February 20, 2012 / 1552pm / Bismark Rewane, FDC
In the banking space, whilst investors await the results of all banks for year-end 2011, Bismark Rewane looks at the implications of the UBA profit warning on the share price and stock market and the future of the competitive repositioning of this Pan-African bank.
UBA - A light at the middle of the tunnel
UBA, the offspring of Banque National de Paris, the large and sprawling African banking franchise shocked the Nigerian Capital markets with a profit warning on February 9, 2012.
Tongues had been wagging about the fortunes of banks in general, but the market was not expecting a bank with the pedigree of UBA to be hit so severely by the economic downturn. The Bank share price had been butchered in 2011 losing 71.69% compared to a market decline of 16.31% during the period. The share price dipped to N1.80 bringing its price to book value to 0.42x, making it the cheapest in the Nigerian banking world. The bad news was however tempered by the simultaneous release of the Q1 outlook, which contained an earning growth, forecast of 46.60% and an after tax profit spike of 210%.
Asset managers, investors and analysts held mixed views about the UBA story. This is because it was as unusual as it was unexpected. Many were surprised and thus sold the stock by selling down their UBA positions. UBA stock was on the most actively traded list for most of January and February.
What comes across clearly is that technical factors are weighing down more on UBA stock than fundamental considerations.
The company‘s profitability has also been impaired by the Zenon and Capital Oil hits; Zenon loans sold to AMCON by UBA was N36bn. The Bank could have opted for an extended write-off of bad loans of 3 years, but chose to take a one-time hair cut.
The decision to brace up to its loan portfolio problems has pushed its NPLs down to 3.9%. What is more important though, is what happens to UBA in 2012 and beyond. UBA is systemically significant to the Nigerian economy and the SSA region. UBA has representation and offices in 18 African countries in addition to the USA , UK and the European Union.
The UBA group had unfolded a very bold and ambitious strategic intent of being a dominant Nigerian Bank with 40% market share and a leading African Financial institution under its aggressive former CEO.
Whilst still pursuing this vision, it is making very painful major adjustments. It has embarked on a ruthless cost reduction and a resource optimization programme.
Staff have been cut, non-core assets are being pruned, and customers who give the bank a less than optimal ROA are being jettisoned. Currently UBA has a cost to income ratio of 75.2%, compared to GTBank of 45.5%, FBN of 65.5% and Zenith of 64.2%.
UBA suspended its Rights Issue in the midst of the profit warning drama. It had planned to bulk up on capital to bring its capital adequacy ratio to an impressive 18%. This capital raising was not merely for cosmetic purposes but to better position it to derive scale economies from its vast branch network and African foot-prints.
UBA‘s current position therefore looks like a real test for investors who have deep pockets and guts.
The market is awaiting, in nervous anticipation, what will happen at UBA in 2012.
Optimistic analysts are saying that if anticipated profits could reach N60bn on a share price of N2.00, UBA could therefore represent a jackpot to the discerning and gutsy investor.