UBA: WHEN STRONG ASSET QUALITY DRIVES EARNINGS GROWTH

The management of United Bank of Africa Plc recently released its full-year 2016 earnings report a bit later than the date of the 2015 numbers, which was however still within the regulatory time frame, in line with its post-listing requirement, realizing that corporate governance and performance cannot be overemphasized, being key ingredients that sustain value creation at any time.    

The bank’s solid network of Pan-African business offices continues to support its profitability ratios, regardless of its huge provision and high income tax expenses in the period under consideration, coupled with the management’s commitment and vision of strengthening its presence and operational capacity to sustain growth and profitability. 

Gross earnings for the year rose by 22% to N383.65bn from N314.83bn in 2015, as bottom line grew 21% rise to N72.26bn from N59.65bn in 2015, as impairment loss on financial assets for the period soared by 448.19% to N27.68bn from N5.05bn in 2015, a reflection of the weak macroeconomic environment that adversely affected manufacturers, in addition to the huge exposure to the highly capital intensive oil and gas, as well as power sectors. It is clear that without the huge provisioning, the bank’s profit level would have been in the neighbourhood of N110bn, making it one of the most profitable in the industry.

The bank grew deposits from banks and customers by 79% and 20% respectively to N109.68bn and N2.49tr, just as loans and advances portfolio to banks and customers were up by 45% and 56% respectively.
These notwithstanding however, UBA Plc has shown resilience by remaining in profit, despite the obvious over regulation in its industry and continuous tightening of monetary policy by the apex bank. 

Improvement in the bank’s core performance ratios and asset quality as revealed by its balance sheet, are indications of its strength and growing financial institution.  

Full-year Earnings Per Share (EPS) was up 21%, beating market estimate at N1.99, from N1.64 in 2015. The up-trend in the bank’s earnings on quarterly basis supported the share price, as it grew by 54% in one year from N3.50 as at release date for the 2015 accounts, to N5.39 as at the released date of its 2016 numbers.  

The market price of the stock is 121% below its N12.35 per share Book Value, an indication that the stock is grossly undervalued and worthy of attention from discerning investors. The bank’s Price to Earnings Ratio is 2.71x, meaning that investors' waiting period has slightly increased, as a result of growth in the bank share price.

United Bank of Africa (UBA)
2016 Full Year Result
COY	2015	2016	% Chg
	(N)	(N)
Date Released	March  14, 2016	March  24, 2017
Price as at Release Date	3.50	5.39	54.00
Gross Earnings	314,830,000,000	383,647,000,000	21.86
Profit After Tax	59,654,000,000	72,264,000,000	21.14
Shareholders' Fund	332,621,000,000	448,069,000,000	34.71
Dividend Payout	0.60	0.75	25.00
ESTIMATED RATIOS
Earnings Per Share	1.64	1.99	21.34
PE Ratio	2.13	2.71	27.23
Earnings Yield	46.98	36.95	-21.35
Book Value	9.12	12.35	35.42
Price to Book	0.38	0.44	15.97
ROE	17.93	16.13	-19.87
Profit Margin	18.95	18.84	0.25

SOURCES: COMPANY DATA & INVESTDATA RESEARCH

UBA recorded a slight decline year-on-year in margin movements with Net  Income Margin down  to 18.84% from 18.95%, while profit before tax  margin increased  similarly to 23.63% from 21.74% in 2015.  Return on equity stood at 16.13% as other profitability ratios for the year were in the green, testifying to real improvement in the bank earnings power. 

Technical View

UBA's price action has been in uptrend for more than a year to form a symmetrical triangle chart pattern and has broken out of the triangle to support continuation of trend. Pullback is imminent as the stock price will be adjusted for dividend soon. The support and resistance level of the bank are N4.09 and N5.59 respectively. The attempt to break out the resistance level has failed on the strength of market forces.

Traders should watch out for a pullback to first support level at N4.09 and second support at N2.89 or reversal to first resistance level at N5.64 and second resistance price of N6.00. The trend ability and momentum is strong   above ADX 20 at .21.56. 

Analysts Opinion/Recommendations

The 2016 numbers have revealed that UBA is seriously undervalued as it is currently trading at a 145% discount to its Book Values, while our Fair Value estimate of N9.28.

We are optimistic that despite the huge provision and present economic situation, the bank will continue to wax strong as the new management moves to reposition its operations and further drive earnings.

Although we expect headwinds to continue till the third quarters in 2017, it is our opinion that the bank’s impairment loss for 2107 will drop and push earnings to the north

We are also impressed with the steady rise in the bank’s core profitability ratio where the Book Value position is over N12.35.  However the bank must be proactive in risk management with its Return on Equity (ROE) growth.

We have a BUY recommendation on the shares of UBA

Forecasts/Valuation

We remain bullish and confident in the ability of UBA’s management team to meet and even outperform its 2016 figures, going forward.  Hence, we have retained our target price of N9.28 on UBA; this represents 65% upside to current price of N5.60. United Bank of Africa currently trades at P/B of 0.44x which is attractive with high margin of safety.  

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 2016	N4.25
Closing Price as at March 29	N4.50
Date Listed	1970
Year End	31ST DECEMBER

Management to drive balance sheet   

The new management of the bank is demonstrating commitment to repositioning it for enhanced profitability, following which the board hopes to reward investors handsomely in the neatest future.  

Moreso, UBA 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. 

Performance in Four Years (2013-2016)

Looking at the bank’s numbers for the period under consideration, it has remained resilient 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 factor for creation of risk assets during the review period.

Gross earnings for the period grew by 45% to N383.65 billion from N264.69 billion in 2013. Profitability for this period was stable, despite the over regulation with banks having to make different provisions. Bottom line for same period was up by 55% to N72.26 billion from N46.6 billion in 2013.  

Return on Capital Employed and Assets for the four-year period were 19.8%, 1.8%, 18.1%, 1.7%, 17.9%, 2.2%, 16.13% and 2.06%  in the four years  respectively from  2013 2014 2015 2016.  Return on Equity  was 16.13% in FY-2016 down from 18.84% in FY-2015 while return on assets experienced a marginal  decline for the same period to 2.06% from 2.17%  year on year. It also grew net assets for the period by 90.64% from N235.04bn in 2013 to N448.09bn.

UBA FOUR YEARS FINANCIAL PERFORMANCE
	2013	2014	2015	2016
Date Released	March 27, 2014	March 26, 2015	March 14, 2016	March 24, 2016
Price @ Released Date	9.45	4.03	3.50	5.39
Gross Earnings	264,687,000,000	290,019,000,000	314,830,000,000	383,647,000,000
Profit After Tax	46,601,000,000	47,907,000,000	59,654,000,000	72,264,000,000
Shareholders' Fund	235,036,000,000	265,406,000,000	332,621,000,000	448,069,000,000
Dividend	0.50	0.10	0.60	0.75

SOURCES: COMPANY DATA & INVESTDATA RESEARCH

Ratio Analysis

The bank has sustained upward earnings trend that supported price performance as the EPS moved from N1.41 in 2013 to N1.99 in 2016, just as Price to Earnings Ratio remained unstable due to up and down movement of equity price. 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 2017.

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
	2013	2014	2015	2016
Earnings Per Share	1.41	1.45	1.64	1.99
PE Ratio	4.95	2.77	2.13	2.71
Earnings Yield (%)	20.18	36.04	46.98	36.95
Book Value	7.13	8.05	9.17	12.35
Price to Book	0.98	0.50	0.38	0.44
ROE (%)	19.83	18.05	17.93	16.13
Profit Margin (%)	17.61	16.71	18.95	18.84
Year End	Dec	Dec	Dec	Dec

SOURCES: COMPANY DATA & INVESTDATA RESEARCH