Sunny result as loans and advances increase

Monday October 4e, 2021 / 1:13 AM / By Adaeze Nwachukwu, Proshare Research / Header image credit: UBA Group

With a recent upgrade from United Bank for Africas (UBA) National short term Default Issuer Rating (IDR)
by Fitch at ‘F1 + (nga)’ from ‘F1 (nga)’, H1 2021 results also reflect the basis on which its ratings have been upgraded. The improvement in earnings was supported by the improvement in interest, fees and commissions. Cash and bank balances made up a large percentage (58%) of total income, while income from electronic banking services contributed the most (42%) of total income from other fees and commissions.

H1 2021 result: Highlights

  • ggross profits increased year over year (year on year) by + 5.13% to N316.04bn in H1 2021 from N300.61bn in H1 2020.
  • Net interest income increased by + 24.09% to N148.07 billion against N119.32 billion in H1 2020
  • The net interest margin increased to 5.80% in H1 2021 compared to 5.4% in full year 2020.
  • Profit before tax increased by + 33.36% to N76.19 billion to N57.13 billion in the first half of 2020
  • Basic and diluted earnings per share increased by + 36.29% to N1.69 from N1.24 to H1 2020
  • Loans and advances to customers increased by + 20.50% at N2.63trn in H1 2021 from N2.19trn in H1 2020
  • Customer deposits increased by + 26.98% at 6.09 trn N from 4.80 trn N in the first half of 2020
  • Total assets increased by + 22.73% in H1 2021 at 8.32 trn of N6.78 trn in H1 2020
  • Shareholder fund increased +22.73 to N752.52 billion in H1 2021 from N634.73 billion in H1 2020
  • Return on average equity increased to 17.50% from 14.40% in the first half of 2020
  • The cost / income ratio fell to 62.30% against 67.00% in the first half of 2020
  • The solvency ratio stands at 23.90% in the first half of 2021 above the regulatory minimum of 15%
  • The group’s bad debt ratio improved to 3.50% in H1 2021 from 4.1%.

A technical look

The year-to-date UBA stock price movement (YTD) showed a negative return of -13.87% from 29eSeptember 2021. the stock traded at its highest between January and February; it hit its lowest level in March 2021. Although stock prices are trending upward, they haven’t reached the levels they had at the start of the year.

Although the trend in the Bank’s share price has moved in the same direction as the banking sector index, the UBA’s share value has experienced a higher negative return compared to the Bank’s index. sector and the NGX All Share (ASI) index, both of which fell by -5.36% and -1.68% respectively (see table 1 below).

By calculating the correlation coefficient between UBA and its Level 1 counterparts, it has a positive relationship between all of them, however, had different strength levels between them. A positive relationship indicates that the stock price moves in the same direction when one falls, the other falls. In the interest of a diversified and balanced investment portfolio, if a portfolio contains more than one level 1 bank stock, when the price of one stock falls, the price of the other stock will most likely fall because they are both in the same direction.

The correlation coefficient of UBA and FBNH was 0.22, which was positive but weak, while GTCO, Access Bank, Zenith Bank and ETI were all positive and strong at 0.55, 0.52, 0.77 and 0.87, respectively.

Graph 1: YTD share price and movement of the banking sector index at 29e September 2021

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Source: NGX, Proshare research

Profitability – A modest boost to the upside

Level 1 institution’s gross revenues increased year-on-year by + 5.26%to N316.04bn in the first half of 2021 from N300.28bn in the first half of 2020. Interest income accounted for 70%, while non-interest income contributed 30% of the bank’s gross profits in the period.

Growth in gross revenues was supported by a + 8.29%
increase in interest income and a -13.56% decrease in interest charges.

The bank recorded its strongest percentage growth of + 37.53%
gross profit in the first half of 2017, while the first half of 2020 saw the lowest percentage growth of
+ 2.24% during the period under review (see table 2 below).

Unlike the growth in naira, gross profits fell by -7.36%
at US $ 770.52 million compared to US $ 831.74 million in the first half of 2020 (the I&E exchange window rate was used for the conversion). The decline in gross income has been associated with the devaluation of the national currency.

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Graph 2: UBA gross profit H1 2017 – H1 2021 (N’bn)

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Source: UBA Financial Statements, Proshare Research

Profit before tax

UBA’s top and bottom revenues were mainly supported by lower expenses, both operating and interest. The + 8.36% growth in operating profit exceeded + 0.54% increase in operating income, supported the + 33.36% growth in profit before tax (PBT).

The bank has consistently recorded its highest PBT growth percentage of + 65.53%, while the first half of 2020 saw the largest percentage decrease (see table 3 below).

In US dollars, PBT recorded a lower growth percentage of + 17.37% to 185.75 million US dollars compared to 158.25 million US dollars in the first half of 2020.

Graph 3: UBA Pre-Tax Profit H1 2017 – H1 2021 (N’bn)

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Source: UBA Financial Statements, Proshare Research

Depreciation charges – Improving loan quality

The Pan-African bank’s depreciation charges have fallen considerably by a few notches year-on-year from -47.01% to N4.14bn from N7.81bn in the first half of 2020. The result was after the bank saw a + 150.22% growth in impairments in H1 2020 (see table 4 below).

The decrease in depreciation charges results from a -61.17% decrease in bad debts and advances to customers; this does not reflect the + 20.50% increase in loans and advances.

Graph 4: UBA depreciation charges H1 2017 – H1 2021 (N’bn)

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Source: UBA Financial Statements, Proshare Research

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The core business – Increased sliding and busy journeys

The core business of the retail lender, namely deposits and loans, has recently seen a meteoric rise. However, the growth of customer deposits exceeded that of customer loans and advances.

In the first half of 2021, customer loans and receivables increased over one year by + 20.50% at N2.63trn, while customer deposits increased by + 26.98% at 6.09 trn N from 4.8 trn N in H1 2020 (see table 5 below).

Graph 5: Growth rate of net deposits and loans and advances H1 2017 – H1 2021

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Source: UBA Financial Statements, Proshare Research

Asset quality – Better by the meter

The bank kept its non-performing loan (NPL) ratio below the CBN threshold for the second year in a row. The NPL ratio improved over the period, from 4.1% in H1 2020 to 3.5% in H1 2021 (see table 6 below).

The oil and gas sector accounted for 37% of NPLs by sector, indicating the bank’s highest exposure by NPL.

Graph 6: UBA non-performing loan ratio H1 2017 – H1 2021

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Source: UBA Financial Statements, Proshare Research

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Total assets

The growth rate of total assets weakened in the first half of 2021 after an upward surge between the first half of 2017 and the first half of 2020.

Total assets increased year-on-year by + 22.73%
at 8.32 billion naira compared to 6.78 billion naira in the first half of 2020. The main drivers of growth in total assets were investment securities at amortized cost and loans and advances to customers; both were up year-on-year from + 93.37%
and + 20.50% (see table 7 below).

Graph 7: Growth rate of total assets H1 2017 – H1 2021

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Source: UBA Financial Statements, Proshare Research

Slippery costs

As previously stated, UBA’s profits were mainly due to reduced expenses, both interest and operating expenses. Cost to Income (CIR) fell sharply in H1 2021, dropping from 67.1% in H1 2020 to 62.30%. The first half of 2020 recorded the highest CIR of 67.1%, while the first half of 2017 recorded the lowest CIR during the period under review. (see table 8 below).

Graph 8: UBA H1 2017 – H1 2021 operating ratio

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Source: UBA Financial Statements, Proshare Research

UBA’s audited result in the first half of 2021 showed net and net profits; asset sizes have also increased, but not to pre-pandemic levels.

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