· UBA Plc reported a 22% YoY rise in H1 2012 gross earnings to N111 billion, 5% short of our forecast. PBT and PAT jumped 159% and 163% to N31.8 billion and N27.1 billion respectively over the same period, 20% ahead of our forecast on both counts.
Expansion of risk and trading assets supported revenue growth
· Revenues were driven, in part, by a N20 billion rise in loans and advances to N700 billion in Q2 2012, a ~3% QoQ and ~5% YTD growth amid favourable re-pricing which led to a 2.5pps rise in effective loan yields to 12.5% in H1 2012 from H1 2011.
· Trading assets rose 15% QoQ to N107.4 billion in a moderate recovery from a 32% QoQ decline in Q1 2012 with asset re-distribution – in favour of loans and trading assets – amid a high interest rate environment enhancing revenue growth. Significantly, contribution to revenue from its African subsidiaries rose to 22% in H1 2012 from 19% in Q1 2012.
A more efficient performance than anticipated
· Operating cost was flat at N49.2 billion in H1 2012 from H1 2011 and the 19% YoY rise in operating income accounted for the 21.4pps decline in Cost-to-Income Ratio (CIR) to 60.7% over this period. It would appear that re-pricing of a number of its procurement contracts, as well as further success in its strategy to optimize its African subsidiaries – whilst putting a halt to its expansion drive – has proved supportive for efficiency metrics. The variance in our CIR estimate of 70% for FY 2012 (applied to Q2) versus actual was, for the most part, responsible for the large disparity between actual PBT and PAT and our forecasts.
· Liquidity Ratio (LR) rose from 57.3% in Q1 2012 to 59.7% in H1 2012; further increasing the spread from the 30% regulatory minimum. An 8bps rise in Capital Adequacy Ratio (CAR) to 23.7% in H1 2012 from Q1 2012 more than double the 10% regulatory minimum, giving the bank further room to grow risk assets; a significant improvement from the bank’s 15% CAR at the height of the crisis two years ago.
· The results indicated further provisioning in Q2 2012 after net write-backs fell N1.9 billion to N379 million. NPL ratio was within management’s 2.5% target; which it expects to maintain even as it nurses optimism for further recoveries in FY2012.
Cautious optimism as tepid deposit growth reflects competitive pressures
· Two relatively incident free quarters in succession lend some credence to the bank’s turnaround from the near-ritual exceptional charge taking of the past but still leave us moderately cautious but optimistic in outlook.
· A 4% decline in its deposit base to N1.47 trillion in Q2 (+2% YTD H1 12) smudges an otherwise benign picture painted by the results somewhat, as do a 20bps QoQ and 50bps YoY rise in the weighted average cost of funds to 3.4% in H1 2012—though, higher asset yields was sufficient to push NIM to 6.1% in H1 2012 from 4.8% in comparable period the previous year.
· The move to focus on optimizing its African operations with Nigeria , whilst rationalizing the latter has proved supportive for the sharp improvement in CIR. This strategy led to 2pps rise to 16% in the contribution of its African operations to PBT. We would expect this improvement to continue into the rest of the year and the major change to our model was a substantial downward adjustment in our FY 2012 CIR forecast to current levels of 60% from our previous 70% and a subsequent decline to current peer average of 55% through 2014.
·We revise our cost of risk lower to the average over the last eight quarters of 1.1% from 1.2%. We expect this ratio to dwindle to 1% over the next two years.
· In view of seasonal effects, we maintain our FY 2012 gross earnings forecast despite the narrow variance in Q2 but the downward revision in our CIR estimate led to substantial upward revision in our FY 2012 PBT and PAT forecasts to N59.4 billion and N44.6 billion, respectively.
We revise our target price higher
· In light of the downward revision in our CIR forecasts, our fair value estimate rose 10% to N6.01, from previous fair price. This puts today’s close at an implied 34% discount from fair value. A relative valuation puts the bank’s forward PE and P/Bv at an attractive 2.8x and 0.7x compared to peer average at 5.8x and 1.2x, respectively.
ARM now employs a two-tier rating system which is based on systemic importance of the security under review and the deviation of our target price for the stock from current market price. We characterize systemic importance as a function of a stock’s ranking among the group of top 20 stocks by NSE market capitalization over a trailing 6 month period (minimum) to the review date. We adopt a 5 point rating system for this category of stocks and a 3 point rating system for stocks outside this group. The choice of top 20 stocks arises from the consideration that this group of stocks constitutes >75% of overall market capitalization and stocks outside this group are generally less liquid and individually account for <<1% of market capitalization. For stocks in both categories, the basis for ratings subject to target price deviation is outlined below: