Union Bank of Nigeria Plc: A pivotal year ahead
By Folakemi Emem-Akpan
Introduction
Union Bank of Nigeria Plc is a bank that has not been able to fully recover from a loss position in 2011. It has since returned to profitability but has not been able to reward shareholders with a dividend in 7 years. While able to hold its ground in 2015 despite Nigeria’s economic recession and able to turn out a profit, it did not however attain the level of profitability it did in the prior year.
The 2016 financial year, while shaping up to be better than 2015, might however prove no different for the shareholder. It will be a pivotal year that will determine if the bank has finally returned to profitability or if it might slide back into the reds.
All is not bad news though. The Union Bank stock is at this point trading at an undervalued price. This is good news for the investor who is prepared to wait for the long haul, in the hopes that Union Bank’s share price will meet up with its potential.
Core operations
Customers patronised most Nigerian banks more than ever before in terms of loans and advances for the 2015 financial year. Union Bank followed the rule in this regards, with its loan portfolio increasing by 17.2 per cent to N366.7 billion. Average lending rate increased slightly over the preceding year’s, as did its average deposit interest rate. So while it provided services to its lenders at a higher finance cost, it also paid its depositors a better interest.
Net interest margin, the true test of a bank’s effectiveness in its core banking operations of lending and borrowing, decreased to 61.3 per cent in 2015 from 68.1 per cent in 2014. While this result was lower than that of the prior year, it is important to note that it yet competed favourable against other banks’ results for the same period.
The bank’s gross earnings (which comprise interest income and other fees and commission) was N117.2 billion. Such gross earnings was a 13.8 per cent decline over the preceding year’s N135.9 billion level, and was brought about by the bank’s lower other operating income such as fees and commissions.
Pre-tax profit decreased by 47.7 per cent to N14.5 billion during the course of the year while profit after tax decreased by 48.1 per cent to N13.9 billion.
Because of the sliding turnover and profit, earnings per share was predictably lower than that of the prior year, closing at 83 kobo, as compared to 151 kobo the year before. The bank did not pay shareholders any dividend, the same way it did not in the prior year.
Profitability ratios
Union Bank’s profitability ratios declined in 2015 over the level they were in the preceding year. These levels while still high, however suggest that the bank’s efficiency in the management of assets and cultivation of profit is slowly being eroded. This can be attributed to the current harsh economic realities of the Nigerian economy.
Profit margin was 12.4 per cent, meaning that for every N100 earned by the bank in the course of the year, N12.40 made it to the profit position. This is as compared to a much higher N20.40 in 2014.
Assets deployed also earned significantly less in 2015 than it did in 2014. Return on assets (ROA) for the year stood at 1.4 per cent in 2015, as compared to 2.7 per cent in 2014.
Meanwhile, return on equity for the year was 5.7 per cent. Analysis shows that for every N100 equity deployed, the bank made an after-tax profit of N5.70, as compared to the N12.10 made in 2014.
Other ratios
The proportion of the bank’s loans classified as non-performing in the course of the year was 6.7 per cent, higher than 5.0 per cent in 201. This was high and therefore worse for the company, as this is a ratio that should be kept as low as possible. This suggests that the bank does not have an effective strategy for loan recovery. Most other banks also had high and worsening proportion of classified loans during the year as well.
In terms of capital adequacy, Union Bank also did not perform better in 2015 than it did in 2014, as its result for the year was lower than that of the preceding year’s. Its equity (a company’s primary and cheapest source of funding) could finance about 15.3 per cent of the loans and advances it gave out to borrowers, down from 16.4 per cent recorded in the erstwhile year. While low at 15.3 per cent, it was however higher than CBN’s mandated 15 per cent minimum ratio.
Having a debt to equity ratio of 3.3 shows that the bank is using N3.30 of liabilities in addition to each N1.00 of stockholders equity. In other words, the bank is using N4.30 of total capital for every N1.00 of equity capital.
Sustainable growth
Union Bank has not declared a dividend in seven years. It also did not declare one for its 2015 financial year, stating that it still has a retained earning deficit. This means that the retention ratio in 2015 was 1.0 time, same as 1.0 time in the preceding year.
Analysis shows that sustainable growth for 2015 was 5.9 per cent, as compared to the 12.1 per cent recorded in 2014. This means that using only the revenue it generates, this bank had the capacity to grow up to 5.9 percent. Instead of growing, the bank however recorded a decline of 13.8 per cent. While it is under no pressure to seek external funding to finance growth, the bank is also not even growing at all.
Stock value
Overall, the stock market position of Union Bank is not truly reflective of the bank’s potential, as major indicators point to the stock being undervalued.
As at analysis date, market price was N4.90 while net assets per share was N14.38. As the difference between these two is quite substantial, this is an indication of undervaluation.
Also, P/E ratio as at analysis date was 5.39 while earnings yield was 0.19.
Another pointer to the stock’s undervaluation is the ratio of its book value to market value. Market capitalisation on analysis date was N78.53 billion, while the company had a book value of N243.9 billion as at the same date. As the book value is greater than the market value, the stock is considered to be undervalued.
We advise a buy at the price for investors who are ready to wait the long haul for the price to appreciate. This might not happen in a long while though, considering the fact that the bank’s share price has been in a free-fall for the past year. Investors should also consider that the bank is attempting to free itself from constraints imposed by the economic recession of the country and might not be able to engineer a quick turnaround.
Also, this is a stock that hasn’t paid dividend in 7 years. For investors whose aim for investment is to generate a dividend income, this is not a recommended buy.
Unaudited results
The bank’s 3rd quarter results for 2016 shows both top line and bottom line growth over the preceding year’s, and the bank recorded better interest margin and profit margin than those of the prior year.
Earnings per share also improved to 76 kobo for the period under review from 55 kobo in 2015.
This result suggests that the 2016 year might end on a note of better profitability for the bank than 2015 did.
Unique strategies
Union Bank of Nigeria is one of Nigeria’s oldest banks, established in 1917. In the distant past, it was one of Nigeria’s long-standing and most respected financial institutions, offering a portfolio of banking services to individuals, SMEs, commercial and corporate clients. It however lost its market leadership to a crop of newer and more vibrant banks in the 1990s and early 2000s.
Under recent new leadership however, the bank redefined its ambition and mapped out a strategy to be a highly respected provider of quality banking services. The Bank’s transformation efforts are yielding positive results as evident from better financial performance.
The bank will be celebrating 100 years of service to the Nigerian economy this year.
Conclusion
As earlier mentioned, the Union Bank stock is ideal for the investor who is prepared to wait for the long haul, but is not a particularly good vehicle for dividend income.
*Source: UNION BANK’s 2015 financial report
*UNION BANK’s 2016 third quarter unaudited results
*The Nigerian Stock Exchange