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UBA Q3,’21 : GIANT LEAPS , BUT STILL IN CATCH-UP MODE

United Bank of Africa  Plc ,UBA, housed in the sprawling edifice  of  its headquarters in Lagos ,Nigeria   no doubt ,,  has sprawling resources to attain sprawling height  of  leadership  in the banking industry. Confirming these potentials ,UBA has been able to deliver impressive margins, leveraging the electronic banking platform and benefiting from the growing contributions of its African businesses in Q3,2021  ;its Profit after tax  hit  N105bn ,a 35 percent jump on year on year record   against its  Net Assets   of  N798bn. 

But , its ambition of industry leadership , however ,  remains  elusive ; except for the First Bank Holdings  which is currently battling with toxic loan debacle since 2015, UBA  is only playing catch up game  when its  market value and profitability status are considered  relative to its peers  Compared to  this performance   ,  Zenith Bank’s  Profit after tax grew to N161bn  and Net Assets  of  N1.2tn  ;   Access Bank  Profit after tax grew   to N122bn  as its  Net Assets grew  to N799bn  ; GTB Profit after tax  is  N129bn  and Net Assets grew   to N842bn  .

 This wide  gap between UBA and its tier-1  peers may not be farfetched as the bank is confronted  with   certain  limiting factors  putting its leadership  ambition on hold ..First , its inability to leverage those resources optimally and resourcefully relative to its peers is its main drawback . Moreover, its lethargic dividend payout is another drawback driving stock price far behind its peers and ultimately its market value ,

  Its   share  price was  N8:40k as at the time its Q3 ,results were released . .Compared to this , Zenith Bank   share  price was   N25:25  per  share   while Access Bank  share   price  stood  at N9:50k   and  GTB  share  price  was   N28:50k  . In spite  of its massive northward swings in varying margins in the recently released 9M 2021 financial statement , United Bank For Africa could still not drive its share  price strongly enough to hit  N8.65 k its starting price at beginning of this financial year  or its 52 weeks high at N9.80k . UBA closed its last trading day  , Friday, October 29, 2021,   at 8.60 NGN per share on the Nigerian Stock Exchange (NGX), recording a  negligible  1.2% gain over its previous closing price of 8.50 NGN.  ;  this fell below its share price at the beginning of the year . 

 Analysts  and financial observers  ,are however ,not caught unaware  on the market less impressive reaction to the 9months results recently released attributing   it  miserable  52k dividend payout at the end of  last  financial year  of 2020 .that is still hunting its share value .  UBA’s  current dividend  yield  at 6.4%   is  low compared to the top 25% of dividend payers in the NG market   at 7.29%  ; its share  underperformed the market which returned 32.1% over the past year.  UBA is believed to be currently undervalued . 

Ordinarily , its Q3 results were expected to have a dramatic impact on its market value . According to analysts  the quality of the fundamentals compels a buy recommendation, as the estimated fair value of N11.41 provides for a 38.78% upside opportunity. However, the stock is currently technically unattractive with the Relative Strength Index (RSI) soaring into the overbought region at 88.33.   UBA  Price Earnings Ratio  , PE  ratio , is   2.3x   ,indicating investors willingness to pay more per its share though compared to the   industry average  at 3.7x ,investors optimism is lower .

To analysts , its current   less competitive share price could be traced to its unimpressive  dividend  policy   as the only  limiting factor   that could  cage   its price and market  value   as the fundamentals have improved .However , UBA is expected to rev up its dividend this year with  the stellar performance that is expected to persist till year end, allowing for a total dividend payment of N1 according to analysts calculations ..

This may not be farfetched . There seems to be rising hope on the horizon except for the misfortunes that hit trading businesses  Interest segment sustains resilience – The remarkable performance in UBA’s topline was sustained in the 9M 2021 reporting period, as the lender was able to simultaneously sweat the interest-bearing assets while moderating the interest expended. Interest income inched up by 8.38% to N343.71 billion in 9M 2021, buoyed by a robust growth in the loan book (22.72%), which proved particularly useful in ramping up the interest from term loans to corporates by 3.45%, with this income line item accounting for 37.97% of the total interest income. Similarly, the net interest income was up by 23.25% to N225.86 billion in the review period, benefitting off the aforementioned growth in interest income, as well as a corresponding decline in interest expense, as the lender continues to keep cost of funds low. Also, noteworthy is the 70.33% decline in UBA’s net impairment loss, lending further support to the sturdy topline performance.

Fee-based income growth shrugs off poor trading performance – The waning factor in most banks’ non-interest segment performance is the dramatic decline seen in their trading and foreign exchange segment. However, UBA was not immune to the pared trading segment performance amidst a challenging market atmosphere (relative to the preceding year’s). We saw the bank’s net trading and foreign exchange income dip by 40.23%, but the impact of the decline, alongside a 6.93% increase in operating expense, was easily surged off by an impressive showing in the fee-based segment. Net fees and commission was up by 20.75% to N67.92 billion, supported by a 30.55% growth in fee-based income. Electronic banking income remains the key driver of UBA’s fee-based income, as the line item rose by 50.41%, while accounting for 37.77% of the fees and commission income. While the corresponding expenses in the fees and commission segment also rose by 49.70% , we anticipate some moderation in the electronic banking expense subcomponent; hence, allowing for a more robust performance in the fees and commissions segment in coming years.

Bottom-line mirrors topline growth –

 Given the impressive performance recorded in the interest and non-interest segments, UBA was able to scale up their profitability in the review period, with the profit before tax and profit after tax surging by 36.50% and 35.61%, to N123.35 billion and N104.60 billion, respectively (as against N90.37 billion and N77.13 billion in 9M 2020). This impressive profit after tax growth was recorded against a backdrop of a 41.67% increase in the income tax expense. Similarly, the earnings per share was up by 36.11% to N2.94 in 9M 2021.

Loan book continues to strengthen – By increasing the total deposit by 18.46%, UBA was able to ramp up its risk assets, with the loan book rising by 22.72% to N3.01 trillion. However, the lender was unable to meet the 65.00% loan-to-deposit (LDR) regulatory minimum set by the Apex bank, as the LDR for the review period stood at 45.31%. Elsewhere, the capital buffer of UBA remains above the 15% regulatory minimum, at 23.90% in the review period.

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