UBA consolidates as Investors’ delight: Net interest income drives solid profit growth

United Bank for Africa (UBA) tipped from interest on investment securities that led to a significant increase in net interest income that eventually impacted on profits in half year ended June 30, 2022.
The pan-African bank in its half year ended June 30, 2022 reported profit before tax growth of 12.6 per cent to N85.75billion from N76.19billion reported in half year ended June 30, 2021, and Net profits growth of 17.2per cent to N70.33billion in H1 2022 from N60.58billion in H1 2021.
Accordingly, on H1 2202, EPS grew by 28.9 per cent to N1.98 in H1 2022 from N1.69 in H1 2021, the board proposed an interim dividend of N0.20, the second time in two years.
This implies a final dividend yield of 2.6per cent on the last closing price.
The reaction to the results has been positive as the stock has risen 4.9per cent over the last two sessions. Year-till-Date (YtD), the stock is down 6.2per cent.
Improved Interest on investment securities
In the period under review, UBA reported 17.8 per cent increase in gross earnings N372.4billion in H1 2022 from N316.04billion in H1 2021.
Interest income grew by 15.6per cent in H1 2022 to N257.36billion in H1 2022 from N222.63billion in H1 2021 and was primarily driven by 24.2 per cent growth in Interest earned on investment securities.
The rise came as the group grew its investment securities portfolio by 24.5per cent.
Interest expense rose by 7.2per cent to N79.9billion in H1 2022 from N74.56billion in H1 2021, driven by a 29.5per cent increase in Interest paid on Customer deposits.
The increase came as the group grew deposits by 10per cent while the average interest rate paid on these deposits rose by 24basis points.
Despite the rise in interest expense, Cost of Funds declined by a marginal six basis points to 2.1per cent as the group benefitted from cheaper interbank funding.
Consequently, Net Interest income grew by 19.9per cent, while the Net Interest Margin (NIM) expanded by 39basis points to 4.3per cent, on our calculations.
 Non-interest revenues rose by a higher-than-expected 21.5per cent in H1 2022 as Fees and Commission income surged 30.9per cent supported primarily by the growth in Credit-related fees and commissions.
Notably, the N35.62billion earned from Fees and Commission income in Q2 22 is a record-high for a single quarter.
Elsewhere, Operating expenses (OPEX) grew 22per cent to N161.9billion in H1 2022 from N132.83billion in H1 2021, primarily on personnel costs — in Q4 2021, staff salaries were reviewed upwards, as part of broad measures to retain talent.
As a result, operating efficiency deteriorated slightly as the group’s Cost-to-Income ratio rose by 93basis points to 63.2per cent in H1 2022 from 62.3 per cent in H1 2021.  
However, following the larger growth in net revenue than costs, Pre-provision operating profits rose by 17.8per cent.
Further down the P&L, Loan Loss Provisions more than doubled, rising by 101.4per cent (Cost of Risk rose by 29basis points in H1 2022) despite weak loan growth.
Nevertheless, UBA, historically, has had a very prudent risk management framework and we suspect the group increased provisioning to account for the increasingly challenging macro environment across its regions of operations
UBA’s asset quality remains strong
Overall, asset quality continued to show a positive trend, as the NPL (non-performing loan) ratio declined to 3.5per cent in H1 22 (FY 21: 3.7per cent) and was below the statutory limit of five per cent.
Elsewhere, the group’s total capital adequacy ratio closed at 25.1per cent, significantly higher than the minimum regulatory requirement of 15per cent.
Conclusion
The Group Managing Director/ Chief Executive Officer, UBA, Mr. Oliver Alawuba, in a statement said, “Our performance in the first half of year 2022 is in line with our expectations as the Group grew gross earnings by 17.8 per cent, largely from double-digit growth in both net interest and non-interest income.
“We have continued to leverage our Customer -1st philosophy to pursue the mission of providing superior value to our stakeholders. This is evident in the increase in low-cost customer deposits, and strong growth of our payments and transaction banking.
“The financial year 2022 showed initial signs of recovery of economies across the globe, despite continued COVID-induced supply-chain disruptions. However, geopolitical challenges including the Russia and Ukraine conflict, resulted in escalation of global commodity prices, particularly those of grains and crude oil, which have taken a toll on several economies.
“Notwithstanding these developments, our half-year numbers came out stronger than the prior year, with top and bottom-line reaching new record highs.
“The Group’s profitability increased by 12.6 per cent to N85.7 billion, with double-digit growth recorded across our key income line. We recorded a decent 20 per cent growth in our net interest income as we continued to moderate our cost of funds whilst improving yield on assets, thereby contributing to the strong 20% growth in operating income.
“Our investments in state-of-the-art technology continue to yield expected results, evident in the huge boost of our digital banking income, which grew 22.7per cent year-on-year to N36.3 billion.
“These gains have enabled us to optimize net earnings amid the accelerating inflationary pressure, the currency devaluation, and increased regulatory induced cost.
“I am particularly delighted at the strides we are making in growing our market share across Africa. Our retail business has continued to grow, as we ride on our agency banking network, trusted brand, competitive product offerings and quality service delivery to deepen our retail penetration.
“As the Group consolidates its Pan-African leadership in facilitating intra-Africa and international trade, cross-border payments and remittances, we are now a preferred partner for last-mile distribution of donor flows. Our newly launched operation in the United Arab Emirate (UAE) will no doubt contribute immensely to these objectives.
“The Group Board of Directors recently appointed me as Group Managing Director/Chief Executive Officer as well as five other Group Executive Directors. Together, with our highly motivated workforce, we are poised to usher the business into a new era of growth that will deliver superior values to all stakeholders.”
According to analysts at Coronation Research, “The group’s Pre-provision operating profits were in line with our expectations. However, Net profits were lower than our and the market’s forecasts following higher-than-expected Loan loss provisioning.  Nonetheless, we are encouraged by the double-digit earnings growth, NIM expansion and the RoE uplift.
 
“Looking ahead, the benefits of rising asset yields are likely to filter through to funded income and further support earnings in Q3. In addition, the stock has declined by 6.2per cent y-t-d, is trading at a deep discount to its peers and historical valuation, and has a 2022F dividend yield of 15.9 per cent. This presents an attractive entry opportunity for investors. Accordingly, we maintain our BUY recommendation on the stock.”