UBA recently released its 9M 2019 result wherein Interest income grew by 11% y/y to N297.9bn, albeit declined 13% q/q. The y/y growth was driven by higher Interest Income earned on loans and advances to customers reflecting the growth in Net loans to customer (+13% Ytd) with all of the loan growth in Q3.
We believe the double-digit growth in the bank’s loan book was driven by the aggressive efforts of management in creating risky assets given CBN’s requirement that banks should maintain a LDR of 65% by December 2019 (an upward revision from the initial 60% to be maintained by September 2019).
Interest expense grew 18% y/y to N138.9bn in 9M 2019, higher than the increase in Customer deposits (up 6% y/y) reflecting funding cost pressures. On a q/q basis however, Interest expense fell 19% q/q. Consequently, Net interest income was up 5% y/y to N158.9bn but declined 6%q/q to N48.8bn.
Non-interest Income grew strongly (up 22% y/y) buoyed by the increase in Net fee and commission income (+25% y/y) and a growth of 18% y/y in other Operating Income (Net trading and foreign exchange income, Dividend income). On a q/q basis, Non-interest Income fell 26% q/q, owing to the sharp decline in other Operating Income (N7.3bn in Q3 2019 compared to N27.6bn in Q2 2019).
Impairment Charge was down 38% y/y but grew 1.5 times on a q/q basis. We believe the sharp increase during Q3 was due to the significant growth in the bankís loan book during Q3 following the CBNís directive on LDR. Annualised Cost of risk moderated by 34 bps to 0.5% in 9M 2019.
Further down the income statement, the bank kept a sub-inflationary growth in OPEX (up 8% y/y). The higher growth in Operating income (up 12% y/y to N265.9bn) drove the decline in Cost to income ratio (ex-provisions) to 60.8% compared to 62.5% in 9M 2018.
Overall, Pre-tax Profit grew by 24% y/y to N98.2bn (9M 2018; N79.1bn) while Profit after tax grew faster by 32% y/y to N81.6bn (9M 2018: N61.7bn), owing to a lower effective tax rate of 17% in 9M 2019 compared to 22% in 9M 2018. On a q/q basis, Pre-tax Profit fell 30% q/q while Profit after tax declined 11% q/q.
Annualized ROAE comes 20.6% in 9M 2019, an improvement from 15.2% in 9M 2018.
We have a target price of N12.44/s for UBA with a BUY recommendation.