Analysis: UBA big profits, bigger dividends

United Bank for Africa (UBA) Plc has released its audited financial results for the half year ended June 30, 2024, showcasing impressive performance across key financial indicators.

The Group recorded a pre-tax profit of N401 billion, driven by strong growth in gross earnings, and declared a record interim dividend of N2 per share.

This dividend, payable on October 22, 2024, reflects UBA’s solid financial performance, resilience in the face of economic challenges, and consistent commitment to returning wealth to shareholders.

Understanding the Big Profits 

In the first half of 2024, UBA’s interest income grew by 143% to N1.003 trillion. This growth was primarily driven by interest income from loans and advances, which contributed 44.39% to total interest income at N445.429 billion.

Furthermore, interest income from investments in securities accounted for 47.28%, generating N474.482 billion.

The management highlighted that this dual approach not only strengthens UBA’s financial performance but also showcases its resilience in capturing market opportunities.

Commenting on the performance, UBA Group Managing Director Oliver Alawuba stated, “UBA Group has continued to deliver strong double-digit growth in high-quality and sustainable banking revenue streams, driven by a focused growth in balance sheet, transaction, and digital banking businesses across geographies in line with our strategic goals.” 

On the other hand, UBA’s interest expense rose by 119% to N328.935 billion with interest expense on customer deposit taking the center stage, contributing over 62% to total interest expense, yet the increase was outpaced by the growth in interest income.

This resulted in a net interest income of N674.618 billion, indicating strong operational efficiency. This is reflected in the Group’s net interest margin, which increased by 21.3% to 8.28%.

Another factor that contributed to the comparatively strong net income after impairment charge is the significant decline in impairment charges for credit losses on loans, which decreased by 59% to N58.556 billion.

This reduction in impairment charges indicates an improvement in asset quality and a decrease in the risk of defaults. Consequently, the lower impairment expenses positively impacted on the net interest income, allowing UBA to retain more of the revenue generated from its lending activities.

The cost of risk, a key metric that measures the quality of the loan portfolio, declined to 1.79% in the first half of 2024 from 3.09% in the first half of 2023.

This decline highlights the bank’s improved credit risk management and a healthier loan book. The moderation in impairment charges serves as a testament to the bank’s effective credit risk management practices, reflecting a stronger and more stable portfolio.

Operational Challenges  

Despite the growth in core operational metrics, UBA faced challenges that tempered overall profitability.

The bank saw a significant surge in operating expenses, with personnel and other operating expenses increasing by 112% to N446.219 billion. This sharp rise exerted pressure on the cost structure, pushing the cost-to-income ratio up by 35%, reaching 50.24%.

Furthermore, UBA experienced a notable decline in net trading and foreign exchange gains, which decreased by 76% to N98.179 billion from N418.278 billion in the first half of 2023.

According to the bank’s notes to the financial statements, this was largely due to a net fair value loss on derivatives amounting to N312 billion, which offset the foreign exchange gains of N326.182 billion.

This net trading loss significantly moderated the bank’s foreign exchange gains, undermining one of its potential sources of income growth.

These factors collectively contributed to a marginal decline in pre-tax profit, which slipped by 0.51%, reaching N401.577 billion compared to the first half of 2023.

Despite this marginal dip, UBA’s management remains optimistic about the prospects of improving operational efficiency.

Ugo Nwaghodoh, UBA’s Executive Director of Finance & Risk Management, noted, “I am delighted at the milestone reached in driving operational efficiency, reflected in the cost-to-income ratio normalizing around the 50% range. Our cost optimization provides scope for further moderation, as we explore options towards a drastic reduction of our foreign currency-denominated cost components, robotizing and automation of processes, and application of artificial intelligence to our operations.”

In the first half of 2024, UBA’s cost-to-income ratio stood at 50.3%; a slight increase from 48.1% in 2023.

Strategic Focus for Future Growth  

Looking ahead, the bank’s guidance for 2024 targets a further reduction in the cost-to-income ratio to around 45%. This goal reflects UBA’s strategic focus on improving efficiency, even amid rising operational expenses.

Furthermore, UBA’s 2024 guidance includes expectations for deposit growth of 20%, which is a significant moderation, compared to the impressive 93% growth achieved in 2023.

Similarly, loan growth is projected to be more conservative at 20%, down from the 61% growth recorded last year.

This cautious approach indicates UBA’s commitment to maintaining a stable balance sheet while optimizing its operations for enhanced profitability.

Subsidiaries’ Performance 

For the first half of 2024, UBA’s 20 subsidiaries, after a group adjustment of -N333.447 billion, contributed 65.25% to the Group’s pre-tax profit of N401.578 billion.

Among the subsidiaries, UBA Cameroon emerged as the top contributor, accounting for 10.10% of the total pre-tax profit.

On the other hand, UBA Mali and UBA Kenya faced challenges, reporting pre-tax losses of N1.684 billion and N7.809 billion, respectively. This highlights the mixed performance across different markets.

Dividends and Shareholder Value  

UBA’s stock valuation and impressive dividend history appear to make it an attractive prospect for investors.

The proposed dividend of N2 represents a significant increase compared to the previous interim dividend of N0.50 per share in 2023. The payout ratio now stands at 7.3%, up from 2.9%, with an attractive yield of 8.9%.

This impressive financial performance, combined with the recently declared interim dividend, is expected to bolster investor sentiment and potentially restore the share price to levels seen in 2023.

In 2023, the share price gained 238% year-to-date but had lost 12.48% of its value by the end of the year’s first half. However, as of the end of trading in September 2024, the share price regained momentum, achieving a 10.33% year-to-date gain and recovering from the 10.53% loss recorded in August 2024.