United Bank for Africa plc
Emerged as a unified entity post-consolidation
United Bank for Africa plc (UBA) is the product of the merger of Nigeria’s third and fifth largest banks, namely the old UBA and the erstwhile Standard Trust Bank plc (STB), respectively, and a subsequent acquisition of the erstwhile Continental Trust Bank Limited (CTB).
Strong geographical presence present huge potentials
The UBA Group presently offers universal banking to more than 7.2 million customers across 700 business offices in 19 African countries. With presence in New York, London and Paris. As a result, the Group is well positioned to provide banking services to customers conducting business within these countries and to promote trade and investment flows across the region. The Group’s geographic spread diversifies and protects its earnings stream against country-specific adverse events.
New business structure to meet regulatory requirement
In line with CBN’s new guidelines for commercial banks in Nigeria, UBA has adopted a monoline commercial banking business model, having divested its interests in the non-commercial banking businesses. The monoline commercial banking business model involves UBA plc remaining the parent company for all its commercial banking activities in Nigeria, Africa and the rest of the world. It will also be the parent company for UBA Pension Custodian Limited, UBA Capital (UK) and UBA FX, Mart Limited.
We recommend a ‘Buy’
Despite the potential pressure on profits, we project gross earnings of N292.46 billion for the full-year 2014. We project a net income of N45.67 billion, leading to a forward EPS of 1.38 and forward book value per share of 8.15. We also calculated a simple industry average PE Ratio and a capitalisation based weighted average price multiples to arrive at an industry PE Ratio of 7.01x and 8.19x, respectively, and price-to-book value of 1.07x and 1.51x. Using price multiples, we estimate intrinsic values ranging from N8.72 to N12.34, an average of which leads to a 9-month target price of N10.5. We therefore recommend a Buy.
Union Bank of Nigeria plc
The erstwhile colonial bank turned Union Bank
Union Bank of Nigeria plc (Union Bank) was founded as a Colonial Bank in 1917, with its pioneer branch in the then colonial capital of Lagos, prior to Barclays Bank’s take over in 1925. The bank was listed on the Nigerian Stock Exchange (NSE) in 1971. Following the forced nationalisation of foreign owned companies in Nigeria in 1977, Barclays Bank International disposed its 40 percent holding to Nigerians.
Operates in Nigeria and beyond
Union Bank is a prominent player in the country’s banking landscape with standing legacy relationships with big multinational corporations and government establishments. The bank has solid platforms to render endless banking services to the growing banking public, leveraging its increasing innovative commercial and personal banking products.
Lower expenses help profit in 2013
Although the bank only recorded a growth of 4 percent in gross earnings for the full-year 2013, a double-digit decline of 17.87 percent in operating expenses resulted in a growth of 217 percent in net income to N3.84 billion from N1.19 billion in December 2012. However, the first quarter 2014 results are not as interesting as the bank reported a decline of 11.41 percent in gross earnings to N26.03 billion in March 2014, from N29.39 billion in March 2013. Net income also declined by 36.34 percent to N4.96 billion from N7.74 billion over the period.
Hold recommendation
Using a discounted cashflow method of valuation and assuming a long-term growth rate of 10 percent from 2016, we arrive at a fair value of N9.56 for each share of Union Bank plc. We therefore recommend a Hold with an expectation of an upgrade if future growth rate surpasses projection.
