Focus for the week: UBA PLC FY’23 Earnings Release – Balance sheet expansion drives earnings growth

4th Quarter Performance

In its Q4 results, UBA’s Gross Earnings came in at ₦767 billion, 213% higher y/y. This was as a result of a 199% y/y growth in the bank’s Interest Income to ₦409 billion, thanks to improvements across all the interest income lines. Meanwhile, Non-Interest Revenue (NIR) also grew by 278% y/y to ₦307 billion, driven by significant gains in trading income and FX revaluation gains.

On the other hand, Interest Expense came in 262% higher y/y at ₦145 billion, as interest paid on customer deposits rose by 89% y/y. Overall, Net Interest Income printed 173% higher y/y at ₦265 billion.

Cost-wise, the bank recorded impairments charges of ₦62 billion (+121% y/y), with a cost of risk of 4.8%, while Opex grew 190% y/y to ₦254 billion, with staff costs as the main driver. In all, Q4 PBT grew by 310% y/y to ₦256 billion, while PAT grew 192% y/y to ₦158 billion.

Balance sheet size expansion to drive FY’24 performance.

For the FY period, the bank’s asset size grew by 90% y/y to ₦20.7 trillion, due to the translation of the Foreign Currency (FCY) component of the bank’s balance sheet following the devaluation of the Naira in the NAFEM window. Based on the strengthened balance sheet, we expect the bank’s Gross Earnings to grow by 24% in 2024 to ₦2.9 trillion. Hence, we raise our Interest Income estimate to ₦1.9 trillion (Previous: ₦1.4 trillion), due to a larger loan book and effective asset repricing following the CBN’s rate hike by 600bps this year. Also, we revise our Interest Expense forecast to ₦710 billion (Previous: ₦500 billion), owing to higher savings rate and cost of interbank borrowing. In all, this gives a Net Interest Income figure of ₦1.2 trillion (Previous: ₦930 billion).

Recapitalisation to drive long-term growth

Following the CBN’s move to increase the capital buffers of Nigerian banks by reviewing upwards their minimum capital requirements, we estimate UBA’s funding gap at ₦384.2 billion. We opine that the recapitalisation exercise will strengthen the earnings potential of the bank in the long run.  However, we expect the bank’s number of shares outstanding to increase, which would in turn lead to a dilution of shareholders’ equity in the near term.

TP reviewed upward to ₦30.80 (Previous: ₦24.90)

Overall, our projections yield a PBT figure of ₦1.1 trillion (+44% y/y) and PAT of ₦874 billion (+44% y/y). However, like we highlighted above, the near-term implication of the capital raise is a slower growth in EPS, due to dilution of shareholders’ equity. Thus, whilst we expect revenue and PAT to record strong growth, EPS is projected to only expand by 6% y/y to ₦18.6 (FY’23: ₦17.7).

Our valuation yields a 12-month target price (TP) of ₦30.8 after pricing in recapitalization. The stock is currently trading at a discount to its peers, with a P/B of 0.43x vs Tier-1 peer average of 0.8x.

What shaped the past week? 

Equities: This week, the local equity market traded in a bearish manner, losing 2.71% w/w to settle at 99,845.91pts. These Losses was majorly driven by sell-offs in banking stocks, as the index lost 11.46% w/w. Banking counters such as GTCO (-19.08% w/w), UBA (-13.69% w/w), and FBNH (-9.83% w/w)  saw price declines, as the market continued to react to the recapitalization direction from the CBN.. Similarly, the Industrial Goods sector fell by 2.71% w/w, due to losses observed in DANGCEM (-4.37% w/w) amongst others. Likewise, in the Consumer Goods space, profit-taking in the likes of DANGSUGAR (-9.60% w/w), saw the sector decline by 0.96% w/w.

Fixed Income: This week, system liquidity remained constrained for most of the trading sessions due to borrowings via the Standing Lending Facility (SLF) window. Hence, the OPR and Overnight rates remained elevated, to close at 29.39% and 30.25% respectively. Meanwhile, in the secondary market, a good number of trades were consummated, as we saw  yields rise 600bps w/w on average in the NTBs market. In the OMO space, trading was relatively muted, as yields only rose 2bps w/w. However, in the bonds space yields contracted by 34bps w/w on average, as investors locked attractive rates at the short-end of the curve.

Currency: At the NAFEM, the Naira depreciated by ₦27.71 w/w to close the week at ₦1,169.99 per dollar.

Domestic Economy:

In March, headline inflation increased by 150 bps to 33.2% y/y (Feb’24: 31.70% y/y). This uptick was driven by both an increase in food and core inflation, which printed 40.01% y/y (Feb’24: 37.92% y/y) and 25.39% y/y (Feb’24: 24.67% y/y), respectively. We highlight that the surge in headline inflation was due to severe food insecurity. Overall, we expect the increase in electricity tariffs to add to inflationary pressures in April. Ultimately, the surge in inflation could call for more policy rate tightening.

Global: This week saw global markets grappling with a myriad of challenges, as geopolitical tensions, mixed economic indicators, and corporate developments influenced investor sentiment.

Geopolitical concerns surged following Iran’s attack on Israel, casting a shadow over market outlooks worldwide. In the United States, robust retail sales figures for March provided a glimmer of optimism, but Federal Reserve Chair Jerome Powell’s cautionary remarks on interest rates tempered market enthusiasm. Mixed corporate earnings reports further contributed to market volatility, with notable disparities between sectors. Europe faced its own set of challenges, with geopolitical turmoil in the Middle East exacerbating economic uncertainties. Despite this, optimism emerged from the European Central Bank’s indication of potential monetary policy easing in the coming months. Asia-Pacific markets experienced declines amidst cautious sentiment, despite China’s economy surpassing growth expectations in the first quarter. Currency markets were marked by the Japanese yen’s historic low against the dollar. Corporate activity, including product launches for Huawui Technologies and earnings anticipation for Taiwan Semiconductor Company, added to market sentiment as well.

What will shape markets in the coming week?

Equity market: The market received a notification from NASCON stating SEC’s suspension of the proposed merger of DANGSUGAR, NASCON and Dangote Rice. Following the news, the two stocks opened fully offered. We expect the sector to trade bearish next week, while the banking sector trades mixed.

Fixed Income: Looking ahead, we expect liquidity levels to determine investors’ sentiments in the NTBs market, while investors continue to lock-in attractive rates in the Bond market.