A double-digit growth in profit and a decline in impairment charges in the half-year ended June 30, 2019, among others, indicate that cost-efficient and other initiatives by United Bank for Africa Plc have started yielding desired fruits, writes Goddy Egene
“Whilst uncertainties around future fiscal policies and broader macro events may dominate the business environment (in 2019), we remain optimistic about these economies and more importantly, we are confident of our resilient business model and governance structure, which have overtime relatively shielded our earnings and balance sheet quality from the volatilities that may arise from these external events. Interestingly, post-election, we expect new economic reforms that will further open these markets for new business opportunities as the increasing demand from electorates and maturing democracy will accelerate implementation of requisite reforms that are pertinent for economic progress.
“I can assure all stakeholders that we will continue to deepen our play in target growth sectors that are benefactors of the government’s reforms and policies whilst also banking new opportunities. This will ensure your bank stays ahead of the curve on all performance metrics, even as we fulfil our aspirations of powering inclusive growth and development of the economies, where we operate,” these were the words of the Group Managing Director/CEO of United Bank for Africa Plc, Mr. Kennedy Uzoka to shareholders last year, when he was projecting into 2019 financial year.
“Distinguished shareholders, we are on a new cost optimisation journey and I believe that the comprehensive strategy being diligently executed by our Assurance teams, with the support of everyone, will yield positive results.
“More importantly, these cost-efficient initiatives will complement our revenue growth drive in moderating our cost-to-income ratio towards our desired target. Overall, we are set to deliver stronger performance in 2019,” Uzoka had added.
Half year into the year, UBA has delivered on its promise to stakeholders posting impressive results. While some of its peers recorded muted growth, UBA ended the half year with a jump in profit after tax (PAT) and rewarded the shareholders with an interim dividend of 20 kobo per share.
Half-year financial performance
Despite the increasingly unpredictable environment witnessed in some of countries where UBA operates, it delivered double digit growth in its profit before tax (PBT), rising by 21 per cent to N70.3 billion in 2019, up from N58.1 billion recorded in the corresponding period of 2018.
PAT grew faster by 29.6 per cent to N56.7 billion, compared with N43.8 billion achieved in the corresponding period of 2018. The profit for the first half of the year, translated to an annualised return on average equity of 21.7 per cent. The PAT was recorded from gross earnings of N293.7 billion, a growth of 14 per cent as against N257.9 billion in 2018.
The bank recorded a decline in impairment charges, which fell from N6.732 billion to N3.12 billion in 2019. The decline stemmed from improved risk management strategy and recovery efforts. The bank recovered about N2.232 billion in the period.
A further analysis of the performance showed that as at 30 June 2019, the bank’s total assets grew by 4.8 per cent crossing the N5 trillion mark to N5.10 trillion. Customer deposits also rose by 4.8 per cent to N3.51 trillion, compared to N3.35 trillion as at December 2018. This growth trajectory underscores UBA’s market share gain, as it increasingly wins customers through its revitalized customer service culture coupled with innovative digital banking offerings. The bank’s shareholders’ funds remained strong at N542.5 billion, reflecting its strong capacity for internal capital generation.
Bank explains performance
Commenting on the results, Uzoka said: “I am pleased with the half performance of the Group, having delivered 14 per cent growth in gross earnings and 21 per cent growth in profit before tax. Despite the subdued yield environment in some of our large markets, we achieved a nine per cent growth in interest income and defended the net interest margin. We also achieved a 39 per cent growth in our electronic banking revenues, as we broaden and deepened our digital banking play across Africa. Revenues from our remittance and funds transfer businesses grew 69 per cent and 53 per cent respectively. All these factors attest to the efficacy of our strategies and the resilience of our business model.”
He said he was very optimistic that the ongoing group-wide transformation programme would in the quarters ahead, enable the bank deliver substantial operational efficiencies and best-in-class customer service, which will ultimately boost earnings.
“We sustained our asset quality with the non-performing loan (NPL) ratio down to 5.62 per cent, from 6.45 per cent as at 2018 full year(FY). We will continue to adopt best practice standards to grow and manage the portfolio in the quarters ahead,” Uzoka said.
Speaking in the same vein, the Group Chief Financial Officer (CFO), UBA, Ugo Nwaghodoh said: “We had a strong start in the year given the prevailing macroeconomic environment across our various markets. There is better dispersion in profit contribution as our banking subsidiaries across Africa contributed 38 per cent of the profit before tax, whilst our recently repositioned United Kingdom (UK) business contributed four per cent. We expect this dispersion to continue, as the subsidiaries consolidate on their share of the various markets.”
He said was particularly delighted that the key ratios were trending in the right direction.
“The net interest margin is trending upwards and will continue to improve as we responsibly grow the risk asset portfolio and realign the funding mix to lower our cost of funds. The cost-to-income ratio trended down to 60 per cent with our focus on balance sheet and operational efficiencies which should enable us deliver our medium term Cost Income Ratio (CIR) target.
“Capital adequacy ratio increased to 28 per cent from 23.6 per cent in December 2018, providing a very strong buffer for asset growth,” Nwaghodoh stated.
Assessing the second quarter results, analysts at FBNQuest Research said UBA’s earnings surprised positively relative to their and consensus forecasts.
“Compared with our forecast, PBT and PAT of N40.1 billion and N24.4 billion beat by 34 per cent and 28 per cent respectively. On an annualised basis, UBA’s H1 2019 PBT of N70.3 billion tracks well ahead of consensus FY 2019 PBT forecast of N105 billion. The bank’s H1 2019 PAT also implies an annualised ROAE of 24.8 per cent, significantly ahead of management’s 2019 guidance of 18 per cent,” they said.
According to them, UBA’s pre-provision profits grew by nine per cent on the back of stellar (+41 per cent) growth in non-interest income. In addition to the growth in pre-provision profits, a 73 per cent reduction in loan loss provisions was the major driver behind the strong PBT growth of 27 per cent to N40.1 billion.
“Below the tax line, PAT improved markedly to N24.4 billion compared with an after tax loss of N2.3 billion in Q2 2018. Following the reduction in loan loss impairments, UBA’s cost-of-risk improved by 100bps y/y to 0.3 per cent during the quarter,” FBNQuest Research said.
Agusto & Co Rating
Meanwhile, Agusto & Co. Limited assigned an “Aa-” rating to UBA, saying the rating reflects the bank’s performance as underpinned by its good liability generation strategy and upheld by a strong brand franchise.
“This is in addition to a good liquidity profile, satisfactory asset quality given the operating terrain, as well as good capitalisation for current business risks. UBA’s rating is, however, constrained by weaknesses in the overall macro economy, a comparably lower net interest spread and a high cost to income ratio, limiting competitive profitability levels vis à vis Tier 1 banking peers,” Agusto & Co said.
With the Central Bank of Nigeria’s recent regulation requiring deposit money banks to maintain a loan-to- deposit ratio(LDR) of at least 60 per cent, Agusto &Co. noted that as at December 31, 2018, the banking industry’s loan to deposit ratio stood at 63 per cent.
“When we back out loans funded by borrowings from multilateral financial institutions, this ratio would be significantly lower. Further examining this ratio by bank shows that most Tier 1 banks recorded LDRs below the newly introduced floor of 60 per cent. The CBN’s target is to compel banks to increase lending to the private sector, particularly SMEs, retail, mortgage and consumer lending with a view to stimulating economic growth through increased lending to the real sector. However, with Stage 3 loans accounting for over 10 per cent of gross loans and advances as at December 31, 2018, alongside a lingering macroeconomic lull, asset creation strategies of banks are expected to be conservative in the short-term,” the rating agency said.