Event

United Bank of Africa’s recently released Q3 2022 numbers were of mixed directions. Gross earnings rose by 33% YoY in Q3 2022, driven by the rising interest rate environment. However, net profit grew by only 4% YoY to N45.71bn due to the high operating costs amid a rising inflationary environment.

Asset Repricing Spurs Interest Income

On average, interest-bearing assets (majorly consisting of the loan book and investment portfolio) grew by 13% YoY to an average of N7.29trn as of 9M 2022. The bulk of the increase was in ‘Investment Securities’, a move we think was strategic by the management given the significantly high-yield environment in the Group’s Pan-African markets including Ghana. Investment securities portfolio grew by 18% YoY to an average of N3.31trn while the loan book grew modestly by 6% YoY to an average of N2.79trn as of 9M 2022. The growth in asset volumes and repricing of those assets spurred interest income growth of 35% YoY to N162.87bn in Q3 2022.

Cost of Funds also Rises with Higher Interest Rates

In the same pattern, interest expense grew by 45% YoY to N57.82bn in Q3 2022 – representing the highest quarterly increase in the 2022 financial year thus far. Although interest-bearing liabilities grew, the increase was 13%, driven by customer deposits (+14% YoY) and deposits from banks (+48% YoY). The significant jump in interest expense in Q3 2022 highlighted the impact of higher interest rates on the economy.

Outlook

We revised our FY 2022 EPS estimate upwards to N4.30 (previous: 4.01) after incorporating the Q3 2022 numbers and adjusting for our expectations of improved net interest margins. However, we maintained a N1.00 dividend for FY 2022. Having previously declared a 20kobo interim dividend during the financial year, we expect the Group to declare an 80kobo final dividend.

Our valuation for the stock is N10.38, and the total upside based on the stock’s price is 54%. We note that the stock’s earnings yield is 64% – one of the highest in the banking industry. This underscores the stock’s current cheap valuation. In our view, the lack of investor interest in the stock is not unconnected to a general waning interest in the Nigerian equities market due to weak macroeconomic policies and heightened regulatory risks in the banking industry. However, we believe that the fundamentals of the stock are strong, and the Group’s geographical diversification positions it to capture significant value across the African ecosystem in the long run. We recommend a BUY

Please follow the link “United Bank for Africa Plc Q3 2022 Earnings Update – Inflationary Pressures Cap Gains of Higher Asset Repricing” to view the whole report.

Thank you.