UBA Plc: Doing well, with capital gains in view
By Folakemi Emem-Akpan
Introduction
Our analysis shows that United Bank for Africa (UBA) Plc had a rewarding year in 2015. Its ability to generate income during the 2015 financial year improved, as well as its profit retention ability. The bank seems to be weathering Nigeria’s economic recession very well, and its shareholders received a dividend that was 300 per cent better than the one it received in 2014.
We are of the opinion that the 2016 operational year will be one of further progress for UBA, and should be a rewarding one for investors and shareholders. For the investor, the UBA stock is currently trading at a slightly undervalued rate, and we predict that the share price will pick up after its 2016 results are released, thereby making allowance for capital gains. For investors who are interested in dividend income, this is a stock to hold on to, as this stock consistently yields dividend income. Also, if the bank’s 2016 quarter three result is anything to go by, profits for the 2016 financial year, and by inference earnings and dividends, might be much higher than they were in 2015.
Core operations
As was the trend in the banking industry for the 2015 financial year, UBA earned more income from both core banking and non-core operations in 2015 than it did in 2014, pushing its gross earnings to an all-time high of N314.8 billion. Profit for the year, at N59.7 billion, was also higher than the N47.9 billion profit recorded in the preceding year.
Clients patronised UBA a little less in matters regarding loans and advances. The bank’s loan portfolio decreased by 6.2 per cent to N1.05 trillion. Average lending rate increased over the preceding year’s to 22.7 per cent, while average deposit interest rate also increased to 4.5 per cent. So while it charged its lenders more, it also paid its depositors a better interest.
Because of this, the bank’s net interest margin increased in 2015 to 59.0 per cent. This means that the bank performed better in its core banking operations of lending and borrowing for the review year when compared with the prior year. It is important to note here that this was one of the exceptions in the banking industry for the year under review, as many bank underperformed in their net interest margins. The core reason for this is that most banks reduced their average lending rate and increased their average interest rate on deposits, thereby constricting the net interest margin.
Earnings per share, at 179 kobo, was higher than the 153 kobo recorded the preceding year’s. Meanwhile, dividend per share increased to 40 kobo from 10 kobo in 2014.
Profitability ratios
As previously mentioned, UBA recorded both a higher turnover and profit in 2015. It was thereby able to have improved profitability ratios on almost all fronts. First to achieve a progression was the profit margin of the company, growing to 21.8 per cent in 2015 from 19.6 per cent in 2014. What this means is that for every N100 earned by the bank in the course of the year, N21.80 made it to the profit position, as compared to N19.60 for the year preceding 2015.
Assets deployed also earned more in 2015 than it did in 2014. Return on assets (ROA) for the year stood at 2.5 per cent in 2015, as compared to 2.0 per cent in 2014.
For the 2015 financial year, UBA deployed equity valued at N332.6 billion and for every N100 equity deployed, the bank made an after-tax profit of N17.90, and this was just about the same as the profit of N18.00 made in 2014.
During the course of the year, the number of employees in its employ and recorded a better earnings per employee. This improved to N24.65 million on the average, up from N22.58 million in 2014. This is an indication of employee productivity and company efficiency.
Other ratios
The proportion of the bank’s loans classified as non-performing in the course of the year was 1.7 per cent, higher and therefore worse than 1.55 per cent in 2014. While the ratio worsened, it is still one of the lower and therefore better ones in the banking industry.
In terms of capital adequacy, UBA performed better in 2015 than it did in 2014, as its result for the year was a little higher than the preceding year’s. Its equity (a company’s primary and cheapest source of funding) could finance about 20 per cent of the loans and advances it gave out to borrowers, up from the 17 per cent recorded in the erstwhile year.
Having a debt to equity ratio of 7.3 shows that the bank is using N7.30 of liabilities in addition to each N1.00 of stockholders equity. In other words, the bank is using N8.30 of total capital for every N1.00 of equity capital. A little high but still within acceptable limits, it also matches what was normal in the banking industry in 2015.
Sustainable growth
The bank gave a total dividend of 40 kobo per share held for its 2015 financial year, and the retention ratio in 2015 was lower than that of 2014, with the bank dedicating a higher proportion of after-tax profit to dividend payout than in the prior year. Analysis shows that sustainable growth for 2015 was 15.5 per cent, lower than 19.0 per cent before, and this means that the bank’s growth ceiling, utilizing only its own source of funding for growth, dropped. Meanwhile, actual growth was 9.8 per cent, lower than the year’s sustainable growth. The bank is currently operating under its growth ceiling and is under no pressure to raise funds to support its business.
Stock value
On February 17 2017, the market price of UBA was N4.85, and this fell within the median line for banking stocks. Despite this, we find the stock to be undervalued i.e. it is currently being sold at a lesser price than it should; therefore prospective investors might want to buy now.
Net assets per share is N9.16, close to two times the current market price, and book value to market value ratio is much higher than one, another clear indication of undervaluation. P/E ratio and earnings yield also point to an analysis of undervaluation.
We recommend a buy at this price, especially because the bank pays dividend consistently.
Unaudited results
UBA’s result for the 2016 third quarter shows both top line and bottom line growth. Gross earnings improved by eight percent over the corresponding figure in 2015, and profit advanced by 7.6 per cent. EPS was 150 kobo, more than 143 kobo in the prior year. If the bank continues in this vein, it should have a good showing come year end 2016.
Unique strategies
With its headquarters in Nigeria, UBA has presence in 18 other African countries, the UK, the US and Paris, France. This is one of the Nigerian banks with the most international reach. The bank started up in 1949 as the British and French Bank Limited (BFB), and was incorporated as a limited liability company in 1961.
UBA is a financial institution offering a range of banking, other financial and pension fund custody services, and has over eight million customers in the retail, commercial and corporate market segments, spread across 22 countries.
Conclusion
UBA is a solid bank, and seems not to have particularly felt the crunch of Nigeria’s economic recession in 2015. It weathered the storm well, and its available result for 2016 also shows the same trend. We however caution investors as we always do; despite the positive signs, prospective investors should always carry out their own due diligence on stocks before investing.
*Source: UBA’s 2015 financial report
*UBA’s 2016 quarter three unaudited results
*The Nigerian Stock Exchange