UNITED BANK FOR AFRICA PLC 9M'19 Earnings - Impressive 9M’19 Scorecards Despite Q3 Miss

Impressive 9M performance on weaker base year
UBA recently released its 9M’19 results, displaying marked y/y improvements in top and bottom lines. The bank recorded a 14% y/y rise in Gross Earnings to ₦428.2 billion (Vetiva estimate: ₦430.9 billion), while Operating profit increased 16.9% y/y to ₦104.3 billion (Vetiva estimate: ₦110.0 billion) and PAT surged 32.3% to ₦81.6 billion (Vetiva estimate: ₦83.0 billion). Based on these numbers, the banks annualized Return on Average Equity currently stands at 20.6% (Q2’19 ROAE: 21.7%). While these numbers are impressive y/y, we observed relatively weaker output in Q3 than previous quarters with key pressure on non-core banking activity.

Lower investment income impacts core earnings
A closer look at UBA’s Q3 performance reveals substantial q/q declines in earnings - a trend that appears consistent across most Deposit Money Banks under our coverage thus far. The bank recorded Interest income of ₦93 billion (Vetiva estimate: ₦95.4 billion) during the quarter, down 13% y/y following a q/q dip in income from investment securities and corporate loans. However, Net interest income was down just 6% q/q to ₦48.8 billion (Vetiva estimate: ₦51.6 billion), as the bank limited Interest Expense to ₦44.2 billion, moderating 18.5% q/q on the back of a 13% q/q reduction in the average spend on customer deposits – customer deposits however declined by 4% q/q to ₦3.4 trillion. Given the regulatory drive for increased lending to “priority sectors” and amid the current yield environment, we have adjusted our interest income estimates for Q4 to account for the dip in investment income and reduced our Q4 interest expense projections to reflect the banks cheaper cost of funds.

Non-interest Income weighed by derivative/Fx losses
UBA’s Q3’19 non-interest income of ₦41.2 billion (Vetiva estimate: ₦34.4 billion) was down 26.5% q/q, largely due to a sub-par performance from the Net trading and foreign exchange income line. A ₦2.3 billion loss on derivatives and FX revaluation reduced modest gains in Fx trading income (₦5.1 billion) to just under ₦3.0 billion during the quarter compared to ₦26.6 billion realized in Q2’19 and ₦11.9 billion in Q3’18. Consequently, operating income was down 9.6% q/q to ₦83.0 billion (Vetiva estimate: ₦93.0 billion), while Opex was up 3.7% q/q to ₦52.0 billion, resulting in a cost-to-income ratio of 60.8% and a 3-month PBT of ₦27.5 billion (Vetiva estimate: ₦34.4 billion).