UBA: EARNINGS POWER STILL STRONG, LOOKING UP

The capacity building of United Bank of Africa has reflected on its profitability ratios as revealed by the nine months scorecard of the bank that were released on Tuesday to the market. Top and bottom lines were mildly up, to consolidate the quarterly results made available so far in this current financial year.  

The new management of the bank has demonstrated high regard for corporate governance by keeping to its post-listing requirement as its 2016 Q3 result was released earlier compared to that of the corresponding period of 2015.  

The bank reported 8.2% rise in gross earnings to N265.53 billion from N247.21 billion in 2015,which translated to an 8% rise in profit tax after to N52.27 billion from N48.56 billion in 2015. The impairment loss on financial assets for the period increased to N9.10 billion from N3.68 billion in 2015, which affected the bank's profitability as provision was up by 147.28 percent.

These notwithstanding, the bank has shown resilience by remaining in green, despite the weak economy and risk exposure, with all sectors of the system falling or already in recession and moving below zero level. Coupled with over regulation of its industry and continuous tightening of monetary policy by the apex bank.

The marginal growth in top line is adduced to the bank’s dexterity in navigating its balance sheet towards areas of opportunity within the review period. 

Third quarter Earnings Per Share (EPS) was up marginally by 7.6% to N1.44 from N1.34 in 2015. The up-trend in the bank's financials so far in the year has supported the share price as it is currently trading at N4.10 per share, which is over 41% above its price of N2.91 each when it released its report in 2015. 

The market price of the stock is 185% below its book value, which indicates that the bank's stock is grossly undervalued for discerning investors to fix their gaze. The bank’s book value currently stands at N11.96 and price to earnings ratio is 0.96x. Investors' waiting period has slightly increased, as a result of growth in the company share price.

United Bank of Africa (UBA)
Third Quarter Result
COY	2015	2016	% Chg
	(N)	(N)
Date Released	October  15, 2015	October 11, 2016
Price as at Release Date	2.91	4.10	41.00
Gross Earnings	247,205,000,000	265,527,000,000	8.20
Profit After Tax	48,557,000,000	52,269,000,000	7.60
Shareholders' Fund	322,558,000,000	433,380,000,000	30.32
Dividend Payout	Nil	Nil
ESTIMATED RATIOS
Earnings Per Share	1.34	1.44	7.60
PE Ratio	0.72	0.95	31.94
Earnings Yield	45.99	35.14	-23.59
Book Value	8.89	11.95	34.42
Price to Book	0.33	0.34	3.03
ROE	15.05	12.06	-19.87
Profit Margin	19.64	19.69	0.25

The bank reported  a mixed  year-on-year margin movements with Net Interest Income Margin dropping to 68.92% from 71.32%, while pre-tax profit margin declined marginally  to 23.18% from 23.37% in 2015. Net Income Margin also improved slightly to 19.69% from 19.64% in 2015.  Return on equity stood at 12.06% as other profitability ratios for the period were in the green to testify real improvement in the bank earnings power. As showed in the table above

Technical View

UBA's price action has side trended for four months to form a symmetrical triangle, a chart pattern to indicate continuation or reversal of trend. The strong support level of the bank in its sideways movement is N4.00, the attempt to  break out of the triangle last week failed due to a pullback on mixed sentiments on the bank numbers. 

Traders should watch out for breakout of the yellow top line for continuation up trend to first resistance at N4.50 and second resistant at N4.75 or reversal to first support level at N4.10and second support price of N4.00. The momentum of the trend is weak below 20 ADX.

Forecasts

Our FY 2016 gross earnings forecast for UBA is N341.80 billion representing an 8.56% improvement relative to FY 2015, while our net income estimate for FY 2016 is N65.53 billion, which translates to a 10% improvement on FY 2015. This yields an EPS of N1.70 and a forward P/E of 1.38X. 

The banking sector still remains in the eye of the storm even in 2016. We expect more loan loss provisions, as many sectors are falling to reflect the current economic situation facing the nation now. 

The policy of government since the beginning of this year hastriggered rising cost of borrowing and the pressure on net interest margins. Our net book value estimate for Q3  is N433.38 billion, which brings forward Price to Book Value to 0.34x. We also expect sluggish growths in both deposit from customers and loan book for FY-2016, which means that the lender’s success in 2016 will be determined by the efficiency of balance sheet deployment and the potency of its risk assessment framework.

Analysts Opinion/Recommendations

The shares of UBA is undervalued with focus on our FY 2016 estimates. The stock is currently trading at a 112% discount to our Fair Value estimate of N9.00. 

We are mildly optimistic that despite the tight operating environment in Nigeria with the implementation of the Treasury Single Account policy of the Federal Government that tightened the liquidity condition in the Nigerian financial system.

The steep tank in oil prices which posed a major threat to asset quality for most Nigerian banks as a result of their exposures to the sector and the tight currency control policies of the CBN which has weakened the earnings capacity of banks in the country, UBA has the capacity to wheather the storm. 

Although we expect major headwinds at least all through the  quarters  in 2016, it is our opinion that the massive drop in share prices will adequately compensate for any unexpected down-side risks. 

We are also impressed with the steady rise in the bank’s Book Value position over the last few years. However the bank must be proactive with its Return on Equity (ROE) growth. We have a BUY recommendation on the shares of UBA

UNITED BANK FOR AFRICA
Share Holding Structure
Stanbic Nominees Nig. Ltd.	11%
UBA Staff Investment Trust Scheme	7.6%
Consolidated Trust Funds Ltd.	4.7%
The Bank of New York Mellon	4.4%
Heirs Holding Ltd	3.4%
STH Limited	2.6%
Bank of America Merril Lynch	2.3%
International Finance Corporation	1.8%
Poshville Investment Ltd.	1.7%
BGL Securities Ltd/MM	1.1%
Other Statistics
Shares Outstanding (MN)	36,279,526,322
Opening  Price (2016)	N3.35
Closing Price at October 14, 2016	N4.25
Date Listed	1970
Year End	31ST DECEMBER

Management to drive balance sheet

The new management of the bank is demonstrating commitmentto repositioning the bankfor enhanced profitability and rewarded investors handsomely in the neatest future. The bank was very proactive with its balance sheet deployment in the review period. The bank’s defensive strategy was very effective and ensured that the backlash of some regulatory policy changes were mitigated. The pressured local currency is a major disincentive for UBA to sustain this venture but its earnings offshore through its operating network has supported bottom line. Loans and advances to banks declined  by 89% from  2015 full year N14.60 billion to N1.62 billion, while loans and advances to customers  for same period increased  by 48.07% to N1.54 trillion from N1.04 trillion in full year 2015. Deposit from customers appreciated by 20.12% between 9M-2016 and FY- 2015. Loans to Deposit ratio cam toe 61.75% in the period under review. The bank was clearly risk averse as far as creating assets so far in this current financial year. 

Performance in Four Years (2012-2015)

The bank has been resilient as mentioned earlier, despite the tight economic conditions especially since the crash in oil prices and the resultant pressure on disposable income, which may have been the major restraining factors for the creation of risk assets during the review period. Gross earnings for the period grew by 43% to N314.83 billion from N220.13 billion in 2012. The profitability level for this period was not stable, due to regulatory rules of different provisions. The bottom line for same period was up by 15.87% to N59.65 billion from N51.48 billion in 2012 but slide back in 2013 to N46.60 billion and later inched up to N47.91 billion in 2014 as shown in the table below. 

This is not efficient and must be checked ROE ROA 28.5% 2.4% 19.8% 1.8% 18.1% 1.7% 17.9% 2.2% 4YEAR ROE & ROA PERFORMANCE 2012 2013 2014 2015  ROE was 17.93% in FY-2015 down from 18.05% in FY-2014 while ROA experienced an upward swing during the same period to 2.17% from 1.73%  year on year. It also grown net assets for the period with 72.82 percent to N332.62 billion from N192.47 billion in 2014.

UBA FOUR YEARS FINANCIAL PERFORMANCE
	2012	2013	2014	2015
Date Released	May  10 , 2013	March 27, 2014	March 26, 2015	March 14, 2016
Price @ Released Date	7.00	9.45	4.03	3.50
Gross Earnings	220,129,000,000	264,687,000,000	290,019,000,000	314,830,000,000
Profit After Tax	51,477,000,000	46,601,000,000	47,907,000,000	59,654,000,000
Shareholders' Fund	192,467,000,000	235,036,000,000	265,406,000,000	332,621,000,000
Dividend	0.50	0.50	0.10	0.60

VALUATION ANALYSIS

Based on our analysis, the stock is currently trading at a 112% discount to our estimate fair value of N9.00, with a 12Month investment horizon. In arriving at our fair value for the stock, we focused on the historical financial performance of the stock and our expectations for full year 2016. Our Fair Value for UBA shares was calculated using the Price to Book Value method of valuation as well as the Dividend Discount Model comprising our expected dividend estimate for the bank and to adjust for the risk of investing in the Nigerian Financial Services sector.  We have placed a POSITIVE rating on the stock of UBA

UBA- ESTIMATED RATIOS
	2012	2013	2014	2015
Earnings Per Share	1.56	1.41	1.45	1.64
PE Ratio	6.05	4.95	2.77	2.13
Earnings Yield (%)	16.52	20.18	36.04	46.98
Book Value	5.84	7.13	8.05	9.17
Price to Book	1.62	0.98	0.50	0.38
ROE (%)	26.75	19.83	18.05	17.93
Profit Margin (%)	23.63	17.61	16.71	18.95
Year End	Dec	Dec	Dec	Dec

All Rights Reserved © Investdata Nig Ltd 2016
Ambrose Omordion
+2348032055467