UBA: Visionary Leadership to drive and sustain Profitability

Propelled by visionary ownership and management, United Bank for Africa Plc, which going by its 2016 full-year and 2017 first quarter performance is today a financial services giant, and despite its age, which qualifies it as an ‘old-generation bank’ is the only one of its ilk that today remains in strong competition with ‘new generation’ peers in terms of earnings, service delivery, investor confidence and robust risk management that has often affected profitability.
It is not in doubt that the bank is today reaping the fruits of foresight that saw it expanding its business offices first across neighbouring West African nations and thereafter, other parts of the African continent; a situation continues to impact strongly on its top and bottom-lines.
The bank’s improving profitability level and enhanced reward to investors shows the commitment of its board and management to creating short, medium and long-term value for investors and other stakeholders.
The bank’s fiscal first quarter result for the period ended March 31, 2017, which was made available to the market recently, though consistent with the performance in recent times, was late in coming, compared to the release date for figures in the corresponding period of 2016. The numbers, nonetheless, showed impressive performance as top and bottom-lines for the period pointed north-ward.
Specifically, gross earnings were robust, compared with those of the corresponding period by 36.58% from N74.13bn in the 2016 Q1 to N101.25bn; while profit for the period was up by 31.58% to N22.35bn from N16.99bn in 2016. Bottom-line for the period was boosted by increase in interest and non-interest income, especially income from fixed income securities and currency trading, in addition to foreign currency revaluation gain.
Profit margin for the period would have been significantly better than 3.67%, if not for the 36.96% rise in operating expenses, combined with the 184.41% increase in tax, as well as a huge 448.88% loan loss expense for the period. Profit margin for the period fell from 22.91% in 2016 to 22.07%, which is impressive to reflect cost management efficiency that is above international average standard of 15% profit margin. Earnings per share for the period increased to 68 kobo from 52kobo in 2016, representing a 30.77% growth.
The 68 kobo EPS for Q1 is a replica of the price in 2.07x, which is higher than the 1.83x recorded last year. Book Value grew by 38.08% to N14.31, up from N10.53 in the 2016 first quarter. Deposit to loan and advances ratio was 1.73; just as the equity multiplier of 7.75 for the period. The improving business environment and the continued intervention by the Central Bank of Nigeria (CBN) in the fx market to ensure price stability and help to reduce inflation rate. This is also helping to reduce provisions by banks, thereby further enhancing profit in the industry.
UBA Q1
SOURCES: COMPANY DATA & INVESTDATA RESEARCH

The bank’s operating network outside the shores of Nigeria contributed over 38% of the reported earnings for the period, a situation that continues to excite investors on excellent improvement in its profitability and investment ratios. These are pointing to a brighter future for the bank as it plans to expand into six more Africa countries and reposition it operations in Nigeria to drive more profitability.

Technical View
UBA Q1-2
The bank’s price action has formed a rising channel for more than a year and has recently broken out its April 24, 2015 resistant price level of N6 to continue rallying within the channel. Positive sentiments on its strong numbers and expectations from the incumbent management has supported this level, as pullback is imminent due to profit taking by traders, investors with medium to long term investment goal should hold and accumulate more.

Valuation
UBA’s current share price is considered very attractive at trailing 2.07x times earnings. Its recent financial results and upgrade to full year 2017 guidance are indicative of strong performance that continues to deliver on expectations. As the bank trades at 2017 Price/Book ratio of 0.90x and price to earnings ratio of 3.20x. Meanwhile, the Book Value reveal an underpriced situation as it trades below N14.31.
Thus, each unit of UBA is fairly priced at N18.00.

Analysts Opinion/Recommendations
Since the last update in early-march 2017, the bank had rallied in price to beat general market performance. With the numbers reported in this Q1 result, the bank’s full year EPS is projected to be in the region of 252 kobo. As summarised in the table above, the bank delivered solid earnings as its retained earnings stood at N160.11bn for the period. The year-on-year change in earnings per share was commensurate with net earnings. Management’s commitment to drive profitability and create value for shareholders is another point of attraction for the stock.
UBA Q1-3
Management to drive balance sheet
The management of the bank is demonstrating commitment to repositioning it for enhanced profitability, following which the board hopes to continue rewarding investors handsomely in the nearest future.
Within the period also, UBA was very proactive with its balance sheet deployment in the review period, as the bank’s defensive strategy was very effective and ensured that the backlash of some regulatory policy changes were mitigated. The pressure on the Naira is a major disincentive for UBA to sustain this venture, but earnings offshore through its pan-African operating network which has supported bottom line.
Performance in Four Years (2013-2016)
Looking at the bank’s numbers for the period under consideration, it has remained resilient despite the tight economic conditions especially since the crash in oil prices and the resultant pressure on disposable income, which may have been the major restraining factor for creation of risk assets during the review period.
Gross earnings for the period grew by 45% to N383.65bn from N264.69bn in 2013. Profitability for this period was stable, despite the over regulation of Nigerian banks and the fact that they make huge provisions on bad loans. Bottom-line for same period was up by 55% to N72.26bn from N46.6bn in 2013.
Return on Capital Employed and Assets for the four-year period were 19.8%, 1.8%, 18.1%, 1.7%, 17.9%, 2.2%, 16.13% and 2.06% in the four years from 2013 to 2016 respectively. Return on Equity was 16.13% in FY-2016, down from 18.84% in previous year, while Return On Assets experienced a marginal decline for the same period to 2.06%, from 2.17% year-on-year. It also grew net assets for the period by 90.64% from N235.04bn in 2013 to N448.09bn.
UBA Q1-4
SOURCES: COMPANY DATA & INVESTDATA RESEARCH

Ratio Analysis
The bank has sustained upward earnings trend that supported price performance as the EPS moved from N1.41 in 2013 to N1.99 in 2016, just as Price to Earnings Ratio remained unstable, due to up and down movement of equity price. In arriving at our fair value for the stock, we focused on the historical financial performance of the stock and our expectations for full-year 2017.
Our Fair Value for UBA shares was calculated using the Price to Book Value method of valuation as well as the Dividend Discount Model comprising our expected dividend estimate for the bank and to adjust for the risk of investing in the Nigerian Financial Services sector. We have placed a POSITIVE rating on the stock of UBA.

UBA Q1-5
SOURCES: COMPANY DATA & INVESTDATA RESEARCH

MR. OMORDION AMBROSE
CHIEF OPERATING OFFICER
INVESTDATA CONSULTING LIMITED
ambroseconsultants@yahoo.com
TEL:01-4724645,08028164085,07028061501