The battle for leadership among the tier one banks continues unabated in the ongoing financial year with their fortunes bludgeoned by competitive pressures ; behind this is the current deleterious economic environment that is proving to be a hard nut . However, while the majority in the entire system are just managing to survive the travail ,barely raising their heads above waters , few players with iron teeth are in control , though have their own challenges too . Their individual market values tell the story better .
A cursory analysis of the tier one banks reveals that while Zenith Bank Plc , by its financial performance, maintains its profit leadership in the industry by a wide margin and drives its market values without much injury, GTB remains the most valuable bank in the industry.
Despite being the most valuable bank , Guaranty Trust Bank ,GTB , also got some injuries ; for the first time in the recent years Access Bank overtook it in profitability by its half year 2021 results ; in the thirty-two weeks since the beginning of 2021, GT Bank, whose share price fell from N33 in January to N28 in August, ranked fifth place and the worst among tier one banks with a -13. 93% decline in its share price among its peers .
For Access Bank , its spate of acquisitions in the recent time is the source of its overblown ego, but the challenge before it is whether it could sustain the fortune without any acquisition .
First Bank of Nigeria Holdings continues to battle the impacts of its 2015 toxic loans ;however ,the bank is making some remarkable progress now .
But United Bank For Africa ,UBA, is not that much lucky ; its case is a source of worry , a big bank with diminutive market size .UBA came in fourth after GTB in August , having recorded a -12.79% fall in its share price . UBA appears to be worst hit as its lethargic profitability over the last few years relative to its peers is hitting harder on its share price performance and turning it the least valuable among its peers . Even Stanbic-IBTC , a tier 2 bank ,towers above the Africa’s global bank by its market value .
UBA is presently in dire strait battling its diminutive market value . This may not spring any surprise. Stock investors are ultimately after returns and when good returns are not forthcoming they battle such an economic agent , after all they cannot force it to pay dividend but could show it where it belongs . UBA’s unimpressive returns on their investments relative to its peers have made it their target in the last few years ; and the impact of this is clear enough : the current share price of United Bank for Africa (UBA) is NGN N8.30, the lowest among its peers .The bank began the year with a share price of 8.65 NGN but has since lost 4.05% off that price valuation, ranking it 113th on the NGX in terms of year-to-date performance. At its N249.66B market capitalization as at June 2021 it lost 46.17 . Compared to its peers , this has created a wide gap in values . Zenith and GTB were valued at N745.67b and N952.1b respectively and their stocks s price above N20.00 per share far ahead of UBA’s . As at 20th October,2021 , FBN market capitalization rose to ₦421.8b ; Access Bank hit ₦334.5b ; Zenith , ₦783.3b ; GTB, N1.0b while UBA , maintained the lowest at ₦283.9b against Stanbic-IBTC’s N496.25b market value .
.This wide gap between UBA and its peers is the source of worry among analysts. But this is not an unusual market behaviour. A is stock price is a function of investors’ perception of the company’s performance ; investors and analysts analyze a stock from various aspects such as risk, returns, cash flows, and corporate governance before allocating it a value or determining its price .UBA’s market exploits and values mirror its relative uninspiring financial performances and values created for the investors among its peers ; investors’ major grouse is on its diminutive returns as the bank maintains good records in other areas .Stockholders are usually banking on dividend and capital gains or share price appreciation . But the agony of the UBA’s stockholders is that most of them bought their shares above the prevailing price yet the bank does not have the necessary fundamentals that are strong enough to lift its stock price heavily and neither can it pay any appreciable dividend to compensate for this inadequacy because of its limited profitability . The consequence of this is uninspiring returns for its investors and uninspiring price for its stock
The worst part of it is that in the estimate of some analysts , UBA at its current price of N8.30k is considered overvalued or believed to be trading above its fair value which some analysts put at N N7.77 .That is the perception of a financial firm and this is confirmed by some valuation metrics . Currently , UBA’s stock price to earnings ratio is 2.3x compared to the industry average 3.9x and the market average of 7.4x .indicating investors are willing to pay N2.30k for every N1.00 worth of its earnings
This price earnings ratio however, is generating mixed feelings among some analysts . .When compared to a bank like GTB’s 4.17x and 3.4x for Zenith Bank as well as the industry and market averages indicated above , to some analysts ,UBA is undervalued relative to the industry and the entire market. And by that they believe it has uptick potentials . However , to some other analysts ,the investors’ relative limited optimism towards UBA’s stock or its future performance compared to its peers is because of its lethargic returns driven by its uninspiring net income and dividend policy ; and this may not allow it to create any positive opportunity for any investor to exploit in the future if the current fundamentals are not better .That is the controversy . The question remains , what is the true position of UBA? ; is UBA’s stock really undervalued?
A low P/E Ratio indicates the share price is low compared to company earnings and is undervalued and potential investors usually look for such a stock ; however, not every stock with low price to earning ratio is undervalued . For this , investors usually like to know the underlying worth of an equity share before investing. Among the big or top five in the banking ,it is clear that investors are no fool , less impressive performance ,no doubt ,drives the poor perception of UBA’s stocks value against its peers .
This view may not be farfetched. Comparatively , certain uninspiring critical profitability and efficiency ratios of UBA are ,no doubt , the drawbacks behind its relative lower stock price and lower market capitalization to its peers . A major profitability ratio dragging down UBA’s stock value perception is its unimpressive Earnings per share (EPS) relative to its peers . This is the portion of a company’s profit that is allocated to each outstanding share of common stock, serving as an indicator of the company’s profitability. It is often considered to be one of the most important variables in determining a stock’s value . Between 2014 and 2018 its EPS ranged between N1.40 , N 1.74 ,N2.11, N2.27 and N 2.30 .This metric ,ultimately impacted negatively on its share price . The implications of this become more evident and meaningful when its EPS is viewed along with its historical figures and when they are compared with the EPS of its peers and some second tiers banks like Stanbic-IBTC .Between 2014 and 2018 , GTB EPS inched up to N3.35, N3.38,N4.49, N5.71 and N6.28 respectively. GTB’s EPS rose by 2.2%. to N711 Kobo. FY 2020 from 696 Kobo. FY 2019. For Zenith Bank, its EPS increased by 10 percent to N7.34 from N6.65 between 2019 and 2020.This their earning power and this determines their ability to pay dividend each company’s dividend polity is another factor .
The only small fraction of EPS paid to investors last financial year by UBA too uninspiring . The fact is that its unimpressive dividend pay out and yield are another factors negatively affecting the investors’ perception and driving down its stock price and ultimately its market values . Despite posting double-digit growth in key financial metrics such as PAT of N113.8 billion (+27.7%), as shown in its recent audited financial statement for FY 2020, UBA Plc proposed a lower dividend, of N0.35 kobo per share in 2020 . compared to a sum of N0.80 declared last year, indicating a decline of 56.25% YoY. .The Bank had earlier paid an interim dividend of N0.17 kobo, thereby raising its total dividend for the year to N0.52 kobo. Compared to this , Zenith Bank and GTB paid N3.00 apiece in 2020 as dividend to their investors .This is influenced by their better profitability and progressive dividend policies compared to UBA
The situation is made worse by the currency devaluation and the skyrocketing inflation that that made nonsense of the meager amount paid as dividend by this bank . With a current dividend yield of 6.5 percent its stock is selling very far below premium at a price to book ratio of 0.4x .UBA’s dividend yield at 6.63% is low compared to the top 25% of dividend payers in the Nigerian market at 7.24% .GTB price to book ratio of 1.49x indicates better optimism from the investors to pay above premium for its stock while Zenith is better too with 0.7x as its price to book ratio ..
Asides EPS , both Return on Equity and return on Assets are also another two critical metrics that that expose UBA’s profitability relative to its peers and their impacts on its market value are overwhelming . Every serious stock investor keeps an eagle eye on these two metrics as they determine returns on his or her investments.Between 2014 and 2018 while Returns on Average Assets moved between 1.77percent , 2.16% ,2.31 percent ,2.05% and 1.76% .Its Return on Average Assets.was 1.7%. in 2020 as against 1.6% in 2019 The indication of this is that for every naira of assets the bank invests in, it returns mostly two kobo or less in net profit per year. Between the same period ,Returns on Average Equity , ROAE were 19.15% , 19.95%, 18.51%, 15.87% , and 15.23% respectively .Its (RoAE):was 17.2% in 2020 compared to 16.6% in 2019FY . .RoE tells us how much profit the firm generates for each naira of equity it owns. . It is a measure of the profitability of the firm just as Return on Assets (ROA) is a type of return on investment (ROI) metric that measures the profitability of a business in relation to its total assets. . The higher the return, the more productive and efficient management is in utilizing economic resources.
The problem confronting UBA is the wide gap between it and its close competitors or peers not only in those two metrics but other profitability metrics . . For GTB , ROAA were 4.43%4.07%4.69%5.27% and 5.65 between 2014 and 2018 respectively .Within the same period ,GTB ROAE were 27.93%, 25.24%, 28.80%, 29.87% and 30.90 ; . its Return on Equity (ROAE) was 26.8% in 2020 while its Post-Tax Return on Assets (ROAA) was 4.6%, .. As regards Zenith Bank , Return on average assets Y-o-Y was 3.40% in 2019 and 3.10% in 2020. ,
Another critical metric any investor rarely jokes with is Net Profit margins and this is equally a factor that could be associated with UBA’s lethargic stock price .Between 2014 and 2018 its ratios were 16.71% ,18.95% , 18.84% , 16.80% and 15.91% for UBA .Compared to both Zenith Bank and GTB, UBA’s net profit margins are below the two. For GTB ,net profit margins were 45.3 percent in 2019 and .44 .2 percent in 2020 .For Zenith Bank ,net profit margins were 31.5 percent and 33percent respectively between 2019 and 2020 . All these may be responsible for the investors’ poor perception towards UBA’s stock and why investors perception towards its peers is better .
BEHIND A TWIST IN THE FATE OF UBA
This twist in the fate of UBA is currently raising concerns . In the past few years, the United Bank For Africa reigned supreme as a profit engine that either maintained the first or second position in the banking industry .Those were the days when Tony Elumelu ,its current board chairman was the Managing Director and Chief Executive Officer. But gone are those days , the bank is now far behind among the first-tier banks in terms of profitability and efficiency .
What has gone wrong with the brand that prided itself the Africa’s global bank ? Two issues could be responsible for a bank experiencing lethargic profit profile . It is ether the bank lacks enough resources relative to its peers or its management is not that resourceful .Definitely , UBA and all its peers do not lack resources to do the competitive battle as tier-1 banks . . Massive assets and equities are the common denominators that set the five tier -1 banks apart from the others in the entire industry and give them dominion over others . . As at the first half of UBA total assets stand at N8.3 trillion while its equity is N753 billion ; First Bank equity is N772billion and assets N8trillion ; GTB’s equity and assets are N 814 billion and N5trillon respectively ; Zenith Bank assets stand at N8.5trilllion and its equity N1.1 trillion while Access Bank controls N10.1 trillion assets and N751 billion equity volume . Surely ,UBA has competitive resources to do the battle of profitability by the way of its resources . .
But it is more than a mere possession of resources . From the point of view of bank practitioners, the most important task is to address the issues of capital, liquidity and risk management, and work them into a coherent strategy that is designed to produce sustainable returns over the business cycle. Banking involves taking risks, and applying effective management of that risk. This risk involves managing the bank’s capital; managing the liquidity mismatch: a fundamental ingredient of banking is “maturity transformation”, the recognition that loans (assets) generally have a longer tenor than deposits
All these are expressed in every bank’s ability to leverage capital base into an asset pool ,funding short and lending long dictated by the recognition of the asset–liability mismatch noted above; ,rolling over funding as it falls due as well as understanding of credit or default risk
No doubt , UBA has what it takes to lead the industry . However ,it has been overtaken by its peers in almost all performance metrics that matter .Although its half year 2021 results on the face value look impressive with percentage jumps in its performance ratios ,its profitability and efficiency metrics show it is merely playing catch up among its peers .
. .In the first half of 2021 , gross earnings rose year-on-year (Y-o-Y) by +5.13% to N316.04bn in H1 2021 from N300.61bn in H1 2020 ; net interest income was up Y-o-Y by +24.09% to N148.07bn from N119.32bn in H1 2020 ; net interest margin increased to 5.80% in H1 2021 from 5.4% in full-year 2020 ; profit before tax inched up by +33.36% to N76.19bn from N57.13bn in H1 2020 and basic and diluted earnings per share rose Y-o-Y by +36.29% to N1.69 from N1.24 in H1 2020 . Also , deposit from customers grew by +26.98% to N6.09trn from N4.80trn in H1 2020, However ,while the above results may look outstanding , when they are analyzed and converted to profitability and efficiency metrics and juxtaposed with the figures from their peers, it is crystal clear that resourcefulness rather than resources is a bigger challenge confronting UBA. And only by reinvention of its profit engine can the chasm between it and its peers be closed .
WHEN THE PROFIT ENGINE IS LESS ROBUST
. As Andy Groves of Intel put it ,”you have to be your own toughest competitor”. To avoid genuine profit crisis , a company must create a quasi crisis years in advance . Moreover , in competition, the only defense is a vigorous offense. ;the best way to ensure that one is not at risk from more imaginative competitors is to be the first to conceive of alternate value delivery mechanisms, the first to cannibalize one’s own products and services, and the first to get to the future, even when the future undermines the past success . .A company must constantly inquire of itself whether its definition of its served market is too narrow, whether its margin structure can be sustained, and whether there might be another ,much more efficient way to deliver a particular product or service . Over time ,new ,more efficient profit engines make older one obsolete.When a company ,fails to observe and abide by the above warnings ,it becomes a victim ,not a victor
..The problem with UBA is its failing at reinventing its profit engine A critical analysis of the bank’s efficiency ratios reveals that it is still far from optimizing its potentials relative to its peers . This could be attributed to its relatively inefficient profit engine .These are observable in its efficiency ratios relative to its peers .Despite its so-called improvements as indicated in its half year 2021 results ,its efficiency metrics are less impressive relative to its peers .
COST TO INCOME
.One of these drawbacks is its cost to income ratio. . Cost-to-income ratio is the measure of the costs of running a company in relation to its operating income. The higher the ratio, the greater the risk of zero profitability. Its cost to income between 2014 and 2018 were 69.90% ,66.60% , 63.00% , 57.80% , and 64.00% while its three years and five years averages were 61.60% and 64.26% respectively .The bank’s cost-to-income ratio increased Y-o-Y to 67.1% from 60% recorded in H1 2019 . ; its cost-to-income ratio fell to 62.30% from 67.00% in H1 2020.UBA’s cost to income ratio is relatively higher compared to its peers and this has become its weak point that drives down its profitability .
The first victim of a high cost to income ratio is the operating margin . Operating margin is employed to analyze how profitable a business is considering its organizational structure, marketing strategies, sales strategies and current fixed expenses. ; it measures its capacity to generate money from sales, after all costs and expenses related to the core operations are deducted. While GTB’s Operating margins were 84percent and 88 percent between 2019 and 2020 respectively ,for UBA there were between 61.8 percent and 65.7 percent within the same period . Businesses with high operating ratio can be considered mature and their business model can be considered sustainable. while business that struggle to earn money on the operational level may have to go through restructuring processes in order to improve their financial situation.
NET INTEREST MARGIN
Another metric that confirms a fact that its profit engine is relatively less robust and a major drawback on competitiveness is its Net Interest Margin. If the profit engine of any corporate organization profit engine is less robust it is this metric that exposes it .Between 2014 and 2018 its NIM ranged from 6.00% ,6.30%, 7.10% , 7.00% and 6.20% while its three year and five year averages were 6.77% and 6.52 respectively ; .its Net interest margin increased to 5.80% in H1 2021 from 5.4% in full-year 2020.A major drawback on its NIM is observable on its relatively cost of funds and low yield environment .Its Cost of funds were 3.80% , 4.00% , 3.70% , 3.70% and 4.20% between 2014 and 2018 while its three and five rears averages were 3.87% and 3.88 respectively. Compared to UBA , GTB despite the downturn that hit its net interest income was able to managed down its cost of heavily as CoF improved by 111 bps from 2.30% in FY 2019 to 1.19% in FY 2020
.NON PERFORMING LOANS
The third major drawback on its profit engine is attributed to its non performing loans ratio which were low and impressive between 2014 and 2016 at 1.60%,1.70% 3.90% but inched up above the regulatory minimum to 6.70% and 6.50% in 2017 and 2018 respectively . The highest NPL ratio of 7.2% was recorded in H1 2018 while the lowest non-performing loan of 1.8% was recorded in H1 2015 . The non-performing loans ratio of the group ,however , improved to 3.50% in H1 2021 from 4.1%.
The above drawbacks on its profit engine have vivid negative implications on its profitability metrics and render it relatively less competitive to its peers . Those metrics above have continued to impact negatively on its earning per share . and consequently on its ability to pay good dividends leading to poor perception of the investors on its stock value