Andrew Stephen Grove , the third CEO of Intel Corporation., once issued a stern warning to the leadership of corporate organizations . In few words , the former Intel CEO said ,”you have to be your own toughest competitor”. Not only Grove acknowledged this fact . George Washington, in 1799 too wrote, “make them believe, that offensive operations, often times, is the surest, if not the only means of defense”. Similarly, Sun Tzu, the Chinese military general, writer and philosopher centuries earlier in The Art of War wrote that “Attack is the secret of defense; defense is the planning of an attack”.
Realities among some corporate entities as well as in human lives confirm this as much . In global competition, the only defence is a vigorous offence. 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.
When a corporate entity fails to abide by the above warnings its economic engine runs out of steam One corporate entity that must heed fast and urgently to the above warning of Grove and others mentioned above , no doubt , is the United Bank for Africa ,UBA.
UBA’s economic engine is running out of steam . A true banking behemoth , the bank surely positions itself to capture certain advantages associated with bigness with a capacity to match the resources and global distribution of large competitors brings advantages. Of course , large companies tend to devote a disproportionate share of their resources to training and education ; it also opens the door to many of tomorrow’s mega-opportunities. Most importantly, volume of output helps an organization to recover high cost of capital through economies of scale .
Sequel to those dreams , UBA has continued to build its size across the continent of Africa and complement this with the appropriate financial assets . It has total assets rising to N10.9trillion in 2022 from N8.5 trillion in 2021 ;it is the leading sub-Saharan African bank with over 21 million customers, 20,000 employees, and 1,000 branches across 20 African countries.
Despite this , UBA , once known for outperforming competition , delivering better value for money or sustaining leadership in those days of Tony Elumelu ,its former CEO is now a shadow of its former self . The bank whose stock per share was selling N37 is now less than N8 currently .It market value not unexpectedly goes down accordingly to become the least among tier 1 banks in Nigeria .
How else could one tell the story of a corporate entity with the necessary and competitive physical and financial assets that fails to live up to its shareholders’ expectations relative to smaller competitors? A comparative analysis of UBA with another tie one bank may be a better way to explain the above assertion .GTCO’s total assets as at 2022 ,for instance, stood at N6.5 trillion as against UBA’s N10.9trillion in 2022 while its total equity was N931b as against UBA’s N887 .
Despite its smaller asset size relative to UBA’s, GTCO has proved itself and has continued to dominate UBA for more than a decade with better strategic capability .This is palpable from the wide gap between the two in terms of profitability in the last one decade or more as UBA aspires and struggles helplessly to catch up with it . Between 2018 and 2021, UBA’s profit after tax inched up incrementally from N78.6 b , N89b , N118.7b and N109b compared to GTCO whose profit ranged from N184.7b , N196.9b , N201.4b and N174.8b within the same period
The bank has remained in the catch-up for more than decade now overtaken by non conventional rivals despite its geographical spread and competitive financial assets among tier one banks .
But its fate could not spring any surprise . In the last few years , its profit engine a appears to going obsolete and the need to reconfigure it to regain its leadership position is highly imperative .
This , however , is not natural . Over time ,new ,more efficient profit engines of any corporate rivals may make older one of an incumbent leader obsolete . But the current fear over UBA is that as the pace of its corporate genetic evolution falls behind the pace of environmental change, UBA , a like the dinosaur , if not get wiped out or could become a mere threshold player .
This is raising a serious concern , particularly among the shareholders who have been at the receiving end of the ugly trend . For the longest time, the bank has focused more on process innovation as the primary driver of profitability. However, since these gains, if materialized at all, are often incremental or short-lived , a better option before it remains a business model innovation that focuses on the real profit engine with an underlying logic for a company’s ability to create value and make money. By making shifts that enhance the value proposition in concert with its operating model, it is possible for a bank like UBA to create greater, lasting competitive advantage.
To achieve the above ,no doubt , UBA needs to reconfigure its profit engine : its deep seated beliefs about what business it is in, what it is delivering to customers , how money is made in this business , what assets and skills are critical , who its competitors are ,among others . The above are decisive factors that define every corporate entity’s fortunes and this bank is in dire need of them to stage a strong come back to its leadership position .
But because it has not done the above , currently , UBA is paying the price of its failure to be its own toughest competitor” as warned by Grove and others . A detailed analysis of its books over the years exposes UBA has failed to outperform competition , deliver better value for money or sustain leadership .
Two key challenges could be traced to its inability to outperform any tier one bank for a long time . One is its less competitive revenue capability ,particularly from the core banking or lending segment of banking .From the face value , the Africa’s global bank is making bigger revenues year on year from its sojourn across African continent underpinned by the necessary clout it gathers through its geographical spread and massive assets . However , when the volume of these revenues are judged from its net interest margins point of view they are not competitive enough to enable it to outperform rivals .
To those in the know of the financial analysis , the main source of income and profitability of banking remains the spread or the difference between the rates at which the funds are borrowed and the rate at which they are invested or loaned out. However , when this gap is not wide enough , a bank’s net interest incomes are restrained and this is communicated directly to its net interest margins .
UBA’s net interest margins apart from being less competitive , have continued to depreciate as its capacity to generate interest incomes in the past few years following its increasing cost of funds relative to yields on earning assets . .From 7.0% in 2017 , it depreciated to 6.3%,6.0% and 5.4% between 2018 and 2020 respectively before marginally lifted to 5.57% and 5.61% between 2021 and 2022 ,albeit below 6%.
To achieve a better net interest margin , a bank is expected to lend profitably and outperform rivals tapping into its core competences and to put in place a robust fund transfer pricing ,a method used by bankers to evaluate the profitability of deposits and loans.
But that is not enough a factor to outperform , every bank also needs to lend safely too by overcoming credit risk . For so many years ,another drawback to UBA’s competitiveness is large volume of loan loss impairments charges that directly hit hard on its nets income . This inched up to N42 in 2022 from N13b , N22b and N16b in the corresponding period of 2021 ,2020 and 2019 respectively However , its improved asset quality underpinned by robust and proactive risk management practice is a consolation as its non performing loan ratio was 3.1% in 2022 compared to 3.6% , 4.7% 5.3%, 6.5% between 2021 and 2018
Beyond the core banking or lending income segment for which UBA most time has found to be a hard nut , the trading segment and operating costs or expenses are where the bank has not demonstrated core competences and unique resources to outperform competition . Trading income is the most volatile income source for a bank which only a super skilled treasury desk could handle to some extent with certainty .It also carries relatively high market risk, as well as not inconsiderable credit risk . UBA is not lagging behind here and this income segment is among its saving grace for its survival . This could be traced to its strong treasury desk .
However , the bank operating costs are where UBA surfaces again among the worst . And this is where its ability to translate revenues to profit is greatly messy. Operational cost management is another segment that has become a hard nut for UBA to break . This has become a recurring decimal , year on year the growth in its operating expenses is always a spoiler to its bottom line . Overall, although the Group was able suppress its Cost to Income Ratio (CIR) marginally from 63.0% to 59% in 2022 , this is still among the worst in the industry . Between 2015 and 2021 its cost to income ratios ranged from 66.60% ,63.00% ,57.80% ,64.00% , 62.7% , 61.3% to 62.7%
Even in fee and commission income where its volume of transactions is expected to give it an edge over smaller banks , expenses incurred are usually the key spoiler to the expected gain ,at least in relative term, due to lack of the appropriate skill to control costs .
The above explanations definitely demonstrate key drawbacks to UBA competitiveness ; consequently , its inability to generate commensurable level of revenues to the assets deployed and to translate the revenues to good profit with high level of cost efficiency are what underpin its continued stay at the threshold line .
The case of UBA is clear enough . The race to competition is not simply to gain immediate market share by assets or geographical reach but to build competencies . This race ,indeed, occurs in three distinct, overlapping stages .While the first is the competition to foresight and intellectual leadership and the second stage is the competition to actively shape the emergence of that future industry structure to one’s own advantage. , the competition shifts to a battle for market share and market position with fairly well defined parameters of value ,price, cost and service . How each player performs at each stage in the race to the future ,determines its competitiveness in the industry and its profit engine. UBA , no doubt , has been overtaken in those stages by its closest rivals .
From those profitability data between 2018 and 2021 above or even in the last one decade , two signals are sent to the industry’s stakeholders : Between 2018 and 2021 , UBA is nothing but a lame duck despite its huge asset size and its so called claim as the Africa’s global bank .
Truly , UBA ‘s performance at the end of 2022 financial year is impressive and could be said to pose a big challenge to its closest competitors when historical data are employed as a standard of benchmarking . Its gross earnings rose significantly to N853.2billion from N660.2billion recorded at the end of the 2021 financial year, representing a strong 29.2 percent growth. Total assets rose remarkably by 27.2 percent, crossing the N10trillion mark, to close at N10.9trillion in December 2022; up from N8.5trillion in 2021. This is a very significant achievement and milestone in the history of the powerhouse financial institution.
Furthermore ,despite the highly challenging global economic and business environment, UBA recorded a laudable profit before tax, with a 31.2 percent growth, to close the year under review at N200.8 billion, rising from N153.01 billion recorded at the end of the 2021 financial year; while profit after tax (PAT) grew by 43.5 percent to N170.2billion in 2022, compared to N118.7 billion recorded the year before. Consequently, UBA Group Shareholders’ Funds rose to N922.1billion, as at December 2022, achieving an impressive growth by 14.6%, compared to prior year.
. In 2022 financial year , for instance ,though UBA’s profit after tax dramatically hit N170b from N109b in 2021 while unfortunately, its superior rivals had their profit backtracked due to the shock from heavy loan loss impairments . However , this did not give UBA an edge over them in terms of delivering better value for money .
This is better explained when it is compared with some tier 1 banks in 2022 .For instance ,in 2022 , GTCO was overtaken by UBA as its profit after tax backtracked to N1692b from N174.8b in 2021, though for the first time over a long period.
Sequel to this, from the face value one signal from the comparative analysis of both UBA and GTCO 2022 profitability is that UBA has regained a better momentum ; its management ,believed to be asleep at the switch , could be said to have awaken from its long time slumber .
But there are more to this than meet the eye when UBA is bench marked with some of its rivals in terms delivering value for money ; this narrative may be very deceptive as it is based on historical data . Most time , when a corporate is less competitive it hides under these data to create an impression of good progress to its uninformed stakeholders. Historical comparison indicated by the above data shows how much an organization is improving over time ; they are used to look at the performance of an organization in relation to previous years in order to identify any significant changes .
UBA and some others either by commission or omission have demonstrated their passion for historical comparison as shown its 2022 reports of its performance . The above analysis is what has made many players to be complacent and sometimes such data could be intended to deceive some investors not well versed in financial analysis .
Though its financial year results for 2022 threw up a different picture with only UBA ,among tier 1 banks displaying the unusual with the sudden flight of its profitability , the mystery ,however , is that it still fails to create better value for money than those hit by the tsunami of loan loss impairment charges like Zenith Bank ,Access Bank and GTCO
Deep insights into UBA’s performance in 2022 could be helpful in gleaning the true position of its competitive status relative to its rivals when a set of agreed performance indicators are used . In other words , one way to avoid the above loophole created by mere historical data and truly measure and compare the true progress of UBA is to benchmark it with its peers and few other tier 2 lenders with certain performance indicators .
Ans this is what some smart investors do ; they look beyond the absolute profitability figures or care less about a corporate size ; they particularly value a corporate entity that could deliver better value for money .
This reason for this may not be far to seek . Though profitability is a critical service feature in banking as it is particularly valued by shareholders ; it must not only be met by every player, but this is where each of them must excel to outperform the competitors . In other words , shareholders do not value profitability at any cost because cost is an important service feature also . Therefore , an organization must be competent at managing cost to generate sufficient profit and deliver competitive value for money .
For UBA , however, the bank’s key drawback to leadership is its inability to manage cost in certain critical segments as indicated above despite its massive assets . This is a key factor that restrains its revenue generation capability and its conversion to profitability or net profit margins .
This is where GTCO and a smaller bank like Stanbic still retains its dominion over UBA when the profit after tax of the two banks are juxtaposed against UBA’s , indicating their capability to deliver better value for money to their shareholders .
Even when bigger revenues are generated by UBA its inability to control its operating costs is another headache worrying its management and for which it has found no cure over time . This is palpably manifested in its cost income ratio and profit margins .
Despite its bigger profit in 2022 financial year than both Stanbic and GTCO , its net profit margin relative to its closest rivals confirms some analysts’ view that size advantage without the capability to leverage resources or efficient profit engine is not enough.
In 2022, the available data showed its gross earnings rose significantly to N853.2billion from N660.2billion recorded at the end of the 2021 financial year, representing a strong 29.2 percent growth. From this figure UBA recorded a profit before tax, with a 31.2 percent growth, to close the year under review at N200.8 billion, rising from N153.01 billion recorded at the end of the 2021 financial year; its profit after tax (PAT) grew by 43.5 percent to N170.2billion in 2022, compared to N118.7 billion recorded the year before.
However , the above translated to pre tax and post tax margins of 23.5% and 20% in 2022 as against 23.2 % and 18% in 2021 . Though the above figures show some improvements year on year , when compared with better run banks like GTCO and Stanbic , UBA needs to re-gig its profit engine as this has become a recurring decimal and a red flag that exposes the bank’s weaker competitive position.
Despite the dramatic improvement on UBA’s profit and its ability to overtake GTCO , though the first time over years, a look at the 2022 financial results of both GTCO and Stanbic bank shows a delivery of better value for money as indicated by their better net profit margins within the same period . While GTCO pretax margin stood 40% and its net income margin 31.4% .
Delivery of a competitive profit margin is a function of every player’s strategic capability ; only those with strategic capability to do so particularly those with unique resources and core competences to deliver this profitability and service features at a lower cost relative to others could outperform rivals and deliver better value for money for the shareholders .
UBA has not been able to deliver better value for money to its shareholders or outperform competitors because as it lacks unique resources and core competences that are robust or difficult enough for competitors to imitate. To achieve robustness , a feature that is related to the nature of an organization’s resources or competences , such an organization’s resources or competencies are expected to be rare ; the organization is expected to possess competence to manage complex activities rather than being vested in separate activities ,thereby making competitors unclear about which resources or competencies underpinning it’s better performance ; its competence must be embedded in its organization’s culture .
This is a lacuna noticeable from the core banking segment of its business as well as in its operations. Its shareholders and the bank are those paying the price of this lacuna in its profit engine . None of those who invested their hard earned earnings in its 2007 initial Public Offer and right issues would forget in a hurry the huge misfortunes that befell them ;the stock bought at N35 has not hit close to that price in the last one decade and is now selling below N8.00 per share
