UBA: Containing growth in loan loss expenses for second year

United Bank for Africa (UBA) closed third quarter operations with an after tax profit of N61.7 billion, a flat growth over the corresponding figure in 2017. The flat position looks likely to be the story for the bank at full year, pointing to a likely slowdown on profit performance for the second year.

The bank ended the 2017 financial year with profit slowing sharply from a 21% growth in 2016 to 8.8% – the slowest profit improvement in three years. A further slowdown to flat growth is likely for UBA based on the growth momentum at the end of its third quarter trading.

Two major developments account for the sustaining weakness in the bank’s profit growth momentum. One is decelerating growth in revenue led by non-interest income and the other a continuing sharp growth in interest expenses.

The bank’s management is however moderating the impact of these developments on the income statement by containing growth in loan loss expenses for the second year. Last year, it recorded the slowest growth in credit losses in three years while a decline looks likely at the end of this year.

The bank earned N356.6 billion in gross income at the end of the third quarter, an increase of 10.5% year-on-year. Interest income continues to lead revenue growth at an increase of 13% to N269 billion at the end of the third quarter. Non-interest income is also sustaining its sharp slowdown from a top record growth of 46% in 2016 to 28.7% in 2017 and further to 3.6% at the end of September 2018.

Full year outlook indicates gross earnings in the region of N478 billion for UBA in 2018. That would be an increase of about 4% over the closing revenue figure of N461.6 billion at the end of 2017 and a sharp slowdown from the 20% growth recorded last year.

Interest expenses are racing up for the second year, claiming more than all the increase in interest income at the end of the third quarter. At over N118 billion, interest expenses grew by 38% at the end of the third quarter – nearly three times the 13% increase in interest income. That claimed 44% of interest income, rising from 36% in the same period last year.

Net interest income therefore declined marginally to N150.7 billion over the review period. It had grown by 25.7% in 2017. Last year, the bank recorded the highest growth in interest expenses in four years. Even a stronger growth looks likely for the bank at the end of this year.

Moderating the impacts of slowing revenue growth and rising interest expenses is a drop in net loan impairment expenses against an increase of 18.8% at the end of 2017. At N10.7 billion, loan loss expenses dropped by 17% year-on-year at the end of the third quarter. That enabled the bank to improve slightly operating income net of loan loss expenses.

The bank also saved some costs from a moderate increase in operating expenses. At N149 billion at the end of the third quarter, operating cost increased marginally and lowered the cost margin from 45% in the same period last year to less than 42% in September 2018.

Cost savings from loan loss expenses and operating cost enabled the bank to defend profit, which crept up 1.3% to N61.7 billion at the end of third quarter. It however lost profit margin, which declined from close to 19% in the same period last year to 17% at the end of the third quarter. Profit margin also declined at the end of last year from 18.1% in 2016 to 16.5%.

Profit is expected to close flat for UBA in the region of N80 billion at the end of the 2018 financial year. The bank grew profit by 8.8% to N78.59 billion at the end of 2017.

UBA earned N1.72 per share at the end of the third quarter, slightly down from N1.74 kobo over the review period. It paid a total cash dividend of 85 kobo per share, for its last year’s operations. It has paid an interim dividend of 20 kobo per share at the end of it half year trading in June.