Nigeria Banking Sector Coverage - December 2011 'Bad ... - Imara

Interest income remained under pressure in UBA’s 9M 11
results, down 5.77% gross, but with interest expense
falling by a higher margin of 17.23%, net interest income
gained 2.66% to NGN 56.1bn. Despite rising interest rates,
the NIMs fell to 4.6% from 5.1% y-o-y, but were flat
compared with H1 11. The disappointing performance was
attributed to a “transmission lag effect” on earning assets
yields. The group’s earning asset mix appears to still have
some inefficiencies carried over from FY 10. The cost of
funds did improve however, down to 2.60% from 4.00%.
Non-interest income fared marginally better, up 4.61% to
NGN 43.5bn. This was driven by increases in commissions
and fees, transaction volumes and the performance of
UBA’s remittance products. The combination of funded
and non-funded income saw operating income increase by
3.50% to NGN 99.6bn. The ex-Nigeria operations
contributed 20% to operating income, up from 9.0% as at
9M 10 and 19% at H1 11. Operating expenses reversed the
interim results trend, increasing by 7.33% to NGN 78.9bn,
resulting in a deterioration in the cost to income ratio to
79.28% compared to 77.22% at H1 11 and 76.45% at 9M 10.
Provision charges of NGN 8.7bn reflected a 53.11% rise y-
o-y, as the mandatory 1% general provision came into
effect, and seemingly high provisioning in the other
African countries. Associate and JV share of profits was
NGN 252.0m from a loss of NGN 75m in 9M 10. Without
the non-recurring exceptional losses of NGN 5.3bn in the
comparative period, PBT increased by 4.79% to NGN
12.1bn. (Pre-exceptionals PBT was actually down 28.01%,
however). Thanks to a lower effective tax rate,
attributable earnings closed the 9M at NGN 11.1bn, up
91.29%. Ex-Nigeria subsidiaries turned profitable,
contributing NGN 706.0m to PBT on a net basis, against
losses of NGN 2.9bn in FY 10.
The balance sheet grew 11.42% from H1 11 to NGN 2.0tn.
Net loans and advances shrunk by 1.47% during the
quarter to end the 9M at NGN 705.3bn. Loan growth
would have been higher (+23%), were it not for NGN
88.0bn in sales to AMCON. The group NPL ratio improved
to 6.0% (Nigeria 3.8%) from 10.8% at H1 11. Contrastingly,
deposits and managed funds were 5.96% higher to NGN
1.5tn. Gross LDR ended the period at 49.3% against
53.62% at H1, while the CAR increased in sympathy to
20.0% (H1 11: 17.0%). 13.7% (H1 11: 14.3%) of net loans
and 16.0% (H1 11: 15.0%) of deposits were from Africa
outside Nigeria. RevPar = Estimate
UBA Q3 11 Results Summary (m) 30-Sep-11 30-Sep-10
Net interest income 56 064 54 612
Other Income 43 505 41 587
Operating income 99 569 96 199
Non-interest expense (78 934) (73 545)
Allowance for credit impairment (8 744) (5 711)
Operating profit 12 143 16 868
Attributable earnings 11 133 5 820
Outlook
UBA will continue to focus on consolidating its
position as one of the premier banks in Nigeria, while
still looking for opportunities to expand further into
the rest of the continent, with Angola and Mali in the
pipeline. While we expect the group to improve on its
H1 performance, with net interest margin and income
improvements expected as loan growth mainly came
through towards the end of the half, we think the
pan-African expansion and cost implications thereof
will continue to put a drag on profitability in the short
to medium term.
Post balance sheet, the group also announced its
intention to raise NGN 500bn in additional capital as
part of a strategic funding initiative, with proceeds to
go into “infrastructure funding, opportunistic
acquisitions and the consolidation of the bank’s
channel and IT infrastructure across Africa.”
Shareholders of UBA have ratified the capital raising
exercise. The fund raising, according to a press
release, is proposed to be a combination of debt and
equity. The debt, to be issued in tranches, will be at a
fixed or floating rate and is callable at the end of five
years. The equity fund will be a combination of
private placement and/or a GDR program to be listed
on the London Stock Exchange. Further details are yet
to be published.
Valuation and Recommendation
Using a DCF valuation, we arrive at a target price for
UBA of NGN 7.04, with earnings recovering based on
improved interest margins as risk assets increase,
growing non-interest income and a falling CIR as the
ex-Nigeria African operations continue to contribute
positively. This suggests the share is trading at a
notable discount at its current price of NGN 2.50.
This, we believe, reflects the market’s
disappointment with recent results, where it has
failed to match the performance of its peers,
particularly on the net interest line, while the African
expansion has thus far not brought the returns
investors may have hoped. A PBV of 0.42x reflects the
apathy towards the stock. The capital raise will likely
lead to further dilution in the short to medium term,
and we await more details on the need, timing and
intended use of funds. HOLD.
30-Sep-11
30-Jun-11
Loans and advances to customers 705 289 715 844
Deposits from customers 1 537 885 1 451 368
Total equity 2 025 379 1 817 831
Source: UBA
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