Given severe macro economy challenges, United Bank for Africa Plc (UBA) for half year ended June 30, 2017 (H1) recorded impressive increase in gross earnings that impacted on its net interest income and probability.

The prudent management of these financial parameters impacted on financial institution profitability in the period under review, reaffirming the pan-African bank as one of the most profitable and well managed financial institution in Africa.

The lender joined other banks to release audited half year results to the Nigerian Stock Exchange (NSE) with impressive performance in key indices in following up to the first quarter results that was released early in the year.Growth in profitability further reflects the earnings capacity of the Group and its capability to progressively deliver superior returns to shareholders.

The growth in profitability impacted positively on shareholders return as management paid interim dividend of N0.20 per share.

With the tight liquidity in the system, the Central Bank of Nigeria (CBN) had introduced the Investor and Exporters (I&E) Window and Small and medium Enterprises window to stimulate foreign currency inflows, and moderated the pressure on the Naira.

Following the CBN moves, UBA recorded double digit growth in Non-interest income, contributing 30per cent to gross earnings, as increased foreign exchange currency liquidity enhanced foreign exchange trading income.

Rest of Africa (ex-Nigeria) operations contributed 32per cent to the Group gross earnings in the first half of the year, justifying early diversification into other Africa countries, which helps to reduce earnings vulnerability to macro risks of a single economy.

The bank has recorded tremendous growth rates in customer adoption of digital services with Electronic Banking Income gained 75 per cent to N23.18 billion within nine-month of 2016.

The *919# robust digital banking platform has provided the bank an array of endless opportunities needed serve over 14 million customers in a cost efficient approach that helps to deepen African banking penetration.

UBA balance sheet growth has been largely funded by the successfully $500 million Eurobond as the management aimed at expanding its general banking purpose across Africa.

The balance sheet as at half year reveals that foreign currency borrowings worth N343.49 million (Eurobond debt security N151.6million, Africa Trade Finance Limited N22.98 million and Credit Suisse Tranche A & B N98.7 billion), among others are due for maturity between August and December 2017.

The borrowing is expected to improve on profit by end of 2017-2018, as foreign exchange related and revaluation gains taper and NIR contribution to gross earnings contract.

The pan-African bank, has presence in 19 African countries, as well as the United Kingdom, the United States of America and France.

Growth in gross earnings driven by interest income, non-interest revenue

UBA for the H1 2017 reported gross earnings growth of 34.5 per cent to N222.7 billion, as against N165.6 billion reported in H1 2016, driven by growth in interest income and non-interest income.

Interest income gained by 44.3 per cent to N154.95 billion in H1 2017 from N107.4 billion in H1 2016 while non-interest income rose by 30 per cent as increased foreign currency liquidity enhanced foreign market trading income.

Interest expenses also increased by 22.8 per cent to N53.6billion in H1 2017 as against N43.3 billion recorded in H1 2016.

Expectedly, UBA’s Net Interest Income (NII) rose by 58.1 per cent to N101.4 billion in H1 2017 from N64 billion in H1 2016. The Group’s operating income stood at N161.8 billion, compared to N116.2 billion recorded in the corresponding period of 2016, representing a 39.2 per cent growth.

Total operating expenses grew by 27.2 per cent from N94.8 billion to N74.5 billion over treatment of Asset Management Corporation of Nigeria (AMCON) levy (which resulted in a one-off charge on other operating expenses) and the increases in personnel expenses and depreciation expense on total operating expenses.

Notwithstanding the impact of Naira devaluation and double digit inflation in Nigeria and a number of other African countries where UBA operates, the Group managed through its cost lines to deliver a Profit Before tax (PBT) of N57.5 billion, 65.5 per cent increase over N34.8 billion recorded in H1 2016.

Tax income for the period gained 98.6 per cent to N15.2 billion from N7.6billion in H1 2016.

The increased in tax income pushed UBA’s profit after tax to N42.34 billion, 56.2 per cent increase over N27.01 billion in 2016.

The Bank has been able to consistently sustain its effective cost management strategies and hence profitability. Despite running a lesser branches network compared, the Bank conveniently generates more competitive profit.

Notwithstanding the tight monetary policy environment in most of the Group’s markets, the cost of funds remained stable at 3.6per cent.

Increase in loan despite economy challenges

The Group closed the half year with Total Assets of N3.69 trillion, a growth of 5.3 per cent from N3.5trillion in 2016, buoyed largely by the Group’s appetite for high yield sovereign treasuries in Nigeria and a modest growth in loan book.

Despite severe Non-Performing Loan (NPL) in the banking sector, the UBA Loans & advances to customers appreciated by 3.7 per cent to N1.56 trillion as at June 2017 from N1.5 trillion in 2016.

Customer deposits dropped by 1.5 per cent from N2.49 trillion in 2015 to N2.45 trillion as at June 2017 while total equity gained 7.8 per cent to N483billion from 448.1billion reported in 2016 full financial year. This brings the group total liabilities to N3.21 trillion in H1 2017, 4.9 per cent above N3.1 trillion recorded in 2016.

Leveraging on enhanced customer service, the Group grew retail savings and current account deposits by five per cent, at a time when households are dissaving. The Group maintained its appetite for a well-diversified balance sheet, with half of the assets in liquid, low risk instruments.

Efficiency Gains Continue To Drive Margin Improvements in key ratios

The bank continued to generate value for shareholders as Return on Average Equity (RoAE), moved from 19 per cent to 18.2 per cent while Return on Average Assets (RoAA) hits 2.4 per cent from 2.2 per cent recorded in 2016.

Net interest margin (NIM) improved 20 basis points to 7.3per cent from 7.1 per cent in 2016, reflecting improved yield on assets and stable funding cost, as the Group continues to leverage its franchise in mobilizing low-cost, stable deposits.

The NIM improvement was also buoyed by enhanced balance sheet management, high sovereign yield in Nigeria and Ghana as well as improving pricing on the loan book.

The Bank continued to maintain a disciplined and prudent approach to loan growth in line with its Risk Management framework. The Bank’s NPL ratio remained low at 4.2per cent from 3.9 per cent reported in H1 2016.

In addition, despite the increase in operating expenses, the Bank’s cost to income ratio closed the period at 58.6 per cent from 64.2 per cent as at H1 2016, evidencing the efficient management of the group assets. UBA managed through the inflationary pressure in a number of African countries to achieve a lower CIR of 59per cent; on track with the medium target of sub-50per cent CIR in 2017.

Reaction from UBA

Group Managing Director/CEO, Mr. Kennedy Uzoka, said the financial institution performance demonstrated the strong momentum of the Bank, as the management continue to improve across businesses lines and key performance metrics.

He further stated that the Bank’s “unwavering focus on customer service excellence is translating to strong operational and financial efficiency gains. We have achieved better pricing on assets and liabilities, leading to continued improvement in the net interest margin to 7.3per cent. Leveraging our service-focused strategy and treasury management, we grew non-interest income by 17per cent year-on-year, reinforcing our transaction-banking-led approach towards deepening financial inclusion in Sub-Saharan Africa.”

According to him, UBA has made considerable progress in its retail banking penetration, gaining market share in deposits, at a time when a sizeable percentage of households are challenged due to inflationary pressures on disposable income. The Bank grew its retail savings and current account deposits by 23per cent and five per cent YTD respectively.

The bank’s Group CFO, Ugo Nwaghodoh said that the Bank had “a strong start in the year, despite protracted recession in Nigeria, our largest market. Our profit after tax of N42 billion translates to 18.2per cent return on average equity, broadly in line with our 2017 guidance.”

He further said that the Bank’s African subsidiaries (ex-Nigeria) contributed 32per cent of the Group’s earnings, leveraging on digital offerings to gain market share across the different markets.

“We maintain our discipline of banking only quality and profitable assets, a conservative stance which reflects on our asset quality. Notwithstanding consistent liquidity mop-up by the CBN, we maintained an average balance sheet liquidity ratio of 42per cent. Further reinforcing the Bank’s capacity is the strong BASEL II capital adequacy ratio of 20per cent, which underpins our ability to grow, as the macro risks decline,” he said.

However, the bank is poised at growing its African franchise – diversified risk and earnings across fast growing African economies; enhance its sound governance, risk management and compliance culture – adherence to international best practice.

Also, the management is determined to connect Africa and the world through its presence in key African markets and major global financial centres – New York,London and Paris.

Analysts at Cordros capital said, “Following the upward adjustment to EPS, we raised our target price by 12.17per cent to N12.62 (previous: N11.25) and rolled forward our valuation to 2018.

“Our current 12-month TP implies upside potential of 31.59per cent from current levels; consequently, we recommend a BUY on the stock. UBA is currently trading at 2017F P/BVPS of 0.7x (below the peer average of 0.9x, but in line with the 5-year average of 0.7x) and 2017 FP/E of 4.5x (below the peer average of 5.5x, but above the 5-year average of 3.1x).,” the report by Cordros Capital added.