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Published On: Sun, Apr 8th, 2018

SPECIAL REPORT: The UBA Spreadsheet…challenging for a piece of the global market  



 United Bank for Africa (UBA) has come a long way from its iconic ‘wise men bank with UBA’ advert days in the 1990’s, but its wise men reference resonates with a younger generation of millennials as the bank  steps onto the global stage with greater determination to diversify its corporate risk assets and grow its intercontinental business credentials. 

The banks recent 2017 results shows that a third of the banks bottom line has come from its non-Nigerian operations making it the country’s most successful continental banking franchise. The bank posted a gross earnings figure of N461.6billion or 20.3 per cent above the N383.6 billion recorded in 2016. Given that half of the year 2017 was marked by weak domestic growth, high interest rates (which still persists) and high domestic inflation rate (officially put at 13.1 per cent), UBA’s earnings growth bucked an overall dreary economic outlook. Growth for 2017 was estimated at a mellow 1.92 per cent or about 5 per cent lower than that of Neighboring Ghana.

The bank’s net interest income grew from N165.2 billion in 2016 to N207.6 billion in 2017 representing a 25.7 per cent rise or what is the same as the money lender being able to increase revenue in its core business by as much as a quarter of a 100 per cent of the prior year’s income. This becomes all the more impressive when it is realized that the Nigerian economy itself grew by a bloodletting -0.50 per cent in the first quarter, a niggardly 0.72 per cent in the second quarter and a happier 1.4 per cent by the third quarter. The fourth quarter saw grow duck just under 2 per cent, which though encouraging was still below the country’s population growth of 2.6 per cent.

In other words UBA, like other banks, had to sail through difficult waters last year as recession prevented their growth in deposits and lending causing a thinning out of net interest margins.  Nevertheless, UBA’s net interest income growth showed that the bank was capable of sourcing well priced deposits to fund risk assets; an uncommon feat at the time, as high interest rates and heavy public sector borrowing swiftly kicked dents into conventional non-treasury bill markets across the board.  Analysts reviewing UBA’s performance against industry average note that the bank made a powerful comeback against secular economic decline. ‘UBA was able to grow net interest income in unusual circumstances’, says investment manager Segun Atere, former senior analyst at Apel Capital and Trust. According to Atere, ‘With money market activities shrinking as they deferred to high public sector borrowings at double digit coupon rates, finding decent spreads between deposit and loan rates was a difficult art to master. Most banks just simply took advantage of exchange rate conversion gains and a stunning 16 to 18 per cent coupon on risk free public sector debt instruments that prevailed at the time’, he says.

Although UBA did a stunning job of pulling up its net interest income, overall profitability growth has, nevertheless, been a bit slow. A major challenge for profitability across the industry has been the challenge of relatively high cost –to-income ratios that reflect higher operating costs that relate to power, maintenance of fixed assets, acquisition of technology (which can generally be amortized over several years) and marketing expenses. However, direct loan financing costs seem to have been kept in check and slid downwards in the last three years. Says Atere, ‘banks seem to be generally getting the hang of decent  and sustained lending margins, the real elephant in the room is rising operating expenses that generally reflect the challenges that come with an economy with weak infrastructure’.

Cranking up the profit machine

The bank was able to grow its profit before tax and amortization and depreciation from N90.6 billion in 2016 to N105.3 billion in 2017 or by slightly under one fifth of a hundred per cent. This appears good, but when considered as a per cent of gross earnings margins fell from 24 per cent in 2016 to 23 per cent in 2017. Besides, from N72.2billion in 2016 profit after tax climbed to N78.6 billion in 2017 or a modest 8.8 per cent.  Bank analysts note that crunching out profits in the midst of recession was a niggling challenge as financing opportunities seemed to have shrunk into tight little boxes of limited business benefits.  Oluwarinu Olawale of Capital Express Securities notes that, ‘several banks got caught pulling out of high risk positions in a flight to safety; this meant heavy investments in treasury bills and lower exposure to manufacturing and retailing sectors of the economy. Suddenly government became not only Goliath but King Kong’.

The bank’s net interest margin dipped from 7.1 per cent in 2016 to 7.0 per cent in 2017 but was still well ahead of the 6.7 per cent posted in 2015, suggesting again that the underlying profitability of the bank is stable. Another bright spot to the bank’s operations is that it has kept its cost of funds down to a comfortable ratio. Cost of funds toppled from 4 per cent in 2015 to 3.7 per cent in both 2016 and 2017. This consolidates the banks leadership ranking among the top five strategically important local money centre banks (SIB’s).


The asset quality conundrum

Bank impairment figures for 2017 have been rather difficult for strategically important financial institutions, indeed previous jumbo-sized loans to the oil and gas sector, telecommunications and the newly privatized energy sector kicked a large dent in the quality of bank risk assets as several companies in these sectors proved to be duds as their short term borrowings soon turned evergreen and required massive restructuring.  UBA’s loan impairment charges rose from N27.7 billion in 2016 to N32.9 billion in 2017, representing a growth of 21 per cent which is troubling since loans and advances to customers over the period grew by only 9.6 per cent from N1.51 trillion in 2016 to N1.65 trillion in 2017. Apparently the quality of the banks risk assets have wobbled a little. However, a sterling dimension to the growth in the bank’s loan assets is that more of the assets are being structured in fast growing European and African economies with less fragile economic situation. This should mean that the quality of UBA’s loans and advances in the course of 2018 should rise as the bank’s nonperforming loans ratio declines. The bank is equally becoming more equity- dependent for the funding of assets as its equity financing contribution rose from 11.2 per cent in 2015 to 12.7 per cent in 2016 and 13 per cent in 2017, bought funs has, nevertheless, also increased growing from 7.4 per cent in 2015 to 9.9 per cent in 2016 and 14 per cent last year. The balance in the rise of the bank’s debt and equity should stabilize shareholder return by preventing an increase in equity from diluting return on equity (ROE) calculations.

The forward thrust

Going forward in 2018 analysts believe that UBA’s spike in NPL’s will slither down as recovery from previously toxic oil sector loans and advances give the bank a breather from slow moving asset recovery. If international oil prices stay above $60 per barrel in the course of the year, Nigeria’s upstream oil sector should be able to conveniently meet domestic credit obligations in a smooth manner and perhaps allow for renegotiation of previously sticky loan obligations. This would help the bank scale bank its impairment provisions and equally improve its liquidity and bottom line. UBA’s cross border commercial foray has been a brilliant strategic move of diversifying away from Nigeria’s credit risk challenges and creating a stronger global earnings buffer. Hurtling forward through the new year, analysts’ seem to have a consensus of opinion that the wise mans bank will prove a formidable continental showpiece of strategy, vision and hard work over the next three quarters as the banks non-Nigerian earnings continue to  rise and its delinquent loan assets take a well-timed tumble.



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