Union Bank set to excite market with N50bn Rights Issue

…we are ready to take it if price is right

Okey Onyenweaku

Union Bank of Nigeria (UBN), is making the headlines again. This time round for its vantage position in attracting foreign investors to take a higher stake in its equity.

Already Bob Diamond, former Chief Executive officer of Barclays Bank is using the company he co-founded, Atlas Mara limited to strategically increase its stake in the bank.

Atlas Mara has disclosed its plans to acquire an additional 13.4 percent shareholding in Union Bank from purchase of the existing equity of the Clermont Group for $55 million to raise its stake in the Lagos-based lender to 44.5 percent.

Interestingly, Union Bank has concluded plans to raise additional capital of N50 billion through a Rights Issue offer, where existing shareholders would be entitled to buy more of the banks shares in proportion to their existing shareholdings. However, the rights exercise when it is executed may have significant implications for existing shareholders.

The new Rights Issue offers will enable Union Bank expand its operations which have recently begun to gain noticeable attention. However, smaller  shareholders fear that the exercise which entails increasing the number of bank shares outstanding would dilute both future earnings and dividend per share.

This is at a time the bank is battling high Non-performing loans, which stood at 7.65 percent in Q1 2017 and relatively low liquidity ratio which is just 7 percent higher than the 30 percent regulatory minimum.

Although the lender’s gross earnings grew 24 percent to N33.8 billion during Q1 2017, its profit after tax (PAT) slumped 4 percent to N4.5 billion.

Atlas Mara bought the shares from the Asset Management Company of Nigeria (AMCON), a vehicle set up by the country’s central bank to absorb non-performing loans in the wake of the 2009 banking crisis.

There is strong belief that Union Bank will succeed in raising the N50billion it is seeking through a rights issue, because of the seeming readiness of its shareholders who (strangely) see the exercise as compensation from the lender for not paying dividend over the last 8 years.

Also making the rounds in corporate quarters is the argument that the bank has the capacity to raise any amount it decides to raise through rights because of the ownership structure which is largely in the hands of its core investors.

A lagos based analyst with Sterling Capital Markets limited, Mr. Sewa Wusu believes that before such a bank embarks on a venture of raising capital at this critical time of the Nigerian economy it would have secured solid consent from its owners.

‘’There is confidence in the bank. The management has stabilized the bank and turned it around from a negative shareholders funds to a reasonably positive position. The bank is now working to regain its market share given its leading position prior to her challenges a few years back’’, said Wusu.

What is the attraction

In an era of recession where it has been difficult for businesses to continue to exist as going concerns, UBN has bucked common boardroom trends by showing a capacity to take on the vigours of turning in strong quarterly performances. This has been despite a national GDP that has plunged from -2.01 per cent in the second quarter of 2016 to -2.24 per cent in the third quarter of the year and 1.5 per cent at year end and 0.52 per cent in the first quarter 2017.

Nevertheless, despite the weak economy, the bank has been able to gallop through the tide with a modest fourth quarter showing in profit.

The bank which has a vision of being Nigeria’s most reliable and trusted banking partner, parades total assets of N1.12 trillion and total equity of 251.3billion.  With a total customer of 3.2million and work force of 2,700 employers, Union Bank is still struggling to get back her numerous customers that migrated to other banks during the banking system crisis in 2009/2010 that nearly engulfed it.

This, however, resulted in growing its customer base on its mobile and online banking platforms by nearly 350% and about 50 per cent respectively, and brought in 73 per cent more new-to-bank customers during the year.

The bank’s momentum is strongly up beat again after the setback it experienced when it almost went distressed a few years back.

Since 2013, Union Bank has placed its head above water as it strategizes to retain its prior position as the ‘Big Strong and Reliable’ financial institution. When the challenging macro- economic drove some banks and companies into posting losses, Union Bank has survived.

For instance: the bank posted profit after tax of N3,951billion in 2012, it rose by 58 per cent to N6,262billion in 2013 and leapt again by 326 per cent to N26,685billion in 2014. Union Bank’s profit after tax plunged by 47 per cent to N14.204 billion in 2015 and dropped by 8.3 per cent in 2016.

Though not as fantastic as shareholders would have expected but they have been assured that the future looks brighter with the expected N50billion capital via Rights Issue.

However, Union Bank has not paid dividend since 2009 ( Seven years) when the CBN sacked its chief executive officer and that of 4 other banks for financial mis-management. The strain of that exercise has weighed down heavily on the second oldest bank in Nigeria which appears determined to make record successes in the future. In fact, many stakeholders have praised Emeka Emuwa, Union Bank’s Chief Executive officer for effort turning the bank around and for attraction huge attention from both internal and foreign investors.

In 2011, customers left the bank in droves after the bank was adjudged terminally ill by the apex bank, thus deposit went down by 33% while loan and advances bolted by 16%. This probably led to increased cost to income ratio which berthed at 183% while equity holders lost more than 420% of their investment.

Then the bank’s assets returned negatives, which invariably meant that it was better to have realized its non-current assets in the market safe for some un-priced goodwill.

Profit before tax had slipped into negative zone, with about N103 billion loss in the hole.

But after a restructuring program, its financials have become better and its business focus redefined. The bank is now having visibility and the brand confidence is stronger compared to past years.

The bank, in addition appears to appeal more to the youthful population now, than its traditional old generation character of rendering banking services. Its rebranding is also reflected in the banking halls and can favourably compare with new generation banks standards.

“I initially thought the gleeful look was randomized, aiming at giving false brand appeal. But, everywhere I go, Union Bank Plc is actually wearing a new look. The bank rebranding program is in no doubt a feat worth celebrating”, Mr. Jide Famodun associate at LSIntelligence team had told Business Hallmark.

The bank which currently has 16.9 billion shares in issue declared no dividend in 2015. Investors are not however worried but hopeful of a bigger thing to come. Union Global Partner limited holds 65 percent of equity investment, Atlas Mara 20.9 percent while diverse shareholders have 14.1 percent.

After 2009 CBN intervention, the bank emerged from the burden of toxic assets, poor governance as well as weak leadership etc. and began to chart a new and straight path to profitability devoid of funfair. The bank’s new brand exudes energy which reflects the ability of some of the individuals’ skills sets working with Mr. Emuwa.

In every respect, the bank strategic direction has been refined, and the brand revitalized but it has to contend with harsh economic environment and the tough rivalry in the industry.

“Union Bank’s restructuring, rebranding and reconnecting to the market has started yielding result. Good result for that matter! The bank’s leadership effort to re-focus was done professionally, no noise but the statement is clear to stakeholders”; analysts told Business Hallmark. The stallion has become lighter, and it could fly as well as run.

Performance in 2016

A deep look at UBN’s financial year end for 2016 shows it posted net interest income of N65 billion as against the N55.7 billion the previous year, while credit impairment charges jumped 67 per cent from N9.9 billion to N16.6 billion. Its operating expenses rose by seven per cent to N62 billion, as against N57.9 billion the previous year.

PBT was N15.7 billion, compared with N14.9 billion, just as profit after tax (PAT) grew by eight per cent from N14.3 billion to N15.4 billion in 2016.

The bank’s gross loans rode on the back of the impact of devaluation on foreign currency loans to hit N535.8 billion, up by 38 per cent from N388.8 billion in 2015.

While customers’ deposits grew by 11 per cent from N569.1 billion to N633.8 billion, shareholders’ funds rose by eight per cent to settle at N251.3 billion, from N233.5 billion in 2015. The bank ended the year with total assets of 1.124 trillion, showing an increase of 12 per cent, compared with N1.001 trillion in 2015.

Union Banks stock closed at N5.60 per share on Thursday June 22, 2017. It is expected that its Rights Issue will be lower than the current price.

Shareholders have expressed readiness to take up their rights given the positive outlook of bank which many expect may pay dividend next year.

Financial analysts believe the bank’s Rights Issue will be successful given that only Atlas Mara Limited and Union Global Partners Limited own 85.89 percent of its total shares.

President, Progressive Shareholders Association of Nigeria, Okezie Boniface still believes that Union Bank, having returned to profitability was going to reclaim its position as a leading bank in Nigeria.

“We are hoping that the bank will reward shareholders with dividend next year. So, we are waiting to pick up our Rights’’,

A Lagos based analyst, Mr. Mike Ezeh, Managing Director of Crane Securities limited, reckons that Union Bank should make the price of its rights attractive enough to woo investors who have waited patiently for seven years without dividend.

“The price of the rights cannot be more that N3.50 per share”, said Ezeh.

With Atlas Mara on a spending hunt to acquire more shares in Union Bank, the upside potential for the banks future earnings growth and capital appreciation look bright, or so investors believe.