UBA: Building assets but profit needs to grow

United Bank for Africa (UBA) is a top runner this year on how fast a bank can grow the size of the balance sheet. The bank’s half-year audited account shows that its asset base expanded by roughly N1.2 billion in the first six months of 2020 to close the half-year at about N6.8 trillion.

This is already more than one and half times the increase of N734 billion in total assets in the 2019 full year. The bank is experiencing the fastest growth in asset base in four years.

Asset expansion is powered by equally rapid growth in customer deposits during the period. Customer deposits were up by 25 percent to N4.8 trillion – the highest growth rate since 2014.

Leading the asset-building campaign of the bank are cash and bank balances, which advanced by 53 percent to over N2.1 trillion in six months. This is against an increase of 14.4 percent in all of last year.

Investment securities followed with an increase of 26 percent to nearly N2 trillion from the 2019 closing. This is a rebound from a 4 percent drop in the preceding year.

Loans and advances aren’t a growth area for the bank this year, apparently cooling off after a 20 percent expansion of customer lending in 2019.

The bank cut back customer loans and advances in the second quarter from N2.26 trillion at the end of March 2020 to less than N2.2 trillion at half-year.

Rising credit losses and the impact of the coronavirus pandemic on the economy appear to underlie the caution in new lending.

The high growth in assets however failed to quicken revenue performance while costs expanded considerably during the review period. Profit capacity weakened in the second quarter compared to the first and profit plunged by about 22 percent year-on-year to N44.4 billion at half-year.

The application of the robust increase in customers’ deposits to build cash and bank balances and investments rather than new lending appears to have undermined growth in revenue.

Interest income was flat at N205 billion at the end of June compared to double-digit growth records the bank has maintained since 2015.

A moderate improvement in gross earnings came from non-interest income, which grew by 6.6 percent year-on-year to below N95 billion at the end of half-year operations. It, therefore, accounted for an improvement of 2.2 percent in gross earnings to over N300 billion at the end of June 2020.

The strong growth in customer deposits appears to have happened at a low cost. Interest expenses went down by 9 percent year-on-year to N86 billion at half-year. This is against the flat position of interest income over the same period. This resulted in an increase of 8 percent in net interest income to N119 billion.

Cost of funds is moderating for the first time since 2018 when it grew by one-third and further by over 16 percent in 2019. Rapidly growing deposits against declining cost of funds make a favourable combination for UBA, which is helping to moderate other rising costs.

Credit loss expenses are part of the rising costs for UBA at half-year – jumping two and half times up to N7.8 billion. More than N5 billion of the figure was incurred in the second quarter, indicating the high prospects for further growth in loan loss expenses in the second half.

Operating cost grew by close to 21 percent year-on-year to N132 billion at the end of half-year operations in June – one of the highest growth rates the bank has recorded in a decade.

Operating expenses claimed 44 percent of gross earnings at half-year, rising from 37 percent in the same period in 2019.

The incursion of the two expense lines on revenue caused a decline in profit margin at half-year. Net profit margin declined from 19.3 percent in the same period last year to 14.8 percent at the end of June this year.

The summary of the bank’s earnings story at half-year is a combination of an inability to grow revenue and inability to contain costs. That caused a profit drop of 21.7 percent to N44.4 billion at the end of June 2020. This is a downturn from an increase of over 13 percent in after-tax profit to N89 billion at the end of 2019.

Earnings outlook for the bank for the second-half points to a further slowdown ahead. Revenue constraints are expected to remain, even intensify while growing costs could squeeze margins further.

UBA earned N1.24 per share at half-year, down from N1.62 per share in the same period last year. The bank’s management has announced an interim cash dividend of 17 kobo per share.