October 5, 2020
by FBNQuest Research
Rolling over to 2021E; 17% increase to our price target
UBA‘s Q2 2020 PAT came in well ahead of our forecast. However, the beat was due to a positive surprise in other comprehensive income (OCI). Above the tax line, PBT missed our forecast because of negative surprises in loan loss provisions – mostly because of the COVID-19 pandemic – and opex. Similar to other banks, about 18% of UBA’s loan book was restructured. Thanks to the restructuring, the bank’s NPL ratio improved by c.230bp q/q to 4.1%.
In the absence of management’s guidance and potential downside risks to asset quality, we have increased our 2020E cost-of-risk assumption by 10bps to 1.1%. As such, our 2020E loan loss provision forecast is c.10% higher. We have also raised our 2020E opex forecast by c.7%. Despite the downward revisions to our forecasts for both lines, our 2020E earnings forecast is c.40% higher because of the positive surprise in OCI. However, our 2021E EPS forecast is c.-15% lower. Our new price target of N11.8 is 17% higher because we have rolled over our valuation to 2021E.
Our new forecasts translate to a 2020E ROAE of 16.5%. On a relative basis, the shares are trading on a 2020E P/B multiple of 0.3x for a 2021E ROAE of 12.5%. Having shed -12.6% ytd vs. 0.5% NSE ASI, the shares now imply a potential upside of 89% from current levels. Consequently, we retain our Outperform recommendation on the shares.
Q2 PBT down 39% y/y due to spike in loan loss provisions & opex
UBA’s Q2 2020 PBT fell by 39% y/y to N24.4bn, driven by a 267% y/y spike in loan loss provisions and a 28% y/y rise in opex. Further up the P&L, pre-provision profit grew by 4% y/y on the back of low single-digit growth on both revenue lines. However, the negatives from both lines were more significant.
In contrast to the marked y/y decline in PBT, PAT growth accelerated by 108% y/y, thanks to a positive result of N35bn in other comprehensive income (OCI) vs -N66bn Q2 2019.
Sequentially, the growth trends mirrored those on a y/y basis. PBT declined by 25% q/q due to a spike in loan loss provisions and opex. PAT expanded by 405%, thanks to the strong result in OCI. Relative to our forecasts, PBT missed by -14%. However, PAT beat by a significant margin.