UBA recharges for growth in third quarter

United Bank for Africa (UBA) seems to have engaged the speed gear in the third quarter that saw it through to a defiant growth in both the earnings numbers and the asset volumes producing the income. The bank has enlarged its key earning assets significantly led by an outstanding growth of nearly 50% in its net credit portfolio to over N1.54 trillion at the end of September. That is a creation of more than N500 billion in loans and advances within the first nine months of the year – a sort of stimulatory lending in a receding economy.

The bank’s second largest earnings asset – investment securities has equally expanded by 15.2% to over N987 billion over the same period while the highest growth of all came from financial assets held for trading, which soared 642% to N83.41 billion over the last December closing figure. The growth in assets summed up to an expansion of 26.4% in the size of the balance sheet in nine months – the kind of growth UBA has not seen over the past five years.

The bank’s high growth drive is powered by equally strong growth on the liability side of the balance sheet. It closed the third quarter with one of the strongest growths in customer deposits seen in the banking industry so far this year. At about N2.50 trillion, the bank’s customer deposits is up by 20% on last year’s closing figure. That means the bank had added over N415 billion to its deposit liabilities base in nine months in an otherwise arid financial climate of 2016.

A further strength for growing earning assets has come from borrowings, which at N257.2 billion, has nearly doubled this year’s opening figure. The third element of the bank’s growth supporting tripod is a reinforced equity cushion, which grew by over 30% to stand at N433.38 billion at the end of September. The growth came exclusively by way of reserve build up.

The high growth in earnings assets has registered favourably on the bank’s income statement. Gross earnings have accelerated significantly from N165.58 billion in the second quarter to N265.53 billion in the third. The bank has stepped out of the earnings constraint it experienced in the second quarter when revenue declined slightly and now to a promising year-on-year growth of 8.2% at the end of the third quarter. With the development, the full year revenue outlook for UBA has improved further.

Based on the accelerated growth rate in the third quarter, we mark up our gross income projection for UBA to N356.6 billion at the end of 2016. That will be an increase of 13.3% over the full year revenue of N314.83 billion the bank posted in 2015. The trend of decelerating revenue is therefore expected to be reversed this year and the bank can look forward to the strongest revenue growth in three years.

Interest income, the main revenue line of the bank, improved by 4.5% to about N183 billion in the third quarter compared to a decline of 6.6% in the second quarter. Non-interest income maintained a stronger growth at close to 12%. A drop of 2.8% in interest expenses stretched out growth in net interest income to 9.8%. The strong growth in the major earnings assets of the bank is expected to reinforce growth in interest income further in the final quarter.

Profit performance was equally strengthened in the third quarter after the bank managed to keep it from declining in the second quarter. After tax profit accelerated from N32.62 billion in the second quarter to N52.27 billion in the third, a year-on-year growth of 7.6%. The bank defended profit margin at 19.7% on year-on-year basis and improved it from 18.6% at the end of last year.

Based on the accelerated growth rate in the third quarter, we mark up the full year after tax profit projection for UBA from N66.1 billion to N68.5 billion in 2016. That will be an increase of about 15% over the last year’s figure of N59.65 billion. The bank had achieved one of the strongest profit advances in 2015 at 24.5%.

A decline in interest expenses against an increase of 20% in customer deposits speaks well about declining average cost of funds. Operating cost increased by 7.5% to N112.54 billion at the end of the third quarter, which reduced the operating cost margin slightly from 43.4% at the end of last year to 42.4% at the end of September – a declining trend for the third year running.

Impairment charge for loan losses remains the only major cost that is on the rise this year.  It grew by 147.1% year-on-year at the end of the third quarter after surging up 207.8% at the end of June. Impairment charges are growing rapidly for the second year after advancing by 59% in 2015.

UBA earned N1.50 per share at the end of the third quarter, up from N1.43 in the same period last year. It is expected to earn N1.89 per share at full year based on the profit projection. The bank earned N1.79 per share at the end of last year and paid a cash dividend of 40 kobo per share. Its interim dividend of 20 kobo per share for the current year is scheduled for payment on 19^th September, 2016.