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Initial View - UBA Plc FY 19 - Red flags in Q4 performance, appealing dividend

• UBA released its audited FY 2019 results on Friday evening with PBT and PAT expanding 4.2% YoY and 13.3% YoY respectively. The growth in earnings was supported by improved performance in interest income and Non-interest revenue. Interestingly, rest of Africa operations continued to impress, contributing circa 47% to PBT (FY 18: 41%). UBA’s FY 19 PAT of N89.1 billion prints lower than our forecast of N94.3 billion, representing a 5% deviation to our estimates. Though operating income came in line with our estimates, the deviation stemmed from a higher net loan loss provision reported over the period. While impairment loss on loans declined by 58% YoY, recoveries in allowance for credit loss were significantly lower (N2.3 billion in FY 19 vs N37.0 billion in FY 18). That said, UBA declared a final dividend of N0.80/share (final dividend in 2018: N0.65) which translates to a dividend yield of ~12% based on last closing price.
• On interest income, UBA recorded a 10.8% expansion while asset yield flat lined at 8.3%. The expansion was largely driven by increases on earnings on investment securities (+14% YoY) and loans (+7% YoY). While average yield on loans moderated (-137 bps YoY), yield on investment securities (+233 bps YoY) helped keep overall asset yield intact. On the other hand, funding cost expanded at a faster pace (+16.3% YoY) with WACF printing higher by 11 bps. The increase reflected more expensive term deposits with CASA (as a share of total deposit) moderating to 73.5% (FY 18: 76.9%). Overall, NII expanded 7.9% YoY with related margin weakening by 18 bps to 4.5%.
• Elsewhere, UBA recorded a growth of 21.3% YoY in Non-Interest revenue against the backdrop of better electronic banking fees, credit related fees, trading gains on fixed income securities. In addition, UBA recorded a lower FX revaluation loss of N10.2 billion compared to a loss of N31.5 billion in 2018. 
• Streamlining to the quarterly numbers, UBA reported a 70% QoQ decline in EPS (N0.22/share), making it the lowest EPS since Q4 2011 where the bank recorded a loss of N0.58/share. From our breakdown, the moderation in earnings reflected lower NIR (-49.8% QoQ) and higher loan loss provisioning (+227% QoQ). On the former, the only line item that stood out was a loss of N2.6 billion (vs gain of N8.9 billion in Q3 2019) in credit related fees. While this figure is not entirely clear to us, we think it could be related to reclassification on the bank’s income line. Nonetheless, we will get more clarity on this from management. The last straw that broke the camel’s back was an increase in loan loss provisioning on interbank loans as well as other assets. Again, we will be seeking more information on this.
• On a positive note, NII (+29% QoQ) came in strong mirroring an expansion in interest income (+15% QoQ) and lower funding cost (-0.6% QoQ). Growth in interest income was reflective of expansions in loan book (+6.5% QoQ) and investment securities (+12.6% QoQ). Asset yield printed higher by 79 bps. For funding cost, WACF moderated by 24 bps reflective of lower interest expense on interbank takings.
• The stock currently trades at a current P/B of 0.45x which is at a premium to its one-year average of 0.43x. Our last communicated FVE on UBA is N13.04 which translates to a BUY rating on the stock. We will revisit our numbers after further discussion with management

More analysis to follow.

Largely from the rest of Africa operation