Positive consensus on the performance of United Bank for Africa (UBA) Plc in the first half has triggered a scramble for the bank’s shares. Capital Market Editor, Taofik Salako, reports on the undercurrents shaping the bank’s fundamentals and the rush for its shares
United Bank for Africa (UBA) Plc is riding high on positive market reviews of its first-half audited earnings report and the related first-ever audit-based interim dividend. Altogether, UBA was the best-performing financial services stock at the stock market last week, combining both volume and share price appreciation in what was clearly a scramble. Against the average benchmark return of 2.42 per cent recorded by the All Share Index (ASI)-the market-wide value index of the Nigerian Stock Exchange (NSE), last week, UBA rode on the back of its half-year results, which was released on Thursday, to close last week with a double-digit gain of 20.57 per cent. The bank’s performance helped the banking sector index to a close of 8.46 per cent, the highest by group indices. Both the UBA’s week-on-week gain and banking sector’s average weekly return underlined market’s response to the bank’s earnings. UBA also ranked as one of the three most active stocks in the market during the week. On the average, bank’s position on the activity chart and price appreciation list highlighted it as the most-sought after financial services stock during the week.
The bank opened this week with a flood of open buy orders, a technical reference to investors’ demand to buy a stock at available price, which automatically implies premium pricing. With the open buy orders, UBA’s shares became a buy market with selling investors dictating the transaction price. UBA rode on the euphoria to record the highest gain at the NSE on Monday. It was also the most active stock, most traded in terms of volume, during the five-hour trading session. UBA’s share price rose by 10.24 per cent to N4.20 per share on Monday, the highest possible change allowed under the pricing rules at the Exchange. The NSE maintains a maximum price change band of 10 per cent. UBA’s performance was more than thrice average return in the banking sector and five times better than the average return by the entire market. The ASI appreciated by 1.83 per cent while the NSE Banking Index rose by 3.19 per cent on Monday. UBA’s performance appeared to have positively altered pundits’ expectations, both of UBA and the entire banking sector. It also highlighted the undervaluation of the Nigerian equities. The three factors were the undercurrents for the market performance on Monday. A total of 11 banking stocks recorded price appreciation, one-third of the advancers for the day. The banking sector is traditionally the most active group at the Exchange and it has wide influence on the overall value position of the market.
Impressive earnings
The six-month audited report of UBA for the first half ended June 30, showed strong growth in earnings and profits, as the bank continued to optimize its pan-African network, which now contribute more than 23 per cent of profit after tax. Key extracts showed that gross earnings rose by 21 per cent to N166.9 billion by June 2015 compared with N138.2 billion in comparable period of June 2014. Profit before tax grew by 35.1 per cent to N39.0 billion as against N28.89 billion recorded in corresponding period of 2014. Profit after tax jumped by 40 per cent to N32 billion in 2015 compared with N22.86 billion posted in comparable period of 2014. Earnings per share increased from 71 kobo to 94 kobo.
Notwithstanding the tight regulatory and monetary environment that banks contended with in the period, UBA’s net interest income grew by 18.91 per cent to N65.65 billion from N55.21 billion, while the fees and commission income grew by 12.07 per cent to N30.35 billion from N27.08 billion in comparative period of 2014.
Balance sheet analysis of the half-year results, audited by PricewaterhouseCoopers, showed that the bank grew its loans and advances by 8.49 per cent to N1.162 trillion by June 2015 as against N1.071 trillion recorded by December 31, 2014. The bank also recorded an increase of 2.67 per cent in deposits from customers to N2.23 trillion compared with N2.17 trillion recorded in December 2014. Shareholders’ funds rose by 15.91 per cent to N307.63 billion as against N265.40 billion by December 2014, showing accretion to reserves. Total assets increased by 6.05 per cent from N2.76 trillion in December 2014 to N2.93 trillion by June 2015.
With the strong earnings, the board of the bank set a new record by declaring its first-ever interim dividend. Shareholders would share a total of N7.2 billion as interim cash dividends, representing a dividend per share of 20 kobo. The dividend will be paid on September 16. The interim dividend represented a dividend yield of 5.7 per cent on the bank’s recent rights offer price of N3.50.
A positive consensus
Market pundits across the board were unanimous in their overall assessment of the bank’s performance, triggering a quick review of price estimate and recommendations on the bank. “The results were generally strong across the board,” said FBN Capital, setting the tones of accolades from diverse groups of bank-led competing brands and stand-alone investment and securities firms. CSL Stockbrokers, a division of FCMB Bank (UK) Limited, which is authorised by the Prudential Regulation Authority (PRA) and regulated by the Financial Conduct Authority (FCA) in the United Kingdom, described the UBA results as “impressive”, sustaining its buy rating on the stock. By the buy rating, CSL Stockbrokers stated that it expects the stock to outperform the benchmark index over the next 12 months. Afrinvest Securities recommended UBA as one of its two stocks to buy this week, citing the first half results. Chapel Hill Denham Securities Limited stated that the UBA’s first half results “came in better than expectations”. All reviews also shared a consensus that the UBA is currently significantly undervalued and its shares hold mouth-watery potential for huge capital gain. CSL Stockbrokers set the bank’s share price target at N7.20, Chapel Hill Denham said the bank’s share price could reach N6.59. Renaissance Capital (RenCap) estimated a price target of N8 while Afrinvest Securities stated a current price target of N6.44, all indicating that the UBA’s shares could be one of the most attractive assets over the next 12 months. “On the back of these results, we would expect consensus estimates to be revised up. We believe these concerns (about growth and asset quality) about half-year earnings contributed to the sell-off in UBA shares over the past few months,” FBN Capital stated, predicting a strong recovery in the bank’s share price while designating the bank as “outperform”, referencing analysts’ consensus that UBA’s share will outperform the benchmark.
Analysts at Renaissance Capital said UBA’s results outperformed their expectations. “We note that profit before tax growth in the second quarter of 2015 was supported by a decent top-line growth, and a decline in impairment charges, down by 51%,” Rencap stated sustaining its “buy” rating on the UBA stock.
All these perceptions fitted into the perspective earlier outlined in May by Exotix Partners LLP, a global finance and investment firm, which stated that UBA’s share price could rise to N9.95 per share over the next 12 months. Exotix coordinates its global operations through five major offices in London, New York, Lagos, Dubai and Nairobi. The Exotix report, signed off by Kato Mukuru and Ronak Ghadia, chartered financial analysts, upgraded UBA’s ranking to buy and recommended the stock to investors looking for substantial returns on their portfolios over the period. Analysts then commended what they described as gradual improvement in the fundamentals of the bank noting that the bank’s management has substantially improved the group’s profit drivers, which has not been fully recognised. They noted increasing improvement in cost efficiency and also pointed out that the bank has witnessed notable improvement in asset quality over a four-year period. According to the report, since 2011, UBA has averaged a cost of risk of 0.9 per cent as against peer average of 1.3 per cent while its non-performing loan ratio of 1.6 per cent was the lowest among Nigerian banks in 2014.
“Relative to its peers, the bank’s loan portfolio has remained very diversified. In particular, as at 2014, exposure to the vulnerable oil and gas sector was 19 per cent as against sector average of 25.7 per cent and its foreign currency denominated loans were 31.1 per cent of total loans as against peer average of +40 per cent. Despite the tough operating environment, management remain confident of maintaining a cost of risk of 1.0 per cent and non-performing loan (NPL) ratio of 2.0 per cent,” Exotix stated. Analysts also cited UBA’s growing non-funded income.
CSL Stockbrokers said the proactive capital management by the bank has placed UBA in a steady position to drive its growth and create better returns to shareholders. “We believe the bank’s capital issues have been adequately addressed with the concluded rights issue. This puts the bank at a comfortable level, in our opinion, to pay dividends and create risk assets, though management has advised a muted growth in loan book in subsequent quarters,” CSL Stockbrokers said.
After extensive review of ratios and actual figures, FBN Capital noted that UBA’s “underlying results are strong enough, especially given that they are audited, to allow the market to breathe a sigh of relief”. The investment banking firm commended the foresights of the management of the bank for being conservative while driving the intrinsic performance.
Expecting better returns
All the analysts’ reviews also agreed on the upward revision of the possible full-year performance of UBA for the year ending December 31, 2015. The management of the bank stated that it would sustain the first-half results, citing deliberate strategy to consolidate domestic market while growing other African markets.
Commenting on the results, group managing director, United Bank for Africa (UBA) Plc, Mr. Phillips Oduoza said the results showed the resilience of the bank’s business strategy in the face of the challenging operating environment.
“Our business strategy has proved to be resilient, balancing prudence, with an ability to significantly grow bottom line and continue to focus on operating effectiveness. We look forward to continuing to support our customers and working with them to achieve financial success for them and the wider Nigerian and African economies,” Oduoza said.
He said the bank’s bottom-line reflected better extraction of value across all business segments and ongoing process optimization.
According to him, it was also satisfying to see the bank’s cost-to-income ratio decline further while the bank has maintained a healthy loan book, a tribute to both its risk management and to the robustness of its clients’ businesses, with non-performing ratio at just 1.8 per cent of total loans granted, one of the lowest in the banking industry.
“We understand that many in Nigeria are facing difficult economic circumstances and we are very much shouldering our responsibility to support and grow wealth creation,” Oduoza said.
Speaking on the performance of the bank’s African subsidiaries, group chief financial officer, UBA, Ugo Nwaghodoh said the bank’s businesses in other African countries have started to significantly impact the group’s returns, contributing 23 per cent of profit after tax, with an even stronger outlook.
He said recent initiatives taken by the bank to improve operational efficiencies have been yielding positive results, thus reinforcing optimism on the future of UBA’s African business.
The bank had in January this year, indicated that it would use the net proceeds of its rights issue to finance its business development plan aimed at further entrenching the bank as the leading bank in Africa. UBA had in 2013 launched a new business development plan aimed at consolidating the bank’s position as a leading pan-African global financial services group. The three-year business development plan codenamed Project Alpha was designed as the group’s next focus of strategic transformation and it contained key transformation initiatives.
Oduoza had said the new business plan was designed to consolidate the group’s strategic positioning and fully capture the opportunities from Africa’s economic renaissance. According to him, Project Alpha is focused on leveraging all aspects of the group’s footprint, product offerings and operational capability, allowing a commitment to customer service transformation, market share growth, the implementation of key e-banking initiatives across all segments, the growth of corporate and trade finance capabilities.
He outlined that a critical aspect of the Project Alpha initiative is the focus on UBA Africa, which is projected to contribute about 50 per cent to the group by 2016, adding that Project Alpha will allow the bank to build on the existing strengths of its franchise as well as continue to reinvent ourselves, ensuring it captures and delivers the maximum of value for all stakeholders. To all extent, the first half performance appears to be a clear evidence of the success of the bank’s strategy and the foresights of its management.
