UNITED BANK FOR AFRICA PLC H1’23 Earnings Release – Earnings soar to N711 billion, buoyed by FX revaluation gains

What shaped the past week?

Global: European markets rebounded this week, while investors digested the latest macroeconomic data releases for the region’s economies. Of note, August inflation numbers showed that inflationary pressures are resurfacing in the Eurozone, while consumer and business sentiment continue to sour in the region. Furthermore, we saw German industrial output fall by 2.2% y/y, as high energy prices weigh on manufacturing activity in the country. On a final note, the European Central Bank (ECB) hiked interest rates by 25bps; President Lagarde, also highlighted that further increases would be necessary, as the road to 2% inflation remains an arduous one. Meanwhile, in the United States, investors also reacted to the country’s latest inflation data report. Inflationary pressures have also resurfaced in the United States, with inflation rising 3.7% y/y (Previous: 3.2% y/y), and this can be attributed to the latest surge in domestic gasoline prices. Furthermore, on the corporate front, industrial action by the United Auto Workers of America has led to strikes at the Ford, General Motors, and Stellaitis facilities. Finally, in Asia, we saw a mixed performance for markets in the region. First, China’s latest inflation numbers were published, and the country recorded a moderate uptick of 0.1% y/y in consumer prices for August. Meanwhile, President Ueda of the Bank of Japan, suggested that the bank may shift its stance on monetary policy as the bank remains confident that it will meet its targets for the year.

Domestic Economy:   In August 2023, headline inflation rose to 25.80% y/y (Vetiva estimate: 25.33% y/y), 47bps higher from July (24.08% y/y). On a month-on-month basis, headline inflation came in at 3.18%, 29bps higher than the rate recorded in July (2.89% m/m). According to the report, the significant increase reflects the impact of the removal of petrol subsidies and the devaluation of the official exchange rate on consumer prices. Month-on-month inflation rose to 3.18% in the review month from 2.89% recorded in the prior month.  In terms of contribution to the year-on-year inflation. Food and non-alcoholic beverages (13.36%) contributed the most, followed by housing, water, electricity, gas, and other fuel (4.32%), and clothing and footwear (1.97%).  On a year-on-year basis, in August 2023, the Urban inflation rate was 27.69%, this was 6.73% points higher compared to the 20.95% recorded in August 2022. The Rural inflation rate stood at 24.10%, representing 3.98% points increase compared to the 20.12% recorded in August 2022.

Equities: Broad-based losses across the NGX led to a red w/w close for the market. The NGX sank 1.10% w/w, with the Banking (-3.24% w/w) and Oil and Gas (-2.02%) spaces closing as the week’s worst performers.   It was also a red close for the Consumer Goods space, driven by profit-taking in small to mid-cap names in the space. In the Oil and Gas space, profit-taking in some players in the oil marketing space dragged the sector lower. On a final note, losses in the likes of WAPCO (-1.69% w/w), translated to a red close for the Industrial Goods space, which lost 0.28% w/w.

Fixed Income:   It was another bearish week in the secondary market due to constrained liquidity levels and rising investor apathy weighing on the space. Yields across benchmark bonds closed higher on the week, largely due to selling pressures at the short end of the curve; investors have expressed pessimism in the bonds space this week, with the focus having shifted to the NTB auction. This week, the Central Bank of Nigeria (CBN) conducted an NTB auction this week, where they offered and sold ₦2.1 trillion across the 91DTM, 182DTM, and 364DTM papers, with stop rates of 6.50%, 7.00% and 12.98%. We saw this drive bearish sentiments at the long-end of the curve, with selling pressures at the long-end of the curve, weighing on yields in the space. Of note, we saw the yield on the 330DTM rise 40bps w/w to settle at 13.32%.

What will shape markets in the coming week?

Equity market: With the positive sentiments gradually wearing off in the banks, the market is on the lookout for its next catalyst. We expect mixed trading next week, as investors mull over the latest inflation data, with headline inflation surpassing our estimate by 47bps to print at 25.80%.

Fixed Income: We expect the market to trade in a quiet manner to open the week, as investors react to the latest macroeconomic data for the country.

UNITED BANK FOR AFRICA PLC H1’23 Earnings Release – Earnings soar to N711 billion, buoyed by FX revaluation gains                           

UBA recently released Q2’23 earnings, with the bank posting a 278% y/y growth in Gross Earnings to N711 billion. This came about due to a 79% y/y increase in Interest Income to N236 billion, as the bank recorded improvements across all the interest income lines, thanks to the revaluation of Foreign Currency (FCY) component of the bank’s loan book and elevated interest rate environment. Similarly, Interest Expense was 98% higher y/y at N79 billion, in line with our estimate, as interest paid on customer deposits rose 97% y/y, due to the revaluation of FCY component of customer deposits and higher interest rate on customers’ savings. This meant that Net Interest Income came in 70% higher y/y at N157 billion. Meanwhile, Non-Interest Revenue (NIR) increased to N450 billion; this was driven by N348 billion FX revaluation gains.

Cost-wise, Impairment charges increased significantly to N147 billion in recognition of the heightened risk environment, while Opex grew 41% y/y to N119 billion, on the back of a 43% y/y increase in staff costs. Notably, H1 cost-to-income ratio moderated to 28.9% (H1’22: 63.3%), as revenue grew faster than expenses. Interestingly, the bank reported a 36% q/q increase in Loans and Advances to N4.5 trillion as a result of the revaluation of the FCY component of the bank’s loan book. Furthermore, the bank had an NPL ratio of 11%, up from 6.9% in H1’22. Overall, Q2 PBT grew by 7.3x y/y to N341 billion, while PAT grew 10.2x y/y to N323 billion. Furthermore, the bank announced an interim dividend of N0.50/share (H1’22: N0.20).

Heightened risk environment to impact 2023 impairment charges

Despite recording the strong improvement in gross earnings, we estimate that impairments charges and Opex would weigh on the FY performance of the bank. We estimate an 88% y/y increase in gross earnings to  N1.6 trillion, supported by a 66% and 18% y/y growth in Interest Income and Commission and fees Income to N915 billion and  N248 billion respectively. However, with Opex and Impairments charges forecasted to rise by 19% and 379% y/y to N416 billion and  N201 billion respectively, we expect this to weigh on the bank’s FY performance. Hence, we project, PBT and PAT of  N555 billion (+176% y/y) and  N470 billion (+176% y/y) respectively.

TP revised downward to N16.90 (Previous: N17.20)

Despite revising FY’23 profit projections upwards, we maintain our dividend projections, as we now do not expect the bank to make dividend payments from FX revaluation gains in accordance with the CBN’s recently released guideline on prudent recognition of FX revaluation gains. Therefore, we revise downward our 12-month target price (TP) to N16.90 (Previous: N17.20). UBA’s shares have gained 82.2% YTD and are currently trading at a P/B of 0.2x vs. Tier-1 peer average of 0.5x.