UBA Plc: Interest and non-interest income drive profitability despite challenging operating environment

UBA Plc’s half-year financial results are undoubtedly the best among the tier one banks. This is because UBA’s growth at the bottom line has been shown to be the largest.

This means the savvy management and boards of directors of the banks are utilizing the resources of its owners in generating higher profits.

The bank’s management was able to grow margins despite the prevailing tight liquidity and harsh regulatory environment that was expected to impact negatively on the financial performance of most banks.  Analysts also say the higher profit margins means the stock of UBA will be attractive to investors who crave for lenders with high interest yielding assets.

Strong interest earnings on loans drive Interest Income

Gross earnings for the first six months through June 2015 increased by 20.77 percent to N166.94 billion from N138.22 billion the corresponding period of (H1) 2014; driven primarily by a 17.95 percent increase in interest income to N116.23 billion in June 2015 as against N98.54 billion the previous year.

Strong fee accretion from credit-related transactions, e-banking, remittances and trade services provided the impetus for Bank’s non-interest income growth in addition to the strong trading gains in the year.

However, interest expenses moved by 16.73 percent to N50.57 billion as at June 2015 compared with N43.33 billion as at June 2014. The consistent high interest rate environment through the period and increase in the bank’s Cash Reserve Ratio (CRR) resulted in competition for deposits among banks and hence increase interest expense. Despite high interest rate environment, the bank’s net interest income increased by 18.90 percent to N65.65 billion in June 2015 compared with N55.21 billion as at June 2014.

Increase in profitability despite foreign exchange curbs

UBA’s pretax profit grew by 31.68 percent to N39.04 billion in June 2015 from N28.89 billion in June 2014. Net income surged by 40.40 percent to N32 billion in June 2015 as against N22.85 billion the same period of the corresponding year of 2014. Operating profit moved by 21.59 percent to N112.89 billion in June 2015 compared with N92.84 billion recorded last year.

Net trading and foreign exchange income grew by 12.05 percent to N30.35 billion in June 2015 as against N27.08 billion as at June 2014. Net trading and foreign income rose surged by 69.40 percent to N16.94 billion in June 2015 as against N10 billion last years.

The growth at the bottom line is impressive given the foreign exchange restrictions imposed by the Central Bank of Nigeria. Industry players say the foreign exchange restrictions are hurting the profits of banks. They also added that the curbs are causing a liquidity squeeze.

The Central Bank of Nigeria applied rules and restrictions to stabilize the naira after it declined to a record low in February as the price of oil, the nation’s major foreign-exchange earner fell by a half in the second half of last year. The central bank has devalued the naira twice since November and prevented banks from buying dollars in the interbank market without matching orders, steadying the exchange rate while reducing liquidity.

The naira has dropped 17 per cent against the dollar in the past six months, the most among 24 currencies tracked by Bloomberg.

“In spite of a challenging operating environment, our business strategy has proved to be resilient, balancing prudence, with an ability to significantly grow bottom line and continue to focus on operating effectiveness. We look forward to continuing to support our customers and working with them to achieve financial success for them and the wider Nigerian and African economies.” said Phillips Oduoza, Managing Director/CEO of the bank, while commenting on the lender’s half year performance.

Efficiency gains drives down cost to income ratio (CIR)

UBA is cost efficient amid the regulatory induced costs imposed by regulators as cost to income ratio reduced to 64 percent in June 2015 as against 68 percent the previous year. Operating expenses were down by 4.63 percent to N55.60 billion the same period of the corresponding year 2014.

A lower ratio means the lender is using the latest technology at its disposal to control costs while maintaining its strategic objective of boosting profit.

The bank’s cost managements initiatives and improving earnings accretions have moderated the CIR in 2015. Further reduction in branch transactions should support the slower growth in operating costs. There were modest improvements in Net Interest Margin (NIM) in the period under review as better yields on assets compensated for regulatory-induced rise in funding cost.

UBA’s net margins another measure of profitability and efficiency jumped to 19.16 percent in June 2015 from 16.53 percent as at June 2014.

“We delivered strong growth of 21 per cent in gross earnings and 40 per cent in profit after tax, reflecting better extraction of value across all business segments and our ongoing process optimisation. It was also satisfying to see our cost-to-income ratio decline further.  We understand that many in Nigeria are facing difficult economic circumstances and we are very much shouldering our responsibility to support and grow wealth creation”, said Oduoza. Moderate growth in balance sheets despite weak macroeconomic indicators.

For the first six months through June 2015, UBA’s total assets increased by 5.79 percent to N2.92 trillion as against N2.76 trillion the preceding year.

Loans and advances to customers jumped by 8.41 percent to N1.16 trillion in June 2015 from N1.07 trillion as at June 2014. Deposits from customers jumped by 2.77 percent to N2.22 trillion in the review period compared with N2.16 trillion the preceding year.

The bank attributed the responsibly growing balance sheet to its focus on quality assets in selected market segments across Africa. Its liquid balance sheet also ensures flexibility and ability to take advantage of emerging opportunities across our target markets. Analysts attribute the slow growth in UBA’s loan to macroeconomic headwinds that has continued to take toll on lenders and companies in Africa largest oil producer.

According to analysts at Chapel Denhall in a June 30 report, they identified three factors that will influence the loan growth of banks. First is liquidity, which will be driven by the monetary policy of the CBN particularly in relation to CRR. The second is capital adequacy as banks brace up for Basel 11. The third, which will largely be driven by market forces, as the bank will have to charge competitive interest rates on loans amid rising costs of funds.

Gross domestic product expanded 2.35 percent on an annual basis, compared with 3.96 percent a quarter earlier, according to the National Bureau of Statistics (NBS). The central bank raised its key interest rate to a record high of 13 percent in November, since then inflation has accelerated beyond the bank’s target band of 6 to 9 percent.

Risk asset quality remained strong

UBA’s highly diversified portfolio of assets, reflecting the risk management culture and appetite for moderate risk across different segments of the market has paid off as the lender’s Non Performing Loans (NPL) ratio of 1.85 percent is the lowest in the industry.

This is commendable when compared to other lenders exposure to the oil and gas and telecommunication. The risk of default from borrowers has culminated in huge loan loss expenses. For instance, the NPL of First Bank Nigeria Holdings Plc is 4.1 percent, a figure that is approaching the target set by Flitch Ratings.

The list of delinquent debtors released by most banks on the pages of the dailies means lenders will have more loans categorized as lost, as most of the borrowers are in state of moribund.

Deposits from UBA’s African subsidiaries remain strong, as the subsidiaries gain critical mass and deepen penetration of their respective niche markets.     

“Our business in Africa (ex-Nigeria) is beginning to significantly impact our returns, contributing 23 per cent of profit after tax, with an even stronger outlook,” said   Ugo Nwaghodoh, Group Chief Financial Officer (CFO) of the Bank.

In December 2014, the Bank Completed the Tier-II Capital raising (N30.5 Billion 7-Year Bond) and the recent Tier-I capital (N11.5 Billion Rights Issue) will further enhance capital adequacy ratio.

Steady dividend policy to magnify shareholder’s value.

UBA decision to pay an interim dividend of 20k for every one share held will magnify shareholder’s value as investors are attracted to a firm that pays steady income in form of dividend payments. All things being equal, stable dividends have a positive impact on the market price of the bank’s share.

Analysts say should UBA follow a policy of stable dividends, there will be resolution of investor’s uncertainty. The bank’s interim dividends equate N7.3 billion, which is about 22.5 percent payout based on BusinessDay’s calculations.

The bank’s gross dividend yield which measures the relationship between stock price and dividend was 5.25 percent. Stock price immediately reacted to the impressive earnings as share price rose by 10.12 percent to close at N3.81 on the floor of the exchange while market capitalization was N138.22 billion.

UBA is a leading pan-Africa bank with operations across 18 other Africa countries as well as the United States, the United Kingdom and France.

The bank is the third largest in Nigeria with total assets of N2.92 trillion as of June 2015. UBA has one of the strongest customer base, of over 8 million customers. The bank also has a strong distribution network of 605 branches, 1,738 ATMs and 13,452 POS machines. UBA’s core banking operation span across retail, commercial and corporate banking. Its Africa operations accounted for about 15.0 percent of the group’s total assets as at FY-14.

BALA AUGIE