UBA PLC: Impressive earnings growth amid high interest rate environment

United Bank for Africa (UBA) Plc. the lender operating in 19 countries on the continent, started 2015 on an impressive note as it recorded strong growth in earnings of 22 percent despite tough operating environment bedevilling lenders in Africa largest economy Nigeria. The bank’s growth in profitability was driven by its cost reduction mechanism which bolstered efficiency level, making UBA the lender with the most improved cost to income ratio.

Strong growth in earnings amid regulatory squeeze

For the first three months through March 2015, UBA’s gross earnings increased by 22.06 percent to N83.09 billion from N68.07 billion the same period of the corresponding year (Q1) 2014. The growth in gross earnings  reflect the benefit of higher yield on assets, stable accretion of fee and trading income and increasing transaction volume.

Also contributing to the earnings growth is a 17.55 percent rise in interest income to N58.66 billion in 2015 from N49.91 billion over the period. The impressive results at the top line defer the regulatory and macroeconomic headwinds entangling the growth potentials of lenders in Africa largest economy Nigeria.

Fees and commission income moved by 11.75 percent to N13.60 billion in the review period from N12.17 billion the same period of the corresponding year 2014

Despite the high interest rate  environment caused by the CBN continuous tightening stance, UBA’s net interest income increased by 5.16 percent to N30.78 billion in 2015 as against N29.27 billion the same period of the corresponding year (Q1) 2014.

However, interest expense moved by 35.07 percent to N27.08 billion in 2015 compared with N20.64 billion in 2014.Pending management comments, we attribute the increase in interest expense to rise in interest expense on time and interest expense on savings account. 

UBA’s healthy growth is coming at the time when most Nigeria commercial banks are ensnared in regulatory induced costs such as the Asset Management Corporation of Nigeria (AMCON) charge and the reduction in Commission on Turnover (COT).

Nigeria lenders are to pay 0.5 percent of their total assets to the sinking fund called AMCON charge; a policy analysts say is bleeding profit of lenders.

Also, Central Bank of Nigeria (CBN) thus raised its benchmark interest rate by 100 basis points to 13 percent. It said the policy is to control inflation and regulate the economy that has been receiving one to two punches due to falling oil price.

Strong earnings accretion and moderated cost profile help boost profit.

The ability of the savvy management of UBA to cut costs while seeking high interest yielding assets to boost earnings have help placed the lender on a growth trajectory given its ballooning bottom line.   

For the first three months through March 2015, UBA’s profit after tax (PAT) surged by 34.71 percent to N16.95 billion, compared with N12.58 billion the same period of the corresponding year (Q1) 2014. Profit before tax (PBT) increased by 35.77 percent to N18.34 billion in 2015 as against N13.54 percent as at March 2014.   

Operating profit increased by 17 percent to N53.24 billion in March 2015 compared with N45.51 billion as at March 2014. The growth in operating income is a reflection of the impact of higher net interest margin on interest earnings assets and moderate funding cost.

Despite the rising cost of doing business in Nigeria, stoked  by huge energy costs as companies resort to  the use of generators to run head office and branches, the lender’s operating expenses increased by a mere  3.51 percent to N32.53 billion in 2015 from N31.42 billion in 2014.

Cost efficiency bolster returns to shareholders

The lender’s objective of giving superior returns to shareholders underscores its ability to maximize the wealth of shareholders. Return on average equity (ROAE) increased to 24.8 percent in March 2015 as against 22.10 percent in 2014. Similarly, the return on average assets (ROAA) moved to 2.4 percent in 2015 from 1.9 percent as at March 2014.

It should be noted that despite the regulatory pressures, UBA’s ROAE and ROAA remains relatively competitive, with strong upside in the years ahead. Shareholder’s fund rose by 5.82 percent to N280.84 billion in March 2015 as against N 265.40 billion as of March 2014.

Cost to income ratio, a measure of efficiency reduced to 63.90 percent in 2015 from 69.10 percent in 2014; it means the Nigeria lender is cutting costs while increasing profit amid tough operating environment.

Earnings Per share EPS increased by 34.78 percent to 217k in 2015 compared with 161k as at March 2014.

Capital and liquidity still above regulatory requirement

UBA’s liquidity ratio was 50 as at the end of March 2015, which is significantly higher than the 30 percent regulatory requirement while capital adequacy ratio remained well above the minimum requirement of 15 percent with capital adequacy ratio of 17 percent.

The bank’s completion of Tier-II Capital raising in December 2014 (N30.5 Billion 7-Year Bond) and recent Tier-I capital (N11.5 Billion Rights Issue) will further enhance capital adequacy ratio.

Focus on quality assets in selected markets of Africa boost, total assets.

For the first three months through March 2015, UBA grew total assets by 7.29 percent to N2.96 trillion in 2015 compared with N2.76 trillion in 2014.

Loans and advances increased by 4.20 percent  to N1.14 trillion in 2015 as against N1.07 trillion as at March 2014; driven partly by foreign exchange translation), with focus on profitability and asset quality .

Customer deposits increased by 6.58 percent to N2.39 trillion in 2015 compared with N2.22 trillion as of March 2014 as a result of strong growth from Africa subsidiaries.

However, total loans to deposit ratio reduced to 48.7 percent in 2015 from 50.2 percent in 2014. It means the bank is less aggressive about lending.

The bank’s Non Performing Loan (NPL) ratio remained flattish at 1.60 percent, which is lower than the 5 percent benchmark set by the CBN. It also means the lender is efficient in terms of managing risks while creating more high interest yielding assets.

 Share performance and outlook

The stock closed trading at N5.32 a share on Friday April 23  2015 and a market capitalisation of N175.46  billion the same day.

Nigeria’s Gross Domestic Product grew at the rate of 5.94 percent y/y in Q4 2014, down by 83bps from 6.77 percent recorded in the corresponding quarter of previous fiscal year. The non-oil sector was the major driver of the growth recorded in Q4 2014, with activities in crop production, trade, textile and real estate contributing the most. With the conduct of a fair and peaceful election, investors’ confidence in the country’s economy has increased which means the economy may pick in last quarter of 2015.

Headline Inflation increased to 8.4 percent y/y in February 2015 from 8.2 percent y/y recorded in January 2015. The marginal rise in the rate was mainly as a result of the increase in the prices of seven of the non-food commodities classification, especially alcoholic beverages and transportation costs.

Nigerian foreign reserves decreased by $5bn (12.7 percent) from $39.5bn at end of Q3 2014 to $34.5billion at end of Q4 2014.

BALA AUGIE