UNION BANK OF NIGERIA PLC
UBN, one of the first generation banks, started as a branch of Barclays Bank Dominion Colonial Overseas (DCO) in 1917. In 1969, it was incorporated as a private limited company in Nigeria. UBN went public a year later and was subsequently quoted on the Nigerian Stock Exchange. The new UBN is an amalgam of the old Union Bank, Universal Trust Bank Plc, Broad Bank Plc and Union Merchant Bank Limited in line with the consolidation programme of the Central Bank of Nigeria.
Having divested from non-banking subsidiaries of Union Trustees Limited and Union Pensions Limited, the bank’s principal activity is the provision of banking services. It plans to offload UBN Property Company Ltd and Atlantic Nominees Ltd. Union Bank UK Plc is its UK subsidiary which is responsible for about 2% of its revenue and 6% of its total assets (2014: 8% of total assets).
Foreign investors account for 85.9% of its shareholding. Union Global Partners Limited, a consortium of investors, now holds 65% (2014: 61.39%), while Atlas Mara Limited retains 20.9% equity stake in UBN. Thus only 14.1% is available for diverse investors.
Mr. Cyril Odu was appointed to chair a 17-man Board of Directors on November, 2015 while Mr. Emeka Emuwa is the chief executive officer (CEO). The management has embarked on restructuring of its operations to increase its brand preference and image. Its efforts include upgrade of its branch network and information technology in order to create a stronger and reliable bank.
The bank has shown improvement since it was recapitalised in 2011 by The Asset Management Corporation of Nigeria (AMCON) and Union Global Partners Limited. But management need not rest on its oars. The bank is divesting from its non-banking subsidiaries to focus on banking. However, the retail banking’s contribution to revenue has been on the decline in recent years. It is lucrative but could expand the creation of risk assets.
But UBN has a remarkable experience and performance in treasury and investment services such as issuance of short term notes, money market investment management and fixed income sales and trading.
UBN operates only in two countries-Nigeria and UK. The subsidiary in the UK only accounts for about 2% of its revenue and about 7% of its assets. Returns to shareholders are low and the bank is trying to rebound after recapitalisation. And such they depend largely on capital appreciation.
UBN is cautiously growing its loan portfolio. Asset quality seems to be improving. And we are of the belief that retail deposit mobilisation will increase its margin going forward. Also, this will improve its internal capital generation and its liquidity.
It should watch its capital level as this is on the decline. It is creating more risky assets than it is growing its capital. The bank is not consistently generating positive free cash flow. Shareholders have been benefitting from non-dilution since 2011. And a decision to raise more capital from the market may erode their wealth.
We would like to keep tabs on the company to see how management’s efforts at restructuring the bank and putting it on the pedestal of profitability pan out. We may still witness another round of consolidation in the industry going forward.
Our have estimated that a share of UBN ranges from NGN8.4 to NGN12.1. UBN could represent a speculative opportunity. A return of 58.2% is expected from owning the shares of UBN.
Gross earnings lost 13.4% in 2015 compared to a gain of 11.9% of the previous period. This was largely due to a 40.7% drop in non-interest income. Interest income as a proportion of gross income was 77.6% up from 56.2%. Non-interest margin, on the other hand, shed 21.4% to close at 22.4%. Net interest margin averaged 46.7%.
Profit Before Tax (PBT) declined by 46.8%; Profit After Tax (PAT) of NGN14 billion was about half of what was recorded a year ago despite the fact that it had been improving since 2011when a loss of NGN82.6 billion was declared.
PBT margin of 12.3% was a fall of 7.6% compared to what was achieved in 2014. But it stands at 49.3% on a 3-Year Compound Annual Growth (CAGR) basis. The corporate segment of the business recorded a loss during the period under consideration; PAT margin was down by 7.8%.
The bank is granting more loans but is struggling growing deposits. Loans are expanding by 26.6% while deposits are growing by 3%. Operating costs are about 50% of its gross earnings and 80.1% of operating income. Shareholders’ fund improved by 11% compared to 6.1% of a year ago (on a 3-Year CAGR basis). Earnings Per Share (EPS) has improved by 57.6% over the past three years. However, retail banking has been eroding shareholders’ wealth. Treasury segment of the business has greatest positive effect on shareholders’ fund since recapitalisation. The company is not insolvent. It should be able pay its long-term maturing obligations when due and creditors are adequately covered by the assets of the company.
UBN’s lack of competitive advantage in the industry makes its earnings vulnerable. The new foreign exchange regime (floating) could impact its earnings considerably going forward. Although its major business is in Nigeria, UBN is prone to unfavourable movement in the foreign exchange market. Also, as it strives to shore up its capital base by accessing the international financial market, it may become even more vulnerable as obligations have to be met in foreign currency. The bank currently owes NGN57.3 billion to external lenders (2014: NGN53.5 billion).