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UNITED BANK FOR AFRICA PLC FY'20- Final dividend payout slashed despite 27% y/y PAT jump

Profits soar 27% y/y after solid gains in FX income UBA recently released its FY’20 results, reporting an 11% y/y growth in Gross Earnings to ₦620 billion (Vetiva: ₦631 billion). This impressive growth was spurred on by a 6% y/y growth in Interest Income to ₦428 billion (Vetiva: ₦460 billion) and a 24% jump y/y in Non-Interest Income to ₦193 billion (Vetiva: ₦171 billion). The rise in Non-Interest Income came as a result of a 15% y/y rise in Fees and commissions to ₦127 billion, gains in fixed income securities (+85% y/y) and FX revaluation gains (+161% y/y). On the other hand, Impairment charges surged 48% y/y to ₦27 billion (Vetiva: ₦18 billion); this was mainly due to a 264% y/y spike in write-offs on loans during the year, most likely caused by the pandemic-induced economic decline. Furthermore, the bank reported a 19% y/y increase in Opex to ₦294 billion, with maintenance costs and AMCON charges contributing the largest portion of this increase. Nevertheless, the bank posted an 18% y/y growth in PBT to ₦132 billion, while PAT grew 27% y/y to ₦114 billion. This yielded an EPS of ₦3.20 (FY’19: ₦2.52) and ROAE of 18.0% (FY’19: 15.9%). However, despite the impressive profit performance, management declared a final dividend payout of ₦0.35/share, a 56% reduction on FY’19 (₦0.80/share). This represents a dividend payout ratio of 16.3%, compared to the bank’s historical average of 39.6%.

Q4 provisions provides clue to management’s dividend decision Despite UBA’s impressive FY performance, Q4 results indicate a steep rise in provisioning for the bank, giving us a clue as to why the dividend payout was so low. In Q4’20, the bank reported a 201% jump q/q in provisions to ₦16 billion, 58% of the bank’s total provisions for the year. After the restructuring of loans which took place in Q2, the bank was able to limit most of its provisioning and maintain steady momentum. However, with many of the restructured loans coming due in Q4, many were written of or added back to stage 3. The bank’s decision to increase its retained earnings by 38% to ₦255 billion, after historically only increasing it by an average of 13% could indicate a more cautious approach in anticipation of further loan losses in 2021. Furthermore, the pandemic—induced slump caused a 1000% jump in impairment losses for the group’s subsidiaries to almost ₦6 billion from a net-positive return of ₦651 million in FY’19. Due to the increase in loan losses, we expect hypothesize that the jump in retained earnings and lower dividend payout are a preemptive measure to shore up the bank’s position ahead of this year’s performance. However, we also note that PAT from these subsidiaries did improve by 25% y/y to ₦30 billion.