UBA: Analysts explain how high risk environment dampens prospects.

United Bank for Africa Plc grew its balance sheet by at least 15.28% on the average from ₦2.752 trillion in 2015 to ₦5.604 trillion in 2019.

In the last five years, total liabilities surged at an average of 15.65% per annum from ₦2.420 trillion to ₦5.06 trillion.

Over the period, the group shareholders fund spiked at 11.77% on the average yearly, from ₦332 billion to ₦597 billion.

UBA group Basel II capital adequacy ratio settled at 23%, which represents a 300 basis points above 20% recorded in 2018.

How UBA performed in 2019

United Bank of Africa Plc, in its recently released 2019 results, reported a 13% growth in gross earnings from ₦494.05 billion in 2018 to ₦559.81 billion.

Double digit growth looks strong in an economy that expanded 2.27%, but then maintenance cost for branches douse this growth.

The audited financial statement shows that UBA operating income rose by 8% to ₦328.04 billion as against ₦303.69 billion.

However, it reported a relatively higher operating expense which expanded 10% from ₦197.34 billion in 2018 to ₦217.17bn in 2019.

However, profit before tax grew at a relatively slower rate, rose 4% year-on-year, from ₦106.77 billion in 2018 to ₦111.29 billion in 2019.

Meanwhile, profit after tax grew by 13% year-on-year to ₦89.09 billion in 2019 compare to ₦78.61 billion, owing to a lower effective tax rate of 20% in 2019.

In 2018, UBA effective tax rate was 26%.

Then, the bank declared a final dividend of ₦0.80, having initially declared an interim dividend of ₦0.20.

Thus, the total dividend declared for FY’19 stood at ₦1.00, representing an 18% increase from the previous year’s dividend of ₦0.85, and the highest dividend ever declared by the bank.

Furthermore, the dividend yield of the bank currently stands at 20%. Subject to shareholders’ approval, the dividend will be paid on April 29, 2020.

The closing period, however, had elapsed since March 20, 2020.

CBN Policies Drive Loan Growth

In line with the industry trend, buoyed by the Central Bank of Nigeria’s (CBN) policies particularly the loan to deposit ratio (LDR) directive, the bank grew its loan book by 20%.

In 2019, loans and advances to customers increased from ₦1.72 trillion in 2018 to ₦2.06 trillion.

WSTC Securities noted that the bank grew its loan book by 22% in six months from ₦1.69 trillion as of first half of 2019 to ₦2.06 trillion.

Analysts noted that shorter-tenor loans grew by 27% from ₦348.17 billion in 2018 to ₦442.85 billion in 2019.

Also, the longer-tenor loans grew by 18% from ₦1.37 trillion in 2018 to ₦1.62 trillion.

Loan concentration

These includes Governments (Federal and State)’, which contributed an average of 13% of total loan book, and grew by 112% from ₦157.22 billion in 2018 to ₦333.42 billion in 2019.

Transportation and Storage, which contributed an average of 3% to total loan book, and grew by 578% from ₦3.04 billion in 2018 to ₦20.63 billion.

“In our view, we attribute the increased loan book exposure to the ‘Transport and Storage’ sector to the strong GDP growth recorded in the past few years.

“In the most recent years of 2018 and 2019, the real GDP growth of the ‘Transport and Storage’ sector stood at 14% and 11% respectively”, analysts at WSTC remarked.

Other sectors with significant loan growth include the ‘Information and Communication’ sector which contributed an average of 5% to total loan book.

This sector however grew by 81% from ₦73.49 billion to ₦113.12 billion in 2019.

Loans to the ‘Construction and Real Estate’, which contributed an average of 4% to total loan book, grew by 67% from ₦50.88 billion to ₦84.90 billion.

Loans to ‘General Commerce which was about 14% of total loan book spiked by 26% from ₦225.67 billion to ₦285.37 billion.

In addition, loans to the ‘Manufacturing’ sector which accounted for 16% of total loan book grew by 7% from ₦287.96 billion to ₦309.31 billion.

On the other hand, loan exposure to the oil and gas sector reduced in 2019, it declined by 3% from ₦382.99 billion to ₦371.01 billion.

Analysts said the decline in loans to the ‘Oil and Gas’ sector implied that the exposure to the “Oil and Gas’ industry reduced from 22% as of 2018 to 18%.

The bank’s total assets grew by 15% from ₦4.87 trillion in 2018 to ₦5.60 trillion.

The growth was driven by a 427% increase in financial assets at fair value through profit or loss from ₦19.44 billion to ₦102.39 billion.

There was a 585% increase in loans and advances to banks from ₦15.79 billion in 2018 to ₦108.21 billion.

In addition to a 20% increase in loans and advances to customers from ₦1.72 trillion to ₦2.06 trillion.

As well as a 122% surge in other assets from ₦63.01 billion to ₦139.89 billion in 2019.

The surge in other assets was majorly due to an increase in account receivable by 243%, from ₦28.15 billion to ₦96.64 billion.

Also, electronic payments receivables spiked by 59%, from ₦20 billion in 2018 to ₦31.87 billion.

The increases on these lines were enough to offset the declines recorded in some total assets line items during the financial year.

Notably, investment securities declined by 4%, from ₦1.64 trillion to ₦1.57 trillion.

“We attribute the decline to the renewed drive towards growing risk assets, as mandated by the CBN or the bank risks deductions and sterilisation of its cash by the CBN”, WSTC Securities held.

The 15% growth in total assets was funded by a 15% increase in liabilities, majorly driven by a 14% growth in deposits from customers.

Customers’ deposits increased from ₦3.35 trillion to ₦3.83 trillion. Borrowings also increased by 11% from ₦683.53 billion to ₦758.6 billion.

Consequent to an increased loan book during the financial year, interest income grew by 12% year-on-year from ₦362.92 billion to ₦404.83 billion.

Interest income on loan and advances grew by 7%, resulting from a higher interest income earned on loans booked to corporate clients.

Of the ₦207.96 billion interest income on loans and advances in 2019 compare to ₦194.94 billion in 2018, loans to corporate clients constituted 96% of the amount.

However, the average yield on loans and advances to customers moderated by 57 basis points, reflecting the impact of increased competition and price war among other players in the banking industry.

On an overall basis, average yield on interest-bearing assets declined to 8.22% from 8.61%. Interest expense increased by 16%, from ₦157.27 billion in FY’18 to ₦182.96 billion.

The higher interest expense during the period resulted from the interest expense incurred on customers’ deposit, which grew by 18% to ₦125.05 billion as against ₦106.01 billion.

The increase was, however, consistent to the growth in customers’ deposit by 14%.

Specifically, deposits from retail customers remained flat in 2019, while deposits from corporate customers grew by 29% from ₦1.63 trillion to ₦2.11 trillion.

The bank’s deposits is more skewed towards costly deposits, as deposits from corporate customers contributed 55% to total deposits in 2019.

Notably, term deposits from corporate customers grew by 50%, while current deposits from corporate customers grew by 22% in 2019.

Interest expense incurred on borrowings also grew by 18%, from ₦35.15 billion to ₦41.41 billion.

Therefore, net interest income grew by 8%, from ₦206.65 billion to ₦221.88 billion, although net interest margin declined by 31 basis points to 4.21%, resulting from lower asset yields during the period.

Towards the end of the financial year (Q3’19 and Q4’19), the bank borrowed combined short-term debts of over $225 million from ABSA Bank Limited ($75mn), and Rand Merchant Bank ($150mn).

Nonetheless, cost of funds lowered by 9 basis points to 4.01% 2019.

Analysts at WSTC Securities believe that the full impact of the new debt takings was yet to materialise.

WSTC Securities however expects UBA cost of funds to increase in 2020.