Mixed Q3 results; retaining Neutral rating
- 6% cut to our earnings estimates and price target: UBA’s Q3 2017 PBT came in weaker than expected, mainly because of a negative surprise in opex (c. 11% higher than our forecast). To a lesser extent, subdued funding income (c. 5% lower than our estimate) also contributed. Although management did not disclose the specific line(s) responsible for the spike in opex, we believe inflationary pressures and the lagged impact of the naira devaluation were major drivers. Going forward, we expect opex to remain elevated. Consequently, we have raised our opex forecasts by 5% on average and cut our funding income forecasts by 4% over the 2017-18E period. A positive surprise in loan loss provisions has led us to reduce our cost-of-risk assumption by 100bps to 1.5%. These changes underpin the -6% reduction to both our 2017-18E earnings forecasts and price target. Our valuation reflects the cancellation of the staff share investment scheme (a 6% reduction to the share count). Our new forecasts imply a 2017E ROAE of 18.8%, lower than management’s guidance of 20%. Beyond Q3, UBA will have to grow its funding income – which has barely grown in the last three quarters – more aggressively to achieve meaningful earnings growth. Having gained 104% ytd (vs. ASI: 36%), our new price target implies an upside potential of 4% from current levels. As such, we retain our Neutral rating.
- Q3 PBT down 14% y/y, driven mainly by a 25% y/y spike in opex: UBA’s Q3 PBT declined by -14% y/y to N20.8bn. The key drivers behind the y/y decline in earnings were a 25% y/y rise in opex and 52% y/y increase in provisions for loan losses. Although pre-provision profits grew by 12% y/y, the negatives on those two lines proved significant. In terms of the revenue split, non-interest income was the major driver of the expansion in pre-provision profits. However, funding income was also up by 6% y/y. Moving down the P&L, the decline on the PAT line was greater at 26% y/y, because of a 35% y/y increase in income taxes and base effects on the OCI line. Sequentially, PBT fell by 35% q/q. In contrast to the y/y trends, the non-interest income line declined by -39% q/q (because of base effects) and drove the marked decline in PBT. The weakness on the non-interest income line also led to a 16% q/q drop in pre-provision profits. Compared with our forecasts, PBT missed by 15%. This was primarily due to a negative surprise in opex.