Would Union Bank Plc settle for M&A sooner or later?
Would Union Bank settle for a merger and acquisition (M&A) deal sooner or later? For now, even Broadstreet is confused as to what will happen to one of the oldest financial institutions in Nigeria.
The future is uncertain but something is cooking. Recently an unconfirmed statement has it that Access Bank and Union Bank Plc were discussing the next deal that would likely disrupt the banking sector, massively. The last “marriage made heaven was denied by Diamond and Access Bank but it went through.
Again, these banks have denied that such a deal exists; but what if…? Access Bank is known for serial M&A deals and has become a connoisseur in its given its overall growth ambition and strategy. That is how it grew the Nigerian lender grew its balance sheet over the years.
A good move but an expensive one indeed as it is struggling to find value.
It is more difficult to grow organically at this time when you are not GTB, FBNH or Zenith etc. If you are familiar with how the game goes here, you would understand the 50:50 rules that apply to such rumour.
Few local banks have what it takes to stand alone in Tier-II class if CBN goes with a recapitalisation plan. In terms of size, in spite of the fact that Access bank Plc has some N6.5 trillion in total when converted at Central Bank of Nigeria’s FX rate, that’s just about $21.24 billion.
If the bank used Nigerian Autonomous Foreign Exchange Fixing, NAFEX, to translate its statement of financial position in dollar terms, is the recent trend in the banking sector as seen with Ecobank Plc, then assets value of the biggest bank in Nigeria would just be $18 billion.
Access Bank still needs to find value. When you sit on total assets worth N6.5 trillion and your quarterly profit is around N45 billion in the first quarter, often the peak period apart from year end rush.
Compare with South Africa banks as an example, this is small fry. It would be nice to see the Tier 1 capital banks coming together as one if you know what I mean. Imagine Access + Zenith + FBNH + UBA and GTB as one bank in the economy?
All the cobblers, artisans and street retailers would be properly supported and the Yaba Silicon Valley version would stop seeing lack of capital as an impediment to scaling up. That is disruption. ‘Dream on Julius’, my colleagues at MarketForces said.
Understandably, competition is fierce as Tier I banks fight unrelentingly to stay ahead of the curve in the banking sector. So, smaller banks have become the victim of the vanquish and the villain race that characterised the sector.
But the market still recognises value. In terms of return on investment, it comes as no surprise that smaller banks often lead the pack. They often rank ahead of Tier 1 banks because of their ability to manage overheads and their footprint in the retail end.
With the recent trends, it seems that the apex bank has turned the corner to become “Oliver Twist”. To CBN, banks’ contribution to the economy is not enough.
So, the CBN is preparing to reset the banking sector with fresh capital injection among other measures like raising bar on loans to deposits ratio, daily placement at Standing Deposit Facilities.
With the CBN coming with more sticks than carrots, which banks would be around afterwards? Even though there is no deal, or it won’t go through how is Union Bank standing?
UBN game plans for 2019
Union Bank of Nigeria Plc plans to make between N19.5 billion and N21 billion earnings before tax in financial year (FY) 2019. The bank intends to do this by growing interest earnings assets by at least 10% in addition to non-interest earnings sources. FX related income has become so insignificant, and trading income can however makes a difference.
According to the UBN guideline for FY 2019, it estimated a net interest margin of 7% (max), this happens to be below 7.8% it achieved in FY 2017. The macroeconomic condition in FY 2017 was a bit tougher than now and the base case seems interesting – busted on stress.
It is likely that UBN has factored into the estimate of the impact of moderating yield in the fixed income market, or that its estimated cost of funds would be just as high as the historical trend – a kind of information asymmetric.
That would be the best bet, though loans from the bank don’t come at a discount really, so there must be other factors that account for the estimated net margin.
It would be recalled that the nation’s economy was just about coming out from recession at the same time when it recorded a stronger net interest margin. So, when the economy gets better year on year, it is normal to see better performance across key metrics. This is not the case here.
Then again, as the management looks ahead into the future, the bank`s guidance for the year shows it wishes to bring down the non-performing loan ratio below 8% while it’s gunning for 70-75% cost as a proportion of income.
As of the end of the first quarter, the bank’s NPL ratio declined to 7% from 8.1% from financial year end 2018.
Meanwhile, before it settled at 8.1% in FY 2018, UBN had carried heavy toxic assets a year earlier when the NPL ratio hit about 21%. At the end of the first quarter in FY 2019, its total assets pitched at N1.52 trillion, as return on average assets flattened at 1.6%.
Also, UBN’s capital adequacy ratio clocked 16.5% from 16.4%, resulted from carrying value of its total equity at N233 billion at the end of the first quarter in FY2019. Recently, a weak capital mix forced the bank to adjust its share premium to upturned accumulated permanent losses.
The battle against the rising cost
Union Bank is faced with high costs. It is a fact derived from its numbers, but the bank is not alone in this. Its cost to income ratio rested at 80.9% at the end of the first quarter FY 2019 as against 82.9% at the beginning of the year. It doesn’t look okay at this level.
When a profit-making entity expends more than 80% as cost as a proportion of its revenues, then the margin becomes thin as other obligations would even play in, then there is an issue to contend with. What that means is that, for every N100 Union Bank Plc generated, N80.90 was burned down through the operation in the period.
Union Bank carried lower earnings assets, and then its gross earnings slipped by 4.5% from N39.5 billion in the first quarter of FY 2018 to N37.7 billion at the end of the first quarter in 2019.
Despite this fact, its profit before tax closed at N5.4 billion at the end of the quarter in 2019, similar to what it achieved in the comparable period in 2018.
Then, its non-interest income jerked up by 39% to N10.8 billion from N7.8 billion. Patronage has increased. Or the bank customers are getting more money to deposits but I would rather settle for increase patronage, albeit marginal.
Total customers deposits surged 1.1% from N857.6 billion at the beginning of the year to N867.2 billion but the bank loan book grew by 3.8% from N519.7 billion to N539.4 billion. Analysis of the bouquet of funding sources indicates that about 65.1% of the bank financing was a mix of low-cost deposits.
Unfortunately, its foreign currency exposure is worrisome given its loans concentration. The bank is highly exposed to oil and gas clients, more than any other sector.
Analysis of the numbers shows that about 37% of the bank loan books were made to oil and gas, the first quarter result shows.
More than 54% of the total loan book was denominated in foreign currencies while 45.8% were local currency loans made to customers. It looks like a deliberate effort but the bank claimed otherwise in its report.
The bank said, “We continue to reduce our exposure in foreign currency book as we look to mitigate any future FX risk”.
But further analysis of financials shows that the bank carried lower exposure at the beginning of the year. In FY 2018 result, 49.7% of the loan book was foreign currencies denominated while local currency closed with 50.3%.
Being Strong, Bold and Reliable
UBN has not shown it has the ability to disrupt the banking sector. It is more of a marginal player with its eyes on the ball. With its restructuring efforts, the past doesn’t define Union Bank Plc anymore but the road to the future is rocky.
After a sharp drop in profit after tax from N26.685 billion in FY 2014 to N18.093 billion in FY 2018, UBN has again started to strengthen its fundamentals.
Management’s review of the bank earnings model and competitive stance resulted to restructure, and this gave birth to rebranding. Aggressive deposits mobilisation follows and the efforts can be seen in the bank deposits collections.
Though, the industry’s cluster poses threat, there is a fierce rivalry with big balance sheet banks that are controlling some 70% of the market share. This won’t go away anytime soon, but the bite would continue until a dead strategy is lifted.
It is survival of the fittest among operators. And some know what to do than the other. That seems to be making the difference.
“The banks that would survive the future must be lean and speedy in attending to their retail and corporate customers’ needs”, MarketForces Africa report revealed.
Leadership: Emeka Emuwa holding sway
Under his leadership, Union Bank gets better. At least, it has been a long we see grandmas and papas at the counter counting as tellers. The culture has not changed but it has been greatly modified to suit the millennia.
Even the horse has lost weight. The management is leading the rebranding agenda, and it is strategic albeit slow.
UBN banking halls are neater and manned with young professionals and staffers now. Some years back, you could not have found such bright light conducting transactions with UBN.
At the just concluded investors and analysts’ conference call, Emeka Emuwa, the Managing Director/Chief Executive Officer (MD/CEO) Union Bank Plc, stated that,
“Our ambition is to be Nigeria’s most reliable and trusted banking partner, a leader in retail and transaction banking, sustainability and innovation”.
“Yes, Union Bank Plc investment in artificial intelligence would add more value to its bottom line but not without re-carving its financial products to bring millennials into the net. Strategy, they say is expensive, but it helps in determining who gets what in terms of share of the market”, Ogochukwu Ndubuisi, Market Researcher at MarketForces said
Union Bank Plc priority is on building a digital footprint, among others, Emuwa said at the conference call. The bank said it is diversifying its funding base.
Given the data from its audited report, it was observed that digital shake-up seems to have started impacting operations, positively. In FY 2018, 96% of transactions volume were conducted on its digital platforms –Online, POS, Mobile, Automated Teller Machines.
Emuwa said; “Our cost to income went up to almost 83% which is higher than we are comfortable with, but it’s a combination of reduced earnings and some of the cost elements that went up, including our investment in technologies that have beginning to bear depreciation impact.
At that level, it means that Union Bank incurred as much as N83 on every N100 income generated in FY 2018. But he quickly added that “We are expecting productivity that would come out from those investments. Aggressive efforts to collect loans resulted to decline non-performing loans ratio”.
But these efforts, as noble as it looks are yet to translate to exciting numbers. Its financial performance is not looking bad on its own but weighing against the industry’s average and direct comparison with peers, it looks like a promise is not a strategy.
Analysts are however mindful of various regulatory demands that are impacting banks of this size. Competition is a key issue, but the regulatory environment has added so much to the burden. CBN is using a cash reserve ratio of 22.5% to reduce loanable funds and Tier II banks are accessing funds at steep costs elsewhere.
Earnings per share since FY 2014
At the banking level, in the last five years, precisely from 2014 to 2019, Union Bank Plc.’s earnings per ordinary shares has been declining year on year. From N1.21 kobo posted in 2014, then N1.06 kobo a year after before it closed the financial year 2016 at N0.94 kobo.
This coincides with the time when the bank increased its share capital by about 72% from N8.468 billion to N14.561 billion. Earnings per share sliced further in 2017 to N0.66 kobo and dropped to N0.63 kobo at the end of the financial year 2018.
The same pattern was seen at the group level except for the year 2016 when earnings per share picked up. As such, it has been a rough ride for investors.
Assets quality
At 6.52x assets to equity ratio, Union Bank is relatively geared, much of its assets are financed with outsiders funds. The result shows that every N100 in assets is funded with N6.52 kobo of equity and N93.48 debt. Its equity stood at N233 billion while its loans closed at N539.4 billion to show equity to loans finance of less than 3x.
The fact that Union Bank non-performing loans tailed off to 7% is a good thing, though above the regulatory 5% benchmark. Its gross loans rested at N539.4 billion at the end of the first quarter in FY 2019 and it cut impairment charges from N2.3 billion to a write-back of N0.8 billion.
In FY 2018, the numbers showed that rising impairment loss on the financial assets has been the “Judas” of the bank`s efforts to sail strongly. At the group level, impairment on credit losses rose from N9.651 billion in 2014 to N9.244 billion in FY 2015 before it settled at N17.186 billion in FY 2016.
The group was the worst hit in FY 2017, asset quality declined as the group booked N25.317 billion against its income statement.
The amount booked as impairment charge on credit losses was about 24% of net operating income for the period. In FY 2018, management efforts paid off as the bank write back N2.992 billion to its net operating income.
Then, its overhead ballooned as operating expenses betrayed the results in a sequential manner over the years. The group overhead rose from N59.419 billion in 2014 without a breakout of sort till 2018 when it expended N75.04 billion on its operations.
Unfortunately, as operating expenses were rising, net operating income declined year on year. Then, the bank had to deal with its bogus impairment charge.
Where is Union Bank going from here?
A quick look at how the bank performed in 2018 could provide some guidance to answer the question. Union Bank total assets increased marginally to N1.463 trillion at the end of the financial year 2018, having expanded by less than 1% from N1.455 trillion in 2017.
However, growth in total liabilities dwarfed total assets growth as it expanded by 11.34% from N1.112 trillion to N1.238 trillion. So, its statement of financial position expanded on the back of a significant increase in liabilities.
On the profitability performance, Chief Financial Officer, Joe Mbulu, commented on the FY 2018 results that: “gross revenues declined by 11% to ₦145.5 billion in 2018 from ₦163.8 billion in the previous year as a direct consequence of the loan book clean-up and resolution of key exposures.
“Notwithstanding significant investments to execute our strategy including expanding our agency banking footprint and aligning compensation with the market for our entry to mid-level employees which increased operating expenses by 12% from ₦66.7 billion in 2017 to ₦75.0 billion as of December FY 2018, we are pleased that our core business delivered a 33% growth to our top line PBT”, Mbulu added.
“In addition to our successful fundraising activities during the year, we will further support future growth and creation of high-quality risk assets in 2019 through a Tier II capital raise. This will boost our Capital Adequacy Ratio, which is currently at 16.4% and remains above the regulatory limit.
Weak macroeconomics persisted through the financial year FY 2018. Thus, the tough economic environment impacted banks performance in general. Many banks muted lending in 2018, as operators favoured cleaner books and took cover in the fixed income market.
For Union Bank, gross loans declined by 7% from N560.7 billion to N519.7 billion. With the CBN directive on loans to deposits ratio set at 60%, then the back must be willing to book more loans.
If you look at where the bank’s earnings came from, you would observe that interest income went down by 11.39%, from N124.55 billion in 2017, the bank made N110.37 billion in 2018.
Meanwhile, expenses incurred to generate this level of income declined just as the value of interest earnings assets receded. In 2018, Union bank Plc expended N55.016 billion against N57.88 billion used to finance interest earnings assets in 2017.
That means it generated more from interest earnings assets than it expended. UBN Plc expended N44.17 on every N100 generated from its interest earnings assets in 2018 compared with N52.44 the bank incurred directly on every N100 interest earned in 2017.
Apart from its cost savings, management efforts targeted to reduce impairment charges gained traction. In fact, there was a write-back of N3.374 billion instead of the usual impairment charge; this reflated the income statement, somehow.
It thus strengthened 2018 results as net income after impairment charge on credit losses jerked up massively by 43%, from N41.06 billion in 2017 to N58.724 billion in 2018.
More business transactions from customers raised the bank net income from fees and commissions by 13.61% to about N11.6 billion from N10.207 billion in 2017.
But net trading income went down by 7.88%, it closed the year at N8.41 billion as against N9.129 billion in 2017. Then, other operating income declined by more than 51%, just as the bank non-interest related income shrank by 10.55% from N39.295 billion to N35.151 billion.
Claim against the bank income statement expanded in the period. Total operating expenses for the group spiked 12.46%, from N66.728 billion to N75.040 billion. The increase was due to improved welfare of the members of staff on one side and related overhead drivers on the other.
Read Also: Union Bank Shareholders Approve Dividend Payment
UBN pre-tax profit increased by 32.56% from N13.92 billion to N18.453 billion while profit after tax increased by 39% to N18.09 billion on the back of more than 60% reduction in tax obligations.
Would Union Bank Plc settle for M&A sooner or later?
