Cost Containment Boosts UBA’s Bottom-line

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Goddy Egene writes that cost containment and improved earnings from its Africa operations combined to help United Bank for Africa Plc record higher profits in 2015 despite economic headwinds

United Bank for Africa (UBA) Plc was among the earliest banks to announce their audited results for the year ended 2015. Given the   regulatory and economic headwinds, many investors were highly apprehensive that they will get lower returns on their investments in banks.  Profit warnings by some backs heightened those apprehensions.  However, UBA is among the banks that have put smiles on the faces of their investors having posted improved performance and declared higher dividends. Despite the challenging operating environment, UBA recorded a growth of 24 per cent in profit after tax (PAT) to N69.65 billion. The bank rode on the back of cost containment strategy to defy competition and macroeconomic pressures to post the impressive performance.

Financial Results
United Bank for Africa Plc has gross earnings of  N314.8 billion up by 9.8 per cent from N286.6 billion. Net interest income grew by 30 per cent from N106 billion to N137 billion. However, impairment charges jumped by 58 per cent to N5.1 billion, from N3.2 billion. Despite the high impairment charges, UBA ended the year with a profit before tax (PBT) of N68.45 billion, showing an increase of 22 per cent from N56.2 billion to N68 billion, while PAT grew by 24 per cent to N59.65 billion, from N47.9 billion recorded in 2014.
Following the impressive performance, the board has proposed a final dividend of 40 kobo per share, bringing the total dividend for the 2015 financial year to 60 kobo per share. UBA had earlier paid an interim dividend of 20 kobo per share, following the audit of its 2015 half year results.

Management Explains Results

Commenting on the result, the Group Managing Director /CEO, UBA Plc, Mr. Phillips Oduoza,  said: “Our 2015 profit is a new high, reflecting the hard work and discipline of our board, management and staff in creating value for all  stakeholders. We remain committed to growing in a responsible manner that aligns with our vision of building an enduring institution.”
He said the bank’s resilient business model, geographic diversification, proactive strategies, and strong governance created an edge for it through the year.
“We will continue to invest in our future whilst managing cost tightly to generate strong returns to shareholders,” he assured.

Speaking in the same vein, Group Chief Finance Officer (GCFO) of the bank, Mr. Ugo Nwaghodoh said: “Amidst macroeconomic volatilities, we leveraged efficiency gains in our business development and operations to grow earnings. We improved on our balance sheet management and pricing, thus ensuring a strong 19 per cent growth in interest income as well as an enhanced net interest margin of 6.3 per cent. Our improved service delivery and customised offerings helped in growing transaction banking volume, with attendant fee income. Whilst we were exposed to some external cost pressure, we managed to keep our cost growth at five (below the average inflation rate of nine per cent  in Nigeria; our core market which represents three-quarter of our operations).”

He expressed satisfaction at the performance of the bank’s Africa operations, particularly in synergy extraction and pursuit of scale economics to achieve market share and earnings targets.

“Precisely, UBA Africa contributed 24 per cent of our Group’s profit before tax in the 2015, despite the impact of cross-currency depreciation in some of our markets. Whilst our cautious stance on lending in Nigeria moderated the loan book, we recorded a collective 14 per cent loan growth in UBA Africa, as we deepen market penetration and our share of customers’ wallet. Our prudence and discipline in risk asset creation over the past half-decade sustained the quality of our loan portfolio; non-performing loan (NPL)  ratio stabilised  at 1.7 per cent with full provisions coverage,” Nwaghodoh  stated.

PAT Surges on Cost Containment

Reviewing the performance of UBA, analysts at Afrinvest (West Africa), said despite a turbulent macroeconomic environment in 2015, UBA’s gross earnings expanded 9.8  to N314.8 billion  from N286.6 billion  2014, 7.8 per cent less than their (analysts)’  forecast of N341.4 billion.

“Much in line with our expectation, the Group also recorded a remarkable 24.5 per cent growth in PAT to N59.7 billion (relative to our N57.4 billion forecast) from N47.9 billion in 2014.  Gross earnings was buoyed by 19 per cent increase in interest income to N234 billion from N196.7 billion in 2014. Net trading and foreign exchange income came in 50.6 per cent lower  to N16.0 billion from N32.4 billion in  2014 resulting in a 6.3 per cent decline in non-interest income to N80.9 billion in 2015. We believe the bank’s impressive performance was bolstered by its renewed drive to consolidate its operations in Africa (19 Countries), the United States  and the United Kingdom.,” they said.

The analysts noted that  UBA’s PBT and PAT margins improved 2.1 per cent and 2.2 per cent to 21.7 per cent and 18.9 per cent in 2015 respectively, even as Return on Average Equity (ROAE) and Return on Average Asset (ROAA) inched   higher to 20 per cent and 2.2 per cent in 2015 from 19.2 per cent and 1.8 per cent in that order.

Faster Growth in Operating Income

They explained that on the back of stronger growth in operating income, UBA’s Cost to Income Ratio (CIR) eased to 65 per cent in  2015 from 68.6 per cent in 2014.
“A further review of its  operating expenses (OPEX) indicated that the Group was able to contain spending on key cost items during the period as against sharp increments noticed in 2014,” they said.

 Low Cost of Risk Despite Challenges

The Bank’s loan book contracted 6.1 per cent, settling at N1.1 trillion in 2015. This is not surprising given the challenges in the bank’s largest market (Nigeria) in 2015. “Notwithstanding the concerns in the economy, UBA’s Cost of Risk (CoR) settled at 0.5 per cent in 2015 relative to 0.6 per cent in 2014, though impairment charges on loans expanded 58.7 per cent to N5.1 billion. We believe UBA’s lower CoR reiterates the Group’s sound risk management structure relative to Tier-1 peers given an average annualised CoR of 1.0 per cent based on 9-month earnings.  Higher average CoR across the sector was triggered by huge impairment losses booked in 2015. Similarly, total assets eased 0.4 per cent to stead at N2.8 trillion. Loan to Deposit ratio stood at  49.1 per cent in 2015 from 50.2 in prior year. When compared to CBN’s regulatory benchmark of 80.0 per cent, the bank remains well positioned to expand risk assets at   current level of deposits,” they said.

 Adequately Capitalised with a CAR 20%

Afrinvest said UBA is  adequately capitalised with Capital Adequacy Ratio (CAR) of 20 per cent in  2015, above the required 16 per cent  for Systemically Important Banks (SIBs), following the recently issued Tier-I & II Capital.
“Total liability, however, moderated 3.1 per cent  to N2.4 trillion  from N2.5 trillion in 2014 as customer deposits slipped 3.9 per cent  to N2.1 trillion in  2015 from N2.2 trillion in previous year.

Rating
The analysts said against the backdrop of strengthening performance in its African market, they  expect UBA to sustain the positive momentum in 2016.
This, they said, might, however be slowed by huge pressure in its Nigerian market given the unrelenting challenges in the economy.

“ On a balance of factor, we envision loan (+5.0 per cent) and deposit growth (+3.0 per cent) to stay modest, nonetheless we expect UBA’s improved risk management structure and cost containment efforts to  support bottom line. Thus, we maintain our earnings projection for the Group in 2016. The Group’s 2015 EPS settled at N1.79 per share higher than N1.50 in the previous year. Consequently, the Bank proposed a dividend per share of N0.40 implying a payout ratio of 22.4 per cent. On the basis of the foregoing, we maintain our target price at N4.99 per share. Therefore, we retain our BUY rating on the UBA,” they said.