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UBA FY 2020 performance ends on a good note

• UBA released its audited FY 2020 results, with PBT and PAT expanding 18.5% YoY and 27.7% YoY respectively. The growth in earnings was supported by improved performance in interest income, Non-interest revenue and lower interest expense. Notably, the rest of Africa operations continued to impress, contributing circa 57% to PBT (2019: 47%). UBA’s FY 2020 PAT of N113.8 billion prints higher than our forecast of N96.9 billion, representing a 17% deviation from our estimate. Precisely, while net interest income was in line with our estimate, the deviation stemmed from a higher than anticipated Non-interest revenue. Overall, UBA declared a final dividend of N0.35/share (final dividend in 2019: N0.80) which translates to a dividend yield of 5% based on last closing price. Despite better earnings result, Management alluded the lower dividend payout to being cautious as well as the need to build capacity for the current year.
• Over FY 2020, net interest margin remained pressured due to the low-rate environment, declining by 60bps YoY to 5.4%. For context, asset yield declined at a faster pace (-206bps YoY), relative to cost of funds (-126bps YoY). Net interest income rose by 16.9% YoY reflecting higher interest income (+5.7% YoY) and lower interest expense (-8% YoY). To shed more light, the expansion in interest income reflected higher interest earnings on loans and advances, as the bank grew loans to N2.55 trillion (24% YoY). Meanwhile, lower interest expense on deposit from customers (-17.1% YoY) accounted for the moderation in interest expenses. We noted an improvement in CASA to 81.8% (+830bps YoY).
• Elsewhere, UBA recorded a growth of 19.1% 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 FX revaluation gain of N6.2 billion compared to a loss of N10.2 billion in 2019.
• Streamlining to quarterly numbers, UBA reported an increase in PBT and PAT by 24.8% QoQ and 12% QoQ, respectively. Precisely, higher net interest income (+10.1% QoQ) – a fallout of lower interest expense (-5.5% QoQ), higher Non-interest revenue (+33% QoQ) and lower operating expenses (-5.5% QoQ) anchored the improvements in quarterly numbers, outweighing the increase in impairment (+323.4% QoQ). On interest income, the bank recorded a 0.7% decline owing to moderations in earnings on investment securities (-3.1% QoQ) as well as loans to customers (-2.7% QoQ). On the other hand, a decline in interest expense on customer deposit (-32% QoQ) resulted in lower interest expense. Meanwhile, Non-interest revenue rose due to higher trading income (+30.6% QoQ) and fee income (+40.3% QoQ).In terms of asset quality, NPL ratio declined by 60 bps YoY to 4.7% reflecting growth in loan book as mentioned earlier. However, UBA still booked higher loan loss provision of N27 billion (+48% YoY) while cost of risk flatlined at 0.9%.
• Over 2021, we expect growth in earnings to stem from higher net interest income (+19% YoY) hinged on our expectation of a gradual recovery in interest rates. That said, we expect a slight expansion in NIM which should reflect higher asset yields. Meanwhile, while management guided to a 20% expansion in loans to meet the minimum LDR requirement, we take a conservative stance with an expectation of a 10% increase in loan book as we expect management to be cautious. Elsewhere, we expect continuous expansion in NIR (+14% YoY), which is a reflection of our expectation of higher trading income as well as fee income. The impact of these adjustments translates to a revised PBT of N180 billion (+28% YoY). The adjustment is a 17% increase in our FVE to N12.18 (Previous: N10.39) and maintain our BUY recommendation. On our numbers, UBA is trading on a FY20 P/E and P/E multiples of 2.2x and 0.34x.