UBA 2019-9m: Improved Profit On Robust Balance Sheet Deployment

The United Bank for Africa recently released its earnings report for the nine-month ended September 30, 2019, closing the period with an impressive after-tax profit of N81.63bn, a growth of 32% over that of 2018, a momentum the bank may likely sustain into the full-year, pointing to the possibility of even higher profit.
The bank ended the quarter with stronger earnings that grew sharply, resulting in its fastest profit growth in three years, with higher profitability and investment ratios driven by electronic and improved retail banking.

Further growth is likely for UBA Plc, based on the growth momentum at the end of its third-quarter trading, driven by three major developments. The first is the accelerated revenue growth, led by interest and non-interest income; as well as the declining provisioning for the bad loans; and improved cost management as shown in the group interest expenses.
The recent directive by the Central Bank of Nigeria (CBN) that banks should raise their Loan-Deposit Ratio (LDR) first to 60% at the end of September 2019 and then 65%, three months later, may not weigh down on UBA Plc’s earnings immediately. The telling effect for UBA Plc and its peers would come in later, should such loans go bad, just as it would enhance performance if the economy improves and debtors meet their payment obligations.

UBA Plc’s top and bottom-line growth in the 9-month period showed its healthy state, as a financial powerhouse poised to support price and dividend payout in the months and years ahead, which are factors expected to trigger a reversal in its price movement. The bank’s share price has lost about 30% of its value, dropping from N8.20 as of when the 2018 Q3 result was released, to N5.70 as of the released date of the 2019 numbers.

The bank’s gross earnings for 2019 nine-month stood at N428.22bn, compared to N310.45bn in 2018, representing 37.94% rise, while profit hit N81.63bn, from N61.7bn in 2018. The group’s impairment charges on financial assets for the period decreased to N6.66bn, compared to N10.67bn in 2018, resulting in a decline in loan loss provision of 37.58%, thereby boosting the bank’s profit for the period.
The improvement in net interest, securities trading and other income boosted the gross earnings and supported the bottom line, despite the 17.55% increase in interest expenses for the period, following which Earnings Yield stood at 41.87%, compared to the 22% recorded in 2018.

The nine-month Earnings Per Share (EPS) increased by 32.77% to N2.39, from N1.80 in 2018. The up-trend in UBA’s financials as mentioned earlier has not supported the share price due to the general market downturn as it currently trades at N5.85per share as of Friday.
With Book Value currently at N16.24 per share, UBA Plc’s share price is therefore 177.61% below market price, an indication that it is grossly undervalued, as a result of which it should command the attention of, and be attractive to discerning investors and traders. Also, Price-Earnings ratio is 2.28x, following which investors’ waiting period in the stock has reduced, due to the low price and stronger earnings that signal brighter prospect capable of supporting a price rally and payout.

African and emerging market economies are under less pressure, given that the inflow of funds is gradually rising, despite the oscillating oil price and trade wars that have slowed down global growth momentum. We note the gradual return of stability to the continent, a situation that is already impacting positively on the region, with return on equity growing to 14.69% from 12.11%.
UBA’s Loans/Deposit ratio improved to 58.86% from 44.88% in 2018; Return on Assets (RoA) stood at 1.65% from 1.37%; just as other profitability ratios for the period closed green as evidence of real improvements in the bank’s earnings power. The improving customer service delivery, new banking products/services that are innovative and technology-driven will further enhance performance by increasing deposits and profit as operating expense to gross earnings dropping to 37.74% from 2018 position of 48.02%.

Technical View

UBA’s price action has declined for almost two years to form a bearish channel, but it recently attempted to rebound before the current pullback, which created a ‘buy’ opportunity amid positive sentiments on strong financials that are likely to support upward reversal which is imminent. The recent strong support level of the bank is N5.55 on a weekly basis.
Traders should watch out for breakout of N6.10 for a continuation of the uptick as current divergence in price action and On Balance Volume (OBV) a supports reversal, given that accumulation in the stock has continued with money flow index looking up at 69.28. The momentum of the trend is STRONG above ADX of 20.

Forecasts
The bank’s full-year gross earnings is forecast at N535.79bn, representing a 15% improvement, relative to FY 2018, while our net income estimate for FY2019 is N94.32 billion, which translates to a 20% growth over the FY 2018 profit level. This yields an EPS of N2.76 and a forward P/E of 2.98X.
It is important to stress that the ongoing efforts by the National Assembly to change Nigeria’s budget cycle to the fiscal year period are expected to redirect the flow of funds into the economy, a situation that would likely have a positive impact as early disbursement of capital projects funds will boost activities in the system.

Analysts Opinion/Recommendations
The share price of UBA Plc is undervalued, judging by our FY 2019 estimates. The stock is currently trading at a 140% discount to our Fair Value estimate of N14. The bank has a book value above the current market price which shows a positive intrinsic value and a higher upside potential for future growth.
After using various valuation models to arrive at the above fair value, we are also impressed by the steady rise in the bank’s Book Value position and earning power over the past quarters and years to record the highest earnings yield of 41.87% in the industry. However, UBA Plc must be proactive with its profit margin (PM) growth which slowed down to 19.06% from 19.87% in the review period.
However, all things considered, we have a BUY recommendation on the shares of UBA Plc.


Positive earnings will push prices higher in the short to long run
The bank ought to double its efforts and strategic risk/cost management and thereby maintain this tempo of profit growth, given that the board has for the fifth consecutive year paid 20 kobo in interim dividend. Moreso, UBA Plc has been very proactive with its balance sheet deployment in the review period, while its defensive strategy has remained very effective, ensuring that the backlash of some regulatory policy changes is mitigated. The relative stability in the local currency has been a plus for the bank and offshore earnings power from its operating network has also supported bottom-line.

Four-Year Performance (2015-2018)
The bank’s numbers in the period under consideration have remained resilient, despite the weak economic conditions, overregulation, unstable oil price and an especially high unemployment rate that had put pressure on the disposable income of many households. However, with the planned implementation of the N30,000 minimum wage and early passage of the 2020 budget we expect a little improvement in the system that will support the creation of risk assets.

UBA Plc topline over the four-year period grew by 47.98% to N465.9bn, from N314.83bn in 2015, even as profit for the period was stable, despite the challenging economic environment and changing policy regime of its primary regulator. The bottom line for the same period was up by 31.77% to N78.6 billion from N59.65bn in 2015.
Investment ratios for the period under review had fluctuated, beginning with the Return on Equity which declined from 17.93% in 2015 to 16.13% in 2016, and then lower to 14.68% by 2017, before rebounding in 2018 to 15.64%. The net profit margin for the same period declined all through from 18.95%, 18.84%, 17.42%, and 16.87% respectively. It also grew Net Assets for the period by 51.10% from N332.62bn in 2015 to N502.6bn.


Ratio Analysis
The bank has sustained upward earnings trend that supports price performance as the EPS moved from N1.64 in 2015 to N1.99 in 2016, and then N2.27 by 2017; after which it posted N2.30 in 2018. Price to Earnings Ratio for the period was unstable, due to the up and down movement in the bank’s share price.

In arriving at our fair value price for the stock, we focused on its historical financial performance and our expectations for full year 2019, which was calculated using the Price to Book Value method of valuation as well as the Dividend Discount Model, comprising our expected dividend estimate for the bank, which was adjusted for the risk of investing in the Nigerian Financial Services Sector. We have placed a POSITIVE rating on the shares of UBA. The current year’s financial performance is a pointer to what investors should expected as dividend. With the projected 2019 full year EPS of N2.76, final dividend possibility of a range of between 95 and 100 kobo is high.

Ambrose Omordion
CRO|Investdata Consulting Ltd
info@investdataonline.com
info@investdata.com.ng
ambrose.o@investdataonline.com
ambroseconsultants@yahoo.com
Tel: 08028164085, 08032055467
https://investdata.com.ng/2019/10/uba-2019-9m-improved-profit-on-robust-balance-sheet-deployment/#more