UBA: Focus on Sustainable Growth


With 40 per cent contribution from its other African subsidiaries in 2018, with a strategy to focus on sustainable growth, shareholders of the United Bank for Africa Plc are assured of a robust future, writes Goddy Egene


United Bank for Africa (UBA) Plc decision to operate in many other African countries some years was seen as a big risk given the experience of some financial institutions. Considering the challenging operating environment across the continent, going beyond Nigeria to other market has not really yielded the desired fruits for many businesses that took that route.

Some banks, for instance, had to either close down or reduce their operations in other African countries. However, with a strong vision and well thought out strategy, UBA Plc decided to spread its operations to other countries. And going by the audited results of the bank for the year ended December 31, 2018, UBA reaping the benefits of that strategic decision.

Besides, the bank’s Nigerian business is benefiting from its product and operational focus, gaining market share. The bank’s increasing penetration of its retail offerings is reassuring as it aligns with its strategy of focusing on sustainable growth.

Financial results

The bank posted gross earnings of N494 billion for the year ended December 31, 2018, showing a growth of 7.0 per cent compared to N461.6 billion recorded in   2017.

Net interest income stood at N205.646 billion in 2018, compared with N207.632 billion in 2017, while fees and commission income rose to N93.997 billion, from N82.937 billion the previous year. Impairment charges declined from N32.895 billion to N4.529 billion in 2018.

Profit before tax (PBT)stood at N106.8 billion, a 2.4 per cent growth, compared to N104.2 billion in 2017 financial year.  Profit After Tax rose by 1.4 percent to N78.6 billion, compared to N77.5 billion recorded in 2017. Due to lower foreign exchange trading income, operating expenses grew by 4.1 per cent to N197.3 billion, compared to N189.7 billion in 2017

Shareholders are to receive a final dividend of 65 kobo per share, bringing total dividend for the year to 85 kobo, having already paid an interim dividend of 20 kobo. The bank’s total assets grew by 19.7 per cent to an unprecedented N4.9 trillion for the year under review.  The bank’s total assets also grew significantly by 19.7 per cent to N4.9 trillion.

According to financial analysts, the results largely demonstrates the benefits of the group’s pan-African footprints with continued growth in market share in key countries of operation across Africa. They said the contributions of subsidiaries ex-Nigeria, which was    40 per cent, confirmed the strong footing of the group’s franchise in Africa.

Bank Explains Performance

Commenting on the result, the Group Managing Director/CEO, UBA, Kennedy Uzoka said the year 2018 was important for the group, as it gained further market share in many countries of operation.

“Defying the relatively weak economic growth in Africa, earnings were positive and we grew our balance sheet by 20 per cent, driven by the 23 per cent growth in our deposit funding. In a period of economic uncertainty, we have focused on retail deposit mobilization, with exciting results. We recorded a 48 per cent year-on-year growth in retail deposits and improved our CASA ratio to 77 per cent, optimizing our funding mix, which will enhance our net interest margin (NIM), over the medium term,” Uzoka said.

He expressed confident that the bank’s performance would be even stronger in the years ahead and shareholders would enjoy even greater dividends, as the group is well positioned to take advantage of imminent fiscal reforms across many economies in Africa.

Uzoka added:  “Our operations in the United Kingdom now offer end-to-end trade, treasury, structured finance, wholesale deposit taking and ancillary services. With this development, we are better positioned to fulfill our aspiration of deepening trade and capital flows between Europe and Africa. We are also pleased with the market acceptance of our new operation in Mali.”

Having said this, I am excited by the profitability of our ex-Nigeria subsidiaries, which now contributes an impressive 40 percent earnings to the Group. At the moment, our Nigerian business is benefiting from our product and operational focus, gaining market share – most importantly, the increasing penetration of our retail offerings is reassuring, as this fundamental progress aligns with our strategy of focusing on sustainable growth.”

In his comment, the Group Chief Financial Officer, Ugo Nwaghodoh said that the improving mix of the bank’s funding base and asset pricing, reinforce a positive outlook on net interest margin(NIM) and broader balance sheet efficiency.

“Whilst considerable investment in people, digital transformation and channel enhancement masked cost efficiency gains within the year, with cost-to-income ratio at 64 percent, we are convinced that our diligent execution of new initiatives will ensure the reduction of cost to income ratio(CIR) towards our medium-term target.

“Our balance sheet is being positioned to take full advantage of market swings and our strong 25 percent capital adequacy ratio provides headroom for growth, even under a BASEL III scenario. As it stands, UBA has started the year on a good note and should sustain the momentum, as we work towards improving our Return on Average Equity (RoAE),” Nwaghodoh said.


Analysts’ assessment

Looking at the results of UBA, analysts at Afrinvest (West Africa) said gross earnings expanded by seven per cent to N494 billion, which was lower than their forecast of 11.4 per cent.

“The expansion was driven by an 11.4 per cent growth in interest income to N362.9 billion, in line with our estimate of 12.1 per cent. Interest income was supported by a strong 35.4 per cent increase in income from investment securities to N156.5 billion while interest income from loans contracted 3.0 per cent to N198.6 billion despite a moderate expansion in the loan book by 3.6 per cent.

“Nonetheless, the group compares well with other tier-1 banks which mostly recorded a contraction in interest income due to a moderation in yields in first half(H1) of 2018 and poor risk asset growth due to the fragile macroeconomic environment,” they said.

The analysts noted that the group’s operating income sharply moderated by 5.6 per cent to N308.2 billion following the decline in non-interest income, while they saw a 4.6 per cent expansion in operating expenses to N197.3 billion which management attributed to statutory costs upon an increase in the size of the balance sheet.

“This pushed cost to income ratio (ex impairment charges) to 64.0 per cent from 57.7 per cent in the prior year and signals a marked deterioration in efficiency, considering the bank’s medium-term target of 50 per cent.  Hence, profit-before-tax increased marginally by 2.4 per cent to N106.8 billion while profit-after-tax rose by a paltry to N78.6 billion,” they said.

Assessing further, Afrinvest said non-performing loans ratio showed improvement, declining to 6.5 per cent from 6.7 per cent in the previous year. Lower impairment charges due to improving asset quality also translated to a marked reduction in the group’s cost of risk to 0.3 per cent.

“We expect the cost of risk to be contained at around 1.0 per cent in the short-term, due to management’s guidance as well as broad-based improvement in the economy.

“Although the group took a hit of N48.0 billion due to IFRS 9 implementation, which affected retained earnings, capital adequacy improved to 24.0 per cent from 22.0 per cent in the previous year. Liquidity ratio at 50.0 per cent remained well above regulatory threshold of 30.0 per cent and 2017 levels of 40 per cent, reflecting the reduced scope for risk asset creation during the year.

“We note that the loan to deposit ratio of the bank moderated to 51 per cent in 2018 from 61 per cent in the prior period, mainly due to slow loan growth and a rapid expansion in deposits by 22.9 per cent,” they analysts said.

Looking ahead, the analysts said the Group is well positioned to expand earnings by 12.8 percent to N525.1 billion  in 2019, noting that  loan growth is expected to expand by double-digit based on management’s guidance while investment securities would remain attractive.

“Non-interest income is expected to return to positive territory, as the group reaps gains from prior investment and efforts in Q4:2018. We also expect improved cost efficiency as cost of risk is contained around 1.0 per cent and cost to income around 60 per cent.  We used a blend of absolute valuation (Gordon’s growth Net  asset value (NAV) residual income and dividend discount models) to arrive at a target price of N13.09 per cent share, up from N12.90. This translates to an upside potential of 67.8 per cent. Hence we maintain our rating on UBA at “Buy,” they said.