Nigeria: United Bank for Africa’s diversification protects it from risks, say analysts

By David Whitehouse
Posted on Tuesday, 7 December 2021 13:33

UBA chairman Tony Elumelu in Paris on 30 October 2019. Bruno Levy for JA

Reduced dependence on the Nigerian market and a share price valuation that trails peers mean that United Bank for Africa (UBA) shares may offer value, analysts say.

Apathy towards UBA shares is “surprising” as the firm reported the highest nine-month growth in earnings per share (EPS) among banks covered by Chapel Hill Denham, analyst Damilola Olupona writes in a research note.

UBA is Nigeria’s fourth-largest bank, holding 15% of the assets in the domestic banking system at the end of 2020. It bills itself as “Africa’s Global bank” and is present in 20 countries in the continent, with an overall total of 21m customers. Chapel Hill Denham estimates that the bank’s share of pre-tax profit earned from the rest of Africa has increased to 69.2% from 59.1% in 2020. Reluctance to increase Nigerian lending due to increased macroeconomic risk is dampening the Nigerian earnings contribution, the research says.

The shares trade at 0.4 times book value, below both the five-year average of 0.5 times and the average for Nigerian first-tier banks of 0.6 times, Olupona writes. Chapel Hill Denham has a target price of 11.50 naira on the shares, implying upside of 52% from the current 7.55.

With a return on assets (ROA) of 19.2% in the first nine months, the bank is on track to record its highest full-year ROA in five years, the research says. Net fee and commission income increased by 20.8% in the first nine months, helped by a 50.4% increase in electronic banking income as UBA promoted its mobile banking channels.

  • Nine-month commissions on transactional services increased by 33%, driven by trade transactions outside Nigeria.
  • Transactions outside the country now account for about 46% of total trade transactions income, Chapel Hill Denham says.
  • The research forecasts average annual fee and commission growth of 16.1% to 2025.

The underperformance of the shares, Olupona writes, may have been triggered by the bank’s “unimpressive” dividend pay-out of in 2020. Last year, the bank cut its dividend by 35% even as profit climbed 28%.  That left the dividend yield at the current share price as 6.8%, well below both inflation and the yield of T-bills.

Diversification risks

Foreign expansion, of course, brings its own risks – especially into African markets that are likely to be correlated with each other. Ikechukwu Iheanacho, managing director at Redwood Asset Management in Lagos, agrees that UBA is attractive in terms of price.

But, he says, a breakdown of return on equity from the various geographies would be needed to judge the long-term viability of non-Nigerian operations.

“Nigeria is the most populous country, and has the strongest consumer case for scalable businesses,” Iheanacho says. “So in that sense, there is a fair amount of risk investments made in smaller countries [which] would generate poorer returns relative to cash invested over the medium to long term.”

Others point to the bank’s long-term track record. UBA’s profitability has been “consistently strong through the cycle”, according to research from Mahin Dissanayake, senior credit analyst in the financial institutions group at Fitch in London. “We believe UBA’s ability to capitalise on business and trade flows and attract deposits across the continent is a competitive advantage relative to the bank’s peer group.”

  • The bank has lower oil and gas exposure than peers at 13% of net loans compared with the sector average of 30%, according to Fitch.
  • Still, Dissanayake writes, UBA is “not immune”’ to foreign-currency shortages in Nigeria and has liquidity gaps at shorter borrowing maturities.
  • That means it depends on the stability of domiciliary deposits and loan repayments in foreign currency to meet its own debt obligations.
  • Fitch has a long-term issuer default rating of ‘B’ of UBA, with a stable outlook.

Bottom line

Investors may want to see higher dividend pay-outs before being convinced on UBA.

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