Union Bank of Nigeria Plc

UNION BANK OF NIGERIA PLC

Ticker:                            UBNNature of Business:    BankingLocation :                              Nigeria
Recent Price:           NGN5.8052-Week High/Low: NGN7.00/4.50Estimated Fair Value:      NGN8.50-NGN11..37
Expected Return:      47.7%Consider Buy:                   Below NGN9.94Business Risk:            Average
Financial Risk:      AverageEconomic Moat:               WeakCorporate Governance: Strong

Company Overview
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 its non-banking subsidiaries, the bank’s principal activity is the provision of banking services. The management of UBN decided to dispose of Union Bank UK Plc, its foreign subsidiary which is responsible for about 3% of its revenue and 9% of its total assets. Union Global Partners Limited, a group of investors, now has 65.1% shareholding while Atlas Mara Limited owns a 25.6% equity stake in UBN.

Mrs. Beatrice Hamza Bassey chairs the board of directors of UBN. Mr. Emeka Okonkwo took over from Mr. Emeka Emuwa as the chief executive officer on 1st April 2021. Mr. Okonwko joined UBN as executive director in 2013. Messrs Paul Kokoricha and Emeka Ogbechie joined the board as non-executive directors while Mrs. Omolola Cardoso and Mr. Joe Mbulu became executive directors in the year 2020. However, Mrs. Furera Isma Jumare resigned from the board in  October 2020.

Investment Thesis
The bank has shown improvements since it was recapitalised in 2011 by The Asset Management Corporation of Nigeria (AMCON) and Union Global Partners Limited. But management should not rest on its oars. It has divested from its non-banking subsidiaries in order to focus on providing banking services. In a bid to improve the performance of UBN, the management embarked on restructuring its operations and information technology upgrades.

UBN has remarkable experience in treasury and investment services which involve the issuance of short-term notes, money market investment management, fixed income sales and trading. However, the retail banking segment’s contribution to revenue has been on the decline in recent years. The retail market is lucrative but could expand the creation of risk assets.

UBN had been operating in only two countries (Nigeria and the United Kingdom) before the decision to sell off its UK subsidiary. The company has not consistently generated positive free cash flow. Returns to shareholders are low and they have largely depended on capital appreciation. However, a dividend of NGN0.25 per share was declared at end of the year 2020, the first time in over a decade. This amounted to a dividend yield of 4.7%.

UBN is cautiously growing its loan portfolio. Asset quality seems to be improving. Non-performing loan ratio stood at 4% (2019:5.8%). Total debt has risen to NGN262.4 billion as at 31st December 2020. In other words, total debt has grown at a 3-Year Compound Annual Growth Rate (CAGR) of 41.2% (2019:19.6%).  Total deposits have increased by 7.8% while gross loans expanded by 9.5% over the past three years. 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.

UBN shares are trading below our fair value estimate and thus present a buying opportunity to investors.

Valuation
We have estimated that a share of the company ranges from NGN8.50 to NGN11.37.  A return of 47.7% is expected from owning the stock of UBN.

Financial Overview
Gross earnings lost 3.8% in 2020 compared to a gain of 14.5% in the previous year. This was largely due to a drop in interest income. Interest income accounted for 62.6% of the fall in gross earnings while non-interest income produced 37.4% of the decrease. Though it was more or less flat at NGN76.4 billion, interest income on gross loans decreased from 12.8% to 10.4%. Investment securities produced 20.1% of the total interest income (2019: 17.1%).   Interest income as a proportion of gross earnings was 70.6%, slightly larger than 70.3% achieved in 2019. Net interest margin averaged 42.6%; non-interest income margin, on the other hand, shed 30 basis points or 0.3% year-over-year to close at 29.4%.

Profit Before Tax (PBT) increased by 4.6% to NGN26 billion; Profit After Tax (PAT), however, declined by 6.1% from NGN19.9 billion in 2019 to NGN18.7 billion in 2020. The net profit for the year was harmed by its discontinued operations in the UK. Loss After Tax (LAT) from its operation in the UK was NGN6.5 billion compared to LAT of NGN4.5 billion made a year earlier.

PBT margin of 16.2% was a rise of 1.3% compared to what was achieved in the previous year. The retail banking segment has failed to make any profit in the last five years. In contrast, the corporate banking segment has been turned around. Most of the profits made in the past few years have been from the treasury business segment. Retail banking has been eroding shareholders’ wealth.

Over the past three years, loans have expanded by 9.5% while deposits have grown by 7.8%. Operating costs are about 50% of gross earnings and close to 80% of operating income. Shareholders’ fund deteriorated by 7.8% compared to 2.4% of a year ago (on a 3-Year CAGR basis). Earnings Per Share (EPS) has worsened by 31.4% over the past one year.

Gross loans and advances to customers jumped by 23.8% from NGN595.3 billion in 2019 to NGN736.7 billion in 2020. Total deposits grew by 27.5% to NGN1.1 trillion. The gross loans to deposit ratio was 65.2%, down from 67.2% of the prior year. Total debt was almost equal to the total equity of UBN in 2020. An interest of NGN26.8 billion was paid on the total debt (2019: NGN22 billion). This amounted to 48% of total interest expense (2019: 34.1%). But total interest income covered total interest expense 2 times in the year under review compared to 1.8 times in the preceding fiscal year. The company, in our opinion, is not insolvent. It should be able to pay its maturing obligations when due and creditors are adequately covered by the assets of the company.

Business Risk  
UBN cannot prevent competitive pressure from eroding its earnings and profit margins. 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 because obligations have to be met in foreign currency. It has a total foreign currency denominated debt of NGN159.4 billion at the end of the year 2020 (2019 NGN78.8 billion).

Recommendation: Buy

Earnings Chart of Union Bank of Nigeria Plc

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