16 January 2013

Nigeria: UBA - Beyond the Monoline Structure

Last Friday, the restructuring of United Bank for Africa (UBA) Plc was concluded, following the listing of two separate entities carved out of the banking group. Following the decision of the Central Bank of Nigeria (CBN) to end universal banking model in 2010, banks were required to adopt a new structure.

The board of UBA opted for a commercial banking (monoline)structure, which led to the divestment from all the group's non-commercial banking business to be held as separate companies by UBA shareholders.

Under the new arrangement, the divested non-commercial banking businesses (except Africa Prudential Registrars and Afriland Properties that will be held directly by shareholders) were consolidated within UBA Capital Plc.

The restructuring, which was approved by the shareholders last December, resulted in the emergence of four separate stand-alone companies. The companies include: UBA Plc, UBA Capital Plc, African Prudential Registrars Plc and Afriland Properties Plc.

UBA Plc comprises the Nigeria bank, 18 African banking subsidiaries, UBA Pension Custodians, UBA Forex Markets and UBA Capital Europe.

UBA Capital Plc is made up of UBA Asset Management; UBA Trustees; UBA Metropolitan Insurance; UBA Stockbrokers; UBA Insurance Brokers and UBA Nominees.

African Prudential Registrars Plc is into share registration business while Afriland Properties Plc is into properties real estate related businesses.

Implication for Shareholders

Listing the benefits of the new structure, Chairman of the bank, Israel Ogbue, said it would enhance UBA's corporate governance practises because there would be dedicated board and management focus on the core business of commercial banking.

The structure, he added, would ensure the protection of shareholders, explaining that in designing the new structure, care was taken to ensure that the potential concerns of all stakeholders were addressed, especially shareholders of UBA Plc

"The proposed restructuring of the Group will ensure significant enhancement of portfolio optimisation, coordination and reduction of risks and duplications across the different businesses. Shareholders will remain the end beneficiaries of inherent/future value existing in viable subsidiaries that operate in industries with strong underlying fundamentals and that have demonstrated sustainable growth and profitability profiles," he declared.

On his part, the Group Managing Director/Chief Executive Officer of the bank, Phillip Oduoza, said the board adopted a commercial banking structure that would lead to more value for shareholders.

"Capital market valuations of post-restructure entities will likely reveal an unlocking of value as investors will gain a deeper understanding of spun off entities currently within the UBA Group. We believe that this will drive operational efficiency, support our growth strategies and be a significant driver of value to all stakeholders," he said.

Last Friday, African Prudential Registrars Plc and UBA Capital Plc were listed on the NSE as separate companies. While one billion shares of African Prudential Registrars Plc were listed at N1.59 per share, four billion shares of UBA Capital got listed at N1.16 per share.

Both companies now have separate boards of directors with Mrs. Eniola Fadayomi as the Chairman of African Prudential Registrars Plc while Mr. Peter Ashade, remains the managing director/chief executive officer.

On the other hand, Angela Aneke is the Chairman of UBA Capital, while Mr. Rasheed Olaoluwa is the chief executive officer of the company.

However, shareholders of UBA Plc have one share in African Prudential Registrars Plc and four shares in UBA Capital for every 33 shares held in the bank.

Analysts' Views

Analysts at Renaissance Capital said the impact of the restructuring on UBA shareholders is boosted by the dominance of the banking assets of the firm. They therefore believe investors should stick more to the banking arm.

"The question, we think, is what shareholders should do with the new entities. We are not convinced the UBA Capital and Registrars business should trade at the same multiple as the commercial banking assets. These businesses are small, and additionally it is unclear, in our opinion, whether they have viable competitive advantages as standalone businesses," they said.

Financial Performance of UBA

Looking at the historic performance of the bank, shareholders should be assured of good future performance even without the non-banking subsidiaries. In terms revenue, the banking arm contributed 96 per cent in 2011, while the remaining arms contributed four per cent. The bank ended 2011 with gross earnings of N184.833 billion, with banking accounting for N178.709 billion.

In terms of before tax and exceptional items, banking accounted for N4.563 billion (54 per cent) out of the N8.355 billion profit. Although the banking arm also made the group to record a loss of N13 billion in 2011 due to clean-up exercise, it is expected that kind of provisioning would not recur in the nearest future.

A further analysis of the gross earnings of the bank indicated that substantial part came from the core banking business of the organisation.

For instance, N121.42 billion of the income was generated from interest income, representing 65 per cent of the N184.5 billion recorded for the year.

Loans and advances accounted for the highest income representing 53 per cent followed by income generated from treasury bills and investment securities which accounted for 41.4 per cent.

In terms of adequate capitalisation to carry on its commercial banking business with subsidiaries in 18 African countries, UBA had paid-up share capital of UBA of N16.17 billion in December 2011, which was an increase of 25 per cent above the N12.93 billion level of 2010. Although the shareholders' funds of the bank declined by 5.2 per cent in 2011 from N179 billion to N170 billion, it stood above the minimum capital requirement of N25 billion by the CBN for banks in the Nigerian banking industry and above the N50 billion international banks that will have office outside Nigeria.

Also, capital adequacy ratio(CAR) of UBA stood at 21 per cent in 2011(17 per cent in 2010) and well above the 10 per cent stipulated by the apex regulator. The bank's CAR improved to 23.9 per cent by the close of third quarter of 2012.

The bank posted an impressive Q3 for 2012, assuring investors of significant cash dividends at the end of 2012 financial year unlike 2011. Profit-before-tax of N44.86 billion in Q3 represented a 376.2 per cent growth above N9.42 billion in the corresponding period of 2011.

Total assets stood at N2.162 trillion in Q3 of 2012. Total amount of deposits from customers was N1.674 trillion, an increase of 11.2 per cent from N1.505 trillion in the corresponding period of Q3, 2011.

Commenting on the Q3 results, Oduoza had said: "We continue to pursue our unique strategy of maintaining diversified business in terms of geography and earnings mix. In Nigeria, we recorded an impressive growth in deposits and still kept funding costs relatively low despite a spike in interest rates during the third quarter. There are increased contributions across key financial parameters in our pan-African business."

No doubt investors have reacted positively to the new structure as high demand pushed the stock price to a five month high last week. The stock rose by 29 per cent in five from N4.56 to N5.92 per share.

Still Work to be Done

However, considering the performance trend of the UBA in the past five years, the management needs to work harder to improve in some of its areas especially now that it has to a focus only on banking business.

According to analysts, there was need to grow the gross earning back to the 2009 levels when it recorded N220 billion.Net operating income also needs to be improved upon considering the fact it declined from N165.547 billion in 2009 to N113.996 billion in 2010 and N100.645 billion in 2012.

The commendable efforts in reducing operating expenses from N111 billion in 2009 to N82.4 billion should be maintained. The bank's management should work harder to ensure the operating expenses are brought down below N82.97 billion recorded in 2011.

Realising the fact that the cheapest deposits are savings deposits, UBA should endeavour to work towards getting more savings deposits. In 2011 for instance, out of the N1.445 trillion deposit liabilities, savings deposits accounted for 17 per cent, while current deposits accounted for 44.5 per cent.

It is believe that only few of the 18 subsidiaries of the bank are currently making profits, it is pertinent for the bank to make that other branches begin to turn in profits and those considered not viable should be shut down so that the resources could be channeled towards profitable businesses.

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