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Initial View: UBA Plc 9M 2018 - Funding Cost thwart Earnings Growth

• United Bank for Africa (UBA) released 9M 2018 results with earnings printing in line with our expectation as EPS expanded slightly by 1.3% YoY to N80/share. Despite growth in Non-Interest Revenue and moderation in loan-loss provision over the period, the earnings was weighed down by sharp jump in funding cost.
• Funding cost, a thwart in earnings. Over 9M 2018, interest expense rose to a record high, with interest expense as at 9M 2018 already matching the amount recorded over FY 17. Higher interest expense (+37.85 YoY to N2 billion) over the period reflected a jump in funding cost on customer deposits (+44% YoY to N79.1 billion) and an increase in borrowing cost (+30% YoY to N33.1 billion). Consequently, funding cost (WACF) printed at 4.1% (+43bps YoY). Importantly, higher interest expense on customer deposits mirrored higher term deposits as a share of total deposit which expanded to a record high of 30.6% (FY 17: 25.4%) over the review period. Elsewhere, we believe the growth in its borrowing cost is linked to the principal repayment of its subordinated bond of N35 billion which it issued in September 2011. On the other hand, growth in interest income  (+13% YoY to N268.9 billion) was not enough to withstand the pressure from funding cost. Consequently, Net Interest Income fell 1.0% YoY to N150.7 billion.
• Fee income boost earnings. On the positives, net fee income expanded by 9.4% YoY to N1 billion on the back of E-banking income (+27.6% YoY to N19.9 billion) and trade transactions income (+80% YoY to N13.5 billion).  Also, other operating income rose 40% YoY to N4.2 billion. In line with our view of a moderation in trading income due to the bank’s derivative maturity of $300 million in Q3 18, trading income declined 6.0% YoY to N32.4 billion.
• Lower Loan-Loss Provision. Providing some cheer to the bank earnings was a moderation in loan loss provisioning to N7 billion (-17.3% YoY) reflecting decline in specific provisioning to N10.6 billion, and N3.7 billion in recoveries. Consequently, annualized cost of risk printed at 0.9% (9M 17: 1.1%). On other fronts, operating expenses increased slightly by 2.3% YoY to N149.1 billion with Cost-to-Income ratio inching higher by 104 bps YoY to 62.5%.
• Sluggish quarterly performance. Over Q3 alone, the bank reported EPS of N52 (-10.7% QoQ) due to a combination of lower NIMs and NIR (-9% QoQ to N30.3 billion). For context, despite WACF staying flat over the quarter, lower asset yields (-84 bps to 11.2%) during the period suppressed NIMs (-250 bps to 6.0%) lower. Also, lower NIR in the quarter mirrored lower trading (-13% QoQ to N11.9 billion) and other income (-105% QoQ). Elsewhere, impairment charge moderated 25.3% QoQ to N3.9 billion.
• Although UBA’s result wasn’t impressive but it was in line with our expectation, with earnings expected to advance higher over FY 18 on the back of higher interest income, lower loan-loss provision, and resilience in fee income. That said, we will be seeking clarity from management on the decline in its CASA ratio as a share of total deposit.
• The stock is trading at a P/B of 0.61x, a discount to peer average of 0.92x. Our last communicated FVE on UBA is N10 which translates to a STRONG BUY rating on the stock. We will revisit our numbers after further analysis and discussion with management.