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UBA PLC H1'19 Earnings - Diversified earnings base to prop H2'19 profitability

Spike in foreign exchange income boosts bottom-line                                                     

Non-interest income boosts H1’19 topline: UBA improved on its impressive Q1’19 financial performance to close the Q2’19 period a notch higher. An 18.5% q/q growth in Operating Income; thanks to a 333.1% q/q surge in Net Trading and Foreign Exchange Income to ₦26.6 billion, lifted Gross Earnings by 23.3% q/q to ₦162.4 billion. In Q2’19, UBA’s Interest Income of ₦106.3 billion was up 7.9% q/q, 11.1% above our estimate; driven by a 44.3% jump in investment securities income, specifically T-bills. Nonetheless, a 34.1% q/q jump in Interest Expense to ₦54.3 billion; caused by a 37.5% spike in interest paid on customer deposits, leading to a 10.4% q/q decline in Net Interest Income to ₦52.0 billion, in line with our estimate. Overall, Operating Income came in 18.5% higher q/q at ₦108.1 billion. PBT also came in 33.8% higher q/q at ₦40.2 billion- this was in spite of an 11.9% q/q rise in Opex to ₦66.5 billion; a result of the sharp rise in Non-Interest Income. However, PAT was down 2.1% q/q to ₦28.1 billion, due to a hike in realized tax expense to ₦12.0 billion vs ₦1.5 billion in Q1’19. Thus, Q2’19 EPS growth tapered slightly to 31.7% (Q1’19 - 34.4%).                                                           

Non-interest income to continue to support FY’19 topline: For H2’19, we expect UBA to struggle to surpass its H1’19 Interest Income scorecards due to the yield environment and a dearth of high-yielding dated bills within its portfolio. The bank would need to aggressively grow its loan book in H2’19 to prop FY’19 interest income, a tough task given its 1.6% contraction in customer loans in H1’19. Nonetheless, we have modeled a 6.2% expansion in loan book and as such expect loan loss provisions to print at ₦9.0 billion, based on the sector weighting requirements, in compliance with CBN guidelines. UBA’s non-interest income has continued to grow its contribution to Gross Earnings, from 27.4% in H1’18 to 30.3% as at H1’19 (Q2’19 - 34.5%). We believe UBA can maintain its H1’19 run rate for fees & commissions and remittances but view the superlative q/q growth in foreign exchange income as a one-off.