United Bank for Africa (UBA) H1 2015 result commentary: The wait was worth the while.

Dear Africa Interested Individuals:
                                                       United Bank for Africa (UBA) has released its half-year audited result for 2015.  Beyond the progressive numbers, the bank knows where its problems are and is tackling them and making progress as the numbers can confirm.  This bodes well for the future when fresh challenges arise.  Let us start with where the bank had success.

  1. Net income rose by 40% and gross earnings rose by 21%.  More earnings trickled down to the bottom-line and boosted net income growth relative to gross earnings. PBT margin was 23.4%.
  2. Management has been focused on consolidation (not expansion) for about three years now and this is paying off and still has more room to further impress going forward.  Fixed assets declined by 0.3% over the first six months of 2015.  23% of group net income came from Africa subsidiaries excluding Nigeria.  This has perennially been the bane of UBA from a group perspective; the bank will operate physically as an Pan-African bank and reflect a "one country" bank when its group earnings are released.      
  3. The bank is more operationally efficient compared to 2014 and this has helped achieve an annualized RoE for 2015 of 20.8% ahead of 18.1% for 2014.  This is despite the bank having less than two months with the $50m raised during Q1 2015.  UBA is on course to once again generate a RoE higher than Zenith Bank for 2015 as it did in 2014.  Cost-to-income ratio declined absolutely by 390 basis points largely due to process optimization.  
  4. UBA is taking a cautious approach to lending which has helped the bank to protect the quality of its loan book and maximize its earnings.  NPL ratio is at 1.8% coupled with cost of risk of 0.6%.  Net loans to assets is at 40% while loans to deposits is approximately 52% which is way below its peers in the 70s.  The benefit of this caution is further revealed when interest income (as published) is compared to net loans.  UBA has the highest percentage of 9.83%; Zenith Bank is nearest to it at 9.25%.  Another pointer to its caution is UBA has $3B more in deposits than GT Bank while GT Bank's net loans disbursed are $590m more than that of UBA.  I am not saying that reduced lending to this extent is a good strategy; I am saying it is a good strategy given the unique peculiarities of UBA.  
  5. Loan-value added (my creation) is positive at 0.26%.  Its loan book is adding positive value to its income statement.  
  6.  UBA has a good mix of interest to non-interest income at 70% to 30% which shows business resilience.  
  7.  The bank is getting increased transactional activity; fee & commission income rose by 8%.  UBA also beat GT Bank, Zenith Bank & FBN Holdings with the amount of fee and commission income generated relative to gross earnings.  Its nearest competitor is more than 200 basis points behind.  Given UBA's cautious approach to lending, it is pursuing non-interest income revenue streams and is making tangible progress.    
UBA needs to work on the following observations if it is to maximize its capabilities as Nigeria's largest bank by reach.  Nigeria's largest bank by reach (UBA) has a better RoE than Nigeria's largest bank by assets (Zenith.)  The same situation applies across the continent where ETI has a better RoE than Standard Bank.     

  • Deposits from customers rose by 2.7% ($290m) over the first six months of 2015.  This is the smallest naira increase when compared to FBN Holdings, Zenith, Access & GT Bank.  The CEO had mentioned that UBA remains focused on sourcing low cost deposits.  Its interest expense relative to interest income declined year-on-year.  Low cost current and savings account deposit pool now accounts for more than 74% of the bank's total deposit base.  This is one of the bank's weaknesses that has been transformed into a strength.       
  • Too many subsidiaries and some local branches in Nigeria are not contributing their 'fair share' positively to the financial performance of the group.  Zenith & FBN Holdings are doing 66% better in generating earnings across their branch network.  The good news is management is aware and this was alluded to when the CFO said "recent initiatives in less profitable subsidiaries are yielding positive results." UBA is on course to improve by about 12% relative to 2014 in this regard.  
  • UBA is still over extended on its balance sheet and needs to raise more Tier 1 equity in less than twelve months or close out some of its assets to give much needed flexibility to its business operations.  This needs to be immediately addressed and is in my opinion limiting UBA's ability to lend even though funds are available.     
  • UBA needs to enhance its revenue.  It has assets on its already bloated balance sheet that are not generating top-line earnings at all.  Not surprising, UBA has the lowest gross earnings relative to assets as at H1 2015 when compared against FBN Holdings, Zenith & GT Bank.  Management is also aware of this and is working assiduously to address this.   
  • UBA is debt burdened; debt to capital is already at the 40% mark. This matter is further exacerbated by the fact that UBA's debt utilization is sub-par and the worst score among FCMB, Access, Zenith, FBN and GT Bank.  For a bank of UBA's size and reach, interest expense relative to interest income of 43.5% is far from ideal.  This is 5.3% more than FBN Holdings that is struggling with a deteriorating loan book.  The bank is taking on expensive debt to fund its operations.  Borrowed N20B in 2010 at 13% and in 2014 borrowed N30.5B at 16.45%; UBA borrowed more at a much higher interest rate.  The 2010 bond is still open and will expire in 2017 with a bullet repayment. UBA is using an excessive amount of its borrowed funds for day-to-day business operations instead of for lending purposes in my opinion and this is negatively impacting the bottom-line.   
UBA has achieved a good financial performance; its stock price has suffered more than other banks while this result was being awaited.  Hopefully, its investors can sing a happy tune going forward.  

UBA is not yet cruising; but, it is moving ahead and in the right direction as long as management gives that balance sheet some breathing space.  

Actionable ideas will become the 'normal' when this blog becomes exclusive effective October 1st.    


   Tell others to tell others about this Africa Research Blog; the financial truth is here.  



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