UNITED BANK FOR AFRICA PLC
Company Overview
In 1949 the British and French Bank Limited, a subsidiary of Banque Nationale de Crédit (Paris), began operation in Nigeria. It was against the backdrop of Nigeria's independence from Britain that British and French Bank Limited metamorphosed into UBA in 1961. UBA became a company quoted on the Nigerian Stock Exchange in 1970.
United Bank for Africa Plc merged with Standard Trust Bank Plc in the wake of the recapitalisation exercise in the banking sector in 2005. Thereafter, UBA acquired Continental Trust Bank Limited in December 2005.
It has established its presence in 23 countries including 20 African countries. Technological improvement has resulted in streamlined and efficient operations.
It is chaired by Tony Elumelu. Kennedy Uzoka was appointed as the chief executive officer of UBA in 2016. He takes over the reins as chief executive officer from Phillips Oduoza who served in that capacity for 6 years.
Investment Thesis
It has a large distribution network in Nigeria from where it derives roughly 75% of its revenue and 73% of its Profit After Tax (PAT). Total deposits have grown at a 3-year compound annual rate of 9% compared to 5% of a year ago. However, loans are expan
ding faster than deposits which has pushed total debts to over NGN500 billion.
UBA's offshore subsidiaries have shown strong earnings growth in the past three years. Revenue and profit from outside Nigeria are growing fast. Revenue from the rest of Africa was 23.6% higher than what was achieved in the year before; similarly, Europe had 28.6% boost in revenue. In addition, PAT growth has been erratic in Nigeria compared to other parts of the world.
The retail and commercial business division generated 56.4% of revenue and 36.1% of PAT. However, its Profit Before Tax (PBT) margin and PAT margin trailed those of the other two divisions, namely corporate, and treasury and financial markets. Though the retail end of the market is very lucrative, competitive pressure is eating deep into its profitability as banks contend for business in this segment. Treasury and financial market segment produced the highest PBT and PAT margins despite making up less than 15% of revenue. Therefore, we expect the management to continue to grow the treasury and financial market business segment.
Valuation
UBA trades at 11.9 times earnings and 0.5 times book value. Adjusted EPV is NGN11.6 while forward Earnings Per Share (EPS) is estimated at NGN1.02. We valued UBA using our Discounted Cash Flow and 2-Stage Dividend Discount Models. We have arrived at a fair value estimate between NGN7.1 and NGN9.6 per share of UBA.
Financial Overview
The bank's turnover has increased at an average of 18.9% over the past six years due to a steady rise in interest income. Interest income has been growing at compound rate of 19.2% in the last six years. Net interest income, the bank's core income, gained 25.7% in 2017 compared to a 23.7% boost of the previous year; however, this translates to 20.4% growth on a 6-Year Compound Annual Growth Rate (CAGR) basis. This is due to the ability of the bank to grant more loans at high rate and attract cheap deposits.
Interest income on loans stood at 19.7% while interest expense on deposits averaged 4.4%. Low interest on deposit is attributable to the relatively strong presence of the bank in the retail segment of the market which enables it to attract cheap deposits. Despite the competitive pressure, UBA has grown retail deposits at 17.6% over the past three years. 
Fee income added 13.3% to close at NGN82.9 billion. PBT jumped to NGN105.3 billion in 2017 from NGN90.6 billion recorded in 2016. The PAT of NGN78.6 billion tantamounts to 20% improvement. Total assets expanded by 16.1% while shareholders' fund gained 18.2%. Earnings Per Share (EPS) was NGN3.11 down from NGN3.81. Book Value Per Share gained NGN3.13 while Dividend Per Share (DPS) of NGN0.85 was 13.3% better.
Business Risk
Net interest margin may decline as competition for deposits increases. The bank may find it difficult to successfully increase interest rate as this would reduce loan volume. But we believe that UBA has a fair share of the market and should be able to maintain it in the longer term. It has a widespread branch network but there is no strong economic moat in sight.
Recommendation: Hold
