United Bank for Africa Plc – Operational Efficiency Leads to Remarkable Performance
THE CBN HAS ONLY RECENTLY ADJUSTED THE CRR TO 25% WITH A VIEW TO INCREASING LIQUIDITY AND ENHANCING LOAN CAPACITY TO YIELD HIGHER CONVENTIONAL INCOME STREAMS GOING FORWARD AFTER THE JUST PAST REMOVAL OF TSA TO THE APEX BANK
United Bank for Africa (UBA) Plc, one of Africa’s leading international bank focused on providing reputable commercial banking services and products to various corporate, commercial, and retail customers in Nigeria, West Africa, and Europe. Despite the harsh operating environment, the bank recorded a remarkable performance in its recently released financial results for the third quarter ended, 30th September 2015, showing an improvement in return on assets and equity. UBA Plc posted a substantial growth of 17.19% and 44.39% in gross earnings and net income respectively compared to the corresponding period of 2014. This remarkable profitability was largely driven by enhanced efficiency in operating activities of the Bank’s branch network across Africa.
ROBUST GROWTH IN INTEREST INCOME BOOST GROSS EARNINGS
Gross earnings grew significantly to N247.2 billion in the period ended September 30, 2015 from N210.7 billion recorded in corresponding period of 2014. The growth in gross earnings was greatly impacted by interest income which contributed 70.83% while non-interest accounts for 29.17%, with the most generated in Nigeria. Interest income grew by a robust 17.19% to N175 billion from the N149 billion recorded in September 2014; as the bank consolidated on its large network base to continue its aggressive lending strategy, and despite the direct effect of CBN’s continuous regulatory liquidity pull in the banking sector. UBA Plc was able to grow its loan account by 2.69% to N1.036 trillion compared to the corresponding figure of N1.009 trillion recorded in the third quarter of 2014. However, interest expense grew by 8.19% to N73.0 billion from N67.4 billion in September 2014. The modest growth in interest expenses resulted in a substantial rise in net interest income which grew by 24.59% to N102.1 billion from N81.9 billion recorded over the period under review.
OPERATING COST EFFICIENTLY IMPACTS PROFITABILITY
The bank recorded an outstanding 34.85% growth in operating income to N57.4 billion for the period ended September 2015 from the previous corresponding figure of N42.6 billion. On the other hand, enhanced efficiency led total operating expenses to remain flat over the last three quarters at 13%, growing in quarter three to N104.6 billion from N93.46 billion recorded in September 2014, despite 41.53% increase in amortization and depreciation expense to N5.9 billion from N4.2 billion over the period reviewed. Pre-tax profit repeated an extraordinary rise of 34.84% to N57 billion from N42.5 billion posted in the third quarter of 2014, while net income rose further to 44.39% to N48.5 billion in September 2015 from N33.6 billion in the corresponding period of 2014.
IMPROVEMENT IN ASSET QUALITY
UBA Plc has consistently maintained and enhanced its growth in deposit and loan base, and its cost efficiency. The bank’s total assets increased by a notable 8.33% to N2.87 trillion as at September 2015 from N2.65 trillion in the corresponding period of 2014, and a growth of 3.98% when compared to N2.76 trillion recorded as at the financial year ended December 2014. The bank modestly grew its deposits base by 3.53% to N2.25 trillion from N2.17 trillion over the period; despite the decline in loan to deposit ratio to 45.06% in the third quarter of 2015 from 48.09% in December 2014. The Bank shareholder’s fund improve by a remarkable 21.53% to N322 billion as at September 2015 from N265 billion in the same period of September 2014. Further analysis shows that the Bank’s return on assets and to shareholders rose remarkably. Return on Asset (ROA) grew to 1.69% in September 2015 from 1.22% in September 2014; Return on Equity (ROE) grew to 15.05% from 12.67% over the period under review.
WE MAINTAIN OUR BUY RECOMMENDATION
The CBN’s monetary tightening policies have resulted in limited income generation and high cost of funds within the Nigerian financial system. The CBN has only recently adjusted the CRR to 25% with a view to increasing liquidity and enhancing loan capacity to yield higher conventional income streams going forward after the just past removal of TSA to the apex bank. However, despite macro-economic, political and regulatory headwinds of 2015 UBA Plc Bank delivered a remarkable performance. Furthermore, the bank is expected to realize additional growth in its African subsidiaries. Considering the above, we therefore made our projections considering regulatory policies and other macro-economic headwinds, to gross earnings of N324.59 billion and N52.52 billion for December 2015, leading to a forward EPS of N1.45. Using an industry PE (Price to Earnings) of x4.95, we arrive at a 3 month target price of N6.38, which represents a 59.05% increase on the current stock price of N4.20. We therefore maintain our BUY recommendation on UBA shares.