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UBA Plc. 9M 17 - Weighed by expensive funding

• As market watchers say, late Friday is the best time to release bad earnings while early Monday is the perfect timing for an impressive result. With this in mind, UBA’s early release on Monday was initially greeted with optimism, with a more critical assessment of the performance revealing concerns on a quarterly basis.
• 9M 17 earnings was spurred by higher asset yields. Aided by higher yield on assets and implied expansion in Net Interest Margin (NIM) to 5.8%, UBA posted EPS of N68 (+28% YoY) over 9M 17. Elsewhere, non-interest revenue (NIR) also remained crucial in the period, with its reported 18% YoY jump, on the back of robust increases across trading income on FI and FX, providing further earnings support.
• Q3 17 results analysis. That said, quarterly breakdown revealed underlying weaknesses owing largely to higher interest expense and tamer revenues from the non-interest leg. Precisely, while interest income was up 6.3% relative to prior quarter with yield on assets trending higher to 9.5%, interest expense rose by a sharper 13.5% QoQ to N2 billion with annualized cost of funds (WACF) tracking higher by 41bps to 4.1%. The foregoing drove a contraction (-16bps QoQ) in NIM to 8.2%. 
• FX loss on derivative position restrains NIR growth. UBA booked an FX loss of N4 billion in the review quarter that stemmed from revaluation of its derivative position (notional value ~N30 billion). The foregoing, combined with sizable decline in FX trading income, led to a decline in NIR. Consequently, cost-to-income ratio expanded by 10.8pps QoQ to 67.7% despite marginal increase in operating expenses (20bps QoQ).
• Overall, the impact of higher funding cost and decline in NIR drove EPS lower to N51 (-7% QoQ). ROAE was down 1.7pps relative to prior quarter at 15.0%.

 Outlook

• Funding cost pressures to subsist in Q4. Given the currently lower yield environment, relative to the last nine months, we expect some moderation in asset yields in Q4 17E (-74bps QoQ to 8.7%) and thus forecast Q4 17 interest income at N6 billion (-6% QoQ). Further down, we expect pressures from funding cost to persist into the last quarter due to expensive term funding and thus forecast WACF at 4.9% (+76bps QoQ). Consequently, NIM should print at 7.6% (-62bps QoQ).
• Higher NIR and lower provisioning should buoy earnings. On NIR, given our expectation of near term naira stability, we see limited scope for further FX loss on the company’s derivative position. This, alongside expected gains from FI and FX trading as well as net fee income, guides to NIR projection of N2 billion (58% QoQ). Furthermore, given improvement in key sectors, we forecast NPL and Cost of Risk at 4% and 1.5% respectively.  In all, Q4 17E EPS should print at N0.58.
• Expected cancellation of SSIT shares elevates outlook. On balance, adjustment for Q4 17 estimate should bring FY 2017E EPS to N26 (+14% YoY). However, we have adjusted our shares outstanding to factor in the repossession/cancellation of unvested portion of shares under the Staff Share Investment Trust scheme (SSIT) Scheme – 2.08 billion units, for which we expect completion before year-end. Consequently, FY 2017E EPS should print at N2.40 (+20% YoY).
• Our revised FVE of N25 translates to an OVERWEIGHT rating on the company. UBA trades at a P/B of 0.66x relative to peer average of 0.9x

See attached for full report