With the Nigerian Exchange mispricing of stocks, equity analysts at WSTC Securities Limited in a report have revealed the United Bank for Africa (UBA) stock is trading below its fair value.
This invariably means the Pan-African financial service boutique worth more than the value placed on the group at the local bourse.
UBA however scored WSTC Securities equity analysts’ buy rating after a better than expected earnings outing in the first quarter of 2021 with N11.89 sets at the target price.
Waving a bullish flag on the stock with a buy recommendation to investors, WSTC Securities believes the stock is significantly undervalued after projecting sustained growth in the bottom line.
On the downside, the investment firm forecasted that UBA group net interest income will slow down in subsequent quarters in the financial year 2021 due to the potential impacts of the rising interest rate on the funding base.
In the first-quarter earnings releases (Q1) in 2021, UBA reported a 6% year-on-year gross earnings growth as the Nigerian economy enters the recovery stage.
In its equity report, analysts at WSTC Securities said they expect to see a sustained growth in the Group’s bottom line to be driven by non-interest income and net interest income.
However, the investment firm expected that the growth in net interest income will slow down in subsequent quarters in 2021.
“The basis of our slow growth expectation is hinged on the potential impact of rising interest rates on the Group’s funding base”, WSTC Securities added.
Explaining, analysts stated that the majority of the Group’s deposit base is skewed towards the short-term while the bulk of the assets are of the longer tenor.
“Therefore, we posit that the funding base could be repriced faster than assets. On non-interest income, we expect increased activities and continued focus on retail banking to drive volumes and earnings”, WSTC added.
For the group, analysts expressed view that the growth in electronic banking will sustain in subsequent quarters.
“We maintain our projections for the financial year 2021, as we believe that the released Q1-2021 result was in alignment with our earnings projections and expectations”.
The investment firm detailed that its fair value on UBA is N11.89, which effectively implies a 3.23x justified price-to-earnings ratio, noting that at the reference market price, the stock trades at a 2.04x forward price-to-earnings ratio.
From the bucket of its interest earnings assets, the lender’s total interest income in Q1 2021 was unchanged, relative to Q1 2020 figures, while non-interest income jumped 23% from N38.06 billion in Q1 2020 to N46.86 billion.
In the period, the Pan-African lender’s operating income recorded a 15% increase, rising from N91.30 billion in Q1-2020 to N104.62 billion in Q1-2021.
UBA Plc.’s Shares Significantly Undervalued – WSTC
The group’s operating expense also swelled up 10% year on year from N58.66 billion in Q1-2020 to N64.45 billion in Q1-2021, partly reflecting the impacts of 19 consecutive months headline inflation uptrend in Nigeria, with a similar pattern in a number of countries in the Africa region.
Key metrics indicate that Group’s cost-to-income ratio reduced by 200 basis points from 64% in Q1-2020 to 62% in Q1-2021.
Hence, profit before tax ballooned 24% year on year from N32.73 billion in Q1-2020 to N40.58 billion in Q1-2021. Profit after tax grew by 27% from N30.10 billion in Q1-2020 to N38.16 billion.
Solid Asset Growth Supports Earnings Capacity
WSTC Securities explained that the Group’s total interest-bearing assets grew by 31% year on year from an average of N5.63 trillion in Q1-2020 to N7.37 trillion in Q1-2021, largely on account of significant increases in loan and advances to customers and investment securities.
UBA loans and advance extended to customers gained strong traction amidst CBN 65% loans to deposit ratio pressure, rising 22% above N2.16 trillion in 2020 to N2.64 trillion. Investment Securities did a 54% uptick year on year from N1.69 trillion to N2.62 trillion.
Meanwhile, analysts at WSTC added that low-yield environment limited upside gains, as interest income remained flat from N106.46 billion in Q1 2020 to N108.48 billion in Q1-2021.
“Based on our estimates, the Group’s asset yield declined from 7.57% in Q1-2020 to 5.89% in Q1 2021”, WSTC Securities stated.
Cheap Funding Base Boosts Net Interest Margins
According to Q1 financials, UBA interest expense declined by 22% year on year from N43.69 billion in Q1 2020 to N34.21 billion in Q1 2021, occasioned by the material increase in the Group’s current and savings deposit accounts (CASA).
Analysts at WSTC Securities Limited noted the bank CASA ratio increased from 73% in Q1-2020 to 82% in Q1-2021. This implies that the proportion of low-cost funds increased on a year-on-year basis.
As a result of the decline in interest expense, the Group’s net interest income grew by 14% year on year from N65.42 billion in Q1-2020 to N74.38 billion in Q1-2021.
Sustained Focus on Digital Banking, Retail Penetration Drive Value
Analysts explained that on the strength of a 24% growth in fee and commission income the Group’s non-interest income grew 23% from N38.06 billion n in Q1 2020 to N46.86 billion in Q1 2021.
In addition to the increase in fee and commission income, WSTC said net trading gains and ‘other operating income grew by 14% (from N9.15bn to N10.47 billion) and 111% (N680 million to N1.43 billion, respectively.
The breakdown of fee and commission income showed that a 50% increase in electronic banking income from N8.30 billion in Q1-2020 to N12.48 billion in Q1-2021 was the core growth driver of the line.
Operating income grew by 15%, attributable to the solid non-interest income growth. WSTC stressed that record improvement in the Group’s cost-to-income ratio from 64% in Q1-2020 to 62% in Q1-2021, further widened bottom-line growth.
UBA profit before tax grew by 24% while profit after tax grew by 27% year on year from N30.10 billion in Q1 2020 to N38.16 billion.