings growth forecast higher to 49.44 per cent (previously 30.28 per cent) in 2017F to N470.50 billion,” they said.

On funding cost, the analysts said they have reviewed their 2017F cost of funds estimate 43 bps higher to 4.11 per cent, translating to an interest expense growth of 27.82 per cent to N126.25 billion.

“Our upward review is driven by the surge in interest charge on borrowings, a development we attribute to the bank’s recently issued USD500 million Eurobond at a yield of 7.875 per cent and a range of bilateral facility secured during the year – and Fed Rates hikes impact on LIBOR linked borrowings,” they said.

They explained that the expansion in cost of risk during the period stemmed from an additional N8.57 billion provision for specific credit loss impairment, which they believe relates to exposure to general commerce, manufacturing, oil & gas, and power.

“ At 4.2 per cent in H1 2017, NPL was well-ahead of 2016FY’s 3.90 per cent. For 2017F, we estimate UBA’s NPL to increase to 4.80 per cent , from 3.90 per ent in FY-16, and cost of risk is expected to remain elevated over H2-17, to 2.00 per cent by year end, translating to a credit loss provision of N32.04 billion in 2017F,” they added.

The analysts noted that despite the impact of both the change in the treatment of AMCOM levy (which resulted in a one-off charge on other opex) and the increases in personnel expenses and depreciation expense on total opex (37.35 per cent), efficiency measures still improved over H1 2017(supported by the significant growth in operating income), with cost to income ratio contracting 80 bps 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 opex to N186.38 billion, translating to a 593 bps 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 FY of 2016.

According to them, overall, they forecast PBT and PAT growth of 74.51 per cent and 14.28 per cent to N109.87 and N82.58 billion respectively, equating to 14.28 per cent expansion in EPS (2017F: N2.28).

They said: “Following the upward adjustment to EPS, we raised our target price by 12.17 per cent to N12.62 (previous: N11.25) and rolled forward our valuation to 2018. Our current 12-month TP implies upside potential of 31.59 from current levels, consequently, we recommend a BUY on the stock. UBA is currently trading at 2017F P/BVPS of 0.7x (below the peer average of 0.9x, but in line with the 5-year average of 0.7x) and 2017 FP/E of 4.5x.”