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UBA Plc - Rest of Africa to drive earnings growth in near term

• UBA earnings dragged over full-year 2018, with EPS growing at the slowest pace in five- years by 1.4% YoY to N2.30 due to decline across income lines - net interest income (-0.96% YoY) and non-interest revenue (-14% YoY). On the former, the pressure was induced by increase in funding cost (+40bps YoY) which, overlaid with a decline in assets yield (-52bps YoY), resulted in Net Interest Margin (NIM) contraction by 94bps YoY. Elsewhere, following loss on the bank’s derivative position of N31.5 billion, total NIR declined over the year. However, we note that, if adjusted for unsustainable lines on net trading and other income, sustainable NIR would have declined by just 3.4% YoY to N78 billion over FY 18 from N80 billion in FY 17, with EPS expansion of 137% YoY. Overall, we note that UBA’s reported earnings growth over FY 18, emanated largely from a decline in loan-loss provision by 86% YoY to N4.5 billion following additional write back over Q4 18.
• At its full year 2018 analysts conference call, management guided to increased focus on Kenya, Ghana, Cote D’Ivoire and Uganda as the key market for loan growth over 2019. Coupled with the expectation of loan growth in the manufacturing, trade finance, agriculture backward integration and oil & gas sectors in Nigeria, management guided to loan growth of 12% over 2019. With the expectation of an early resolution on its exposure to Ghana bulk purchasing company and a possible reclassification of the 9Mobile (after the minimum 6 months waiting period) management expects NPL to decline to 5% in FY 19 (FY 18: 6.4%). As a result, management expects Cost of Risk during the year to be approximately 1%, cost to income ratio of below 60% and ROAE of ~18% (FY 18: 15.2%).
• While noting the sluggish performance over 2018, we believe UBA growth story across Africa remains compelling. Particularly, we expect meaningful growth in earnings over 2019 on the back of strong retail deposit growth, increase in loan book, expansion in trading book and net fee income, and healthier asset quality. Consequently, we see FY 19E earnings growth of 15% YoY to N90.2 billion (lower than prior estimate of N102.5 billion), with FY 20F and FY 21F growth forecasts of 6% and 5% respectively. Overall, we maintain our STRONG BUY recommendation with a revised FVE of N13.04 (previously: N14.10). UBA trades at a FY 19F price-to-book of 0.8x, a discount to Tier 1 average of 1.0x. At current price, our expected dividend of N0.94 over FY 19F translates to a dividend yield of 12.5%. Key risks include decline in loan book and sticky NPLs which could necessitate higher than expected loan-loss provision.