Union Bank of Nigeria Plc: Not the best of years

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Introduction

Our analysis of Union Bank Plc’s newly released 2017 results shows that it did not enjoy as good a level of profitability during the course of the year as it did in the preceding year. While it was able to step up the level of its core banking operations and non-core operations, it recorded a lower profit and lower profitability ratios than it did in the erstwhile years.

Investors are also not yet benefiting from the bank’s profits. They did not get any dividend for the year ended 2017, just like they didn’t for 2016 and 2015.

 

Core operations

The 2017 FY was not too great a year for Union Bank. While it was able to expand its core banking operations during the course of the year and also succeeded in stepping up its non-core banking businesses, it wasn’t able to maintain such a momentum to the profit position.

It had a higher gross earnings of N163.8 billion in 2017, up from N129.6 billion in 2016, and translating into a 26.4 per cent growth rate.

It also had a lower interest margin of 53.4 per cent, lower than 66.3 per cent in the prior year, and this was not indicative of a better efficiency in the core business of lending and borrowing. This lower net interest margin was perpetuated despite a wider gap between average lending rate and average interest rate. Average lending rate increased over the preceding year’s (to 24.1 per cent from 19.3 per cent) while average deposit interest rate decreased to 6.4 per cent from 8.8 per cent. This means that the bank charged its lenders a higher interest rate, but paid its depositors a lower interest during the course of the year.

It is worth noting that during the course of the year, the bank gave out a slightly higher level of loans and advances, but received much more deposits from customers.

Profit for the year, at N14.6 billion, was about 5.2 per cent less than the N15.4 billion profit recorded in the preceding year.

Earnings per share, was thus predictably lower than that of the prior year, closing at 81 kobo, as compared to 92 kobo before. The bank did not pay its shareholders any dividend during the course of the year.

 

Profitability ratios

The bank recorded mostly lower results in respect to profitability in 2017. With a higher revenue intersecting with a lower profit, the bank was definitely not able to record a profit margin that was better than that of 2016. At 9.5 per cent, the bank’s profit margin was lower than the 12.1 per cent recorded in the prior year. What this means is that for every N100 earned by the bank in the course of the year, N9.50 made it to the profit position, as compared to a higher N12.10 for the year preceding 2017.

The bank was also unable to squeeze as much profit as was possible from assets, as assets deployed earned less in 2017 than it did in 2016. Return on assets (ROA) for the year stood at 1.1 per cent in 2017, as compared to an already low 1.3 per cent in 2016.

For the 2016 financial year, Union Bank deployed equity valued at N345.7 billion and for every N100 equity deployed, the bank made an after-tax profit of N4.20, a regression over the profit of N5.70 made in 2015.

Employing fewer employees in 2017 than in the previous year, earnings per employee increased to N5.86 million on the average, slightly up from N5.81 million in 2016, and is somewhat indicative of employee productivity and company efficiency.

 

Other ratios

The bank had a slightly better capital adequacy standing in 2017 than it did in 2016, meaning that the bank is doing better in its primary business of giving out loans. Union Bank’s capital adequacy improved in 2017 to 17.8 per cent, higher than 13.3 per cent in the prior year, and also higher and better than the 16 per cent rate mandated for Systemically Important Banks.

For the 2017 financial year, the bank recorded a higher (and therefore worse) proportion of loans classified as non-performing when compared to the prior year’s. The 19.8 per cent result was higher than the already high 6.9 per cent result recorded in the preceding year, and clearly overshot (and therefore worse than) the Central Bank’s regulatory threshold of 3.66 per cent.

The bank had a debt to equity ratio of 3.2, meaning that it is using N3.20 of liabilities in addition to each N1.00 of stockholders equity. In other words, the bank is using N4.20 of total capital for every N1.00 of equity capital, lower than the N4.60 it did in the erstwhile year.

 

Sustainable growth

Union Bank did not pay shareholders any dividend in 2017, same as the trend for the past two years. Retention ratio was therefore one time, same as it was in the prior year.

Assets/equity ratio was lower than that of the prior year while asset turnover was slightly lower. Meanwhile, profit margin, at 9.5 per cent was also lower than the 12.1 per cent recorded in the prior year.

Analysis shows that sustainable growth for 2017 was 4.5 per cent, lower than the 5.8 per cent recorded before, and this translates to mean that the bank’s growth ceiling, utilizing only its own source of funding for growth, shrunk. Meanwhile, actual growth was negative 26.4 per cent. The actual growth was therefore higher the sustainable growth, meaning that Union Bank overshot its growth ceiling for the year.

 

Stock value

As at June 1 2018, Union Bank’s stock traded at N5.55, and our analysis shows that the stock was undervalued at this price.

As at analysis date, the company had a net assets per share (NAPS) value of N11.87, much higher than the N5.55 at which it traded on the floor of the stock exchange. Also, the company had a book value of N345.7 billion and a market capitalisation of N161.6 billion, putting its book value/market cap ratio at more than two. Traditionally, a book to market value ratio greater than one indicates an undervalued stock.

The stock is at the moment low priced enough that it is easily accessible by all kinds of investors, but as it isn’t one that pays dividend on a regular basis, we do not recommend a buy for those whose primary purpose of investment is dividend receipt.

 

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 recently celebrated 100 years of service to the Nigerian economy.

 

Conclusion

This was not a very good year for Union Bank. It remains to be seen if the 2018 financial year will end on the same note, or better.

*Source: Union Bank’s 2017 financial report

*The Nigerian Stock Exchange

Nbillion 2017 Percentage change 2016 Percentage change 2015
Turnover 163.8 26.4 129.6 10.6 117.2
Profit pre tax 15.5 -1.3 15.7 6.1 14.8
After tax profit 14.6 -5.2 15.4 7.7 14.3
Total assets 1455.5 16.2 1252.7 19.3 1049.7
Equity 345.7 27.2 271.7 10.1 246.7
Liabilities 1109.8 13.1 981.0 22.2 802.9
Deposits 902.5 20.6 748.6 21.8 614.6
Loans and advances 517.1 2.0 507.2 38.3 366.7
Kobo
Earnings per share 81 -12.0 92 9.5 84
Dividend per share 0 0.0 0 0.0 0
Core operations 2017 2016 2015
Turnover growth rate 26.4 10.6 -13.8
Profit growth rate -1.3 6.1 -45.6
Average lending rate (%) 24.1 19.3 24.8
Average interest rate 6.4 8.8 5.7
Net interest margin (%) 53.4 66.3 61.3
Profitability ratios
Profit margin (%) 9.5 12.1 12.6
Return on assets (%) 1.1 1.3 1.4
Return on equity (%) 4.2 5.7 5.8
Pre-tax profit (loss) per employee (Nm) 5.86 5.81 5.63
Other important ratios
% of classified loans 19.8 6.9 6.7
Capital adequacy 17.8 13.3 15.9
Debt to equity ratio 3.2 3.6 3.3
Actual Vs sustainable growth
Profit margin (%) 9.50 12.1 12.6
Retention ratio 1.00 1.00 1.00
Asset turnover (times) 0.11 0.10 0.11
Assets/Equity (times) 4.2 4.6 4.3
Sustainable growth 4.5 5.8 6.0
Actual growth 26.4 10.6 -13.8

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