Investment Analysis Report: United Bank for Africa (UBA) Plc

Francis Kyei, Senior Market Analyst

Introduction

This report is our brief analysis of the status of United Bank for Africa (UBA) Plc. We have analysed the company’s financials over the past five years, its credit ratings, and the current market and economic conditions to help investors considering the company’s Eurobond in 2023 make informed decisions.

Established in 1949 in Lagos, Nigeria as the British & French Bank, UBA has expanded beyond the borders of Nigeria. The bank operates in Benin, Burkina Faso, Cameroun, Congo Brazzaville, Congo DRC, Cote d’lvoire, Gabon, Ghana, Guinea, Kenya, Liberia, Mali, Mozambique, Nigeria, Senegal, Sierra Leone, Tanzania, Tchad, Uganda, and Zambia.

UBA also operates in the United Kingdom, France, and the United Arab Emirates (UAE) with over 27 million customers globally. The bank prides itself as the only sub-Saharan African (SSA) bank with a deposit-taking license in the United States.

Outlook for 2023

As the global economy slows down, tighter financial conditions and a dramatic increase in inflation have worsened the economic situation in the SSA region. Economic growth slowed sharply in the region in 2022, amidst rising food and energy prices. Public debt has reached levels not seen in decades.

Authorities have tightened monetary policies in response to the increased inflation. Governments are struggling to address the growing social needs, rising imbalances, and depleted buffers.

Bond investors also suffered the challenge posed by the strong USD in 2022. Barclays Outlook 2023 expects this year to bring similar challenges, as some emerging markets still have weak currencies. Lower dollar reserves, less headroom to counteract any further dollar-imported inflation, and limited fiscal leeway are likely to pose a risk in 2023. (Barclays Outlook 2023: A Rebalancing Act)

However, Barclays predicts 2023 to be a turning point for emerging and developing markets. The bank believes markets can stage a comeback if the US policy rates peak and if the market starts to lower rates. The timing may coincide with higher bond spreads, which will open opportunities.

According to S&P, despite the challenges posed by tightening financial conditions, the strong US dollar, and slower growth in China, banks with strong balance sheets can buffer headwinds, with solid capitalization and sound asset quality (S&P Global Bank Outlook 2023)

Fitch’s African Banks Outlook 2023 adds that rising interest rates and satisfactory loan growth (above GDP growth) will be supportive of banks’ revenue generation and profitability and mitigate moderate rises in credit costs in Africa.

UBA’s financial summary (2018 to mid-2022)

UBA has sustained a strong performance over the past five years, growing its profit margins by an average of 10% per annum. The company posted a profit after tax of ₦78,607 million (approx. US$175 million) in 2018, and ₦89,089 million (approx. US$199 million) in 2019. Notwithstanding the socioeconomic impact of the COVID-19 pandemic in 2020, the company posted a profit of ₦109,162 million (approx. US$244 million), an increase over the figure recorded the year before.

In 2021 UBA recorded a profit of ₦118,678 million (approx. US$265 million) while the first half of 2022 recorded ₦70,334 million (approx. US$157 million)

UBA has continuously maintained a strong balance sheet over the past five years. From ₦4,869,738 million (approx. US$10.8 billion) in 2018, the bank increased its total assets to ₦5,604,052 million (approx. US$12.5 billion) and ₦7,693,377 million (approx. US$17 billion) in 2019 and 2020 respectively. UBA’s total asset in 2021 was ₦8,541,318 million (approx. US$19 billion) and, in the first quarter of 2022, increased to ₦8,998,954 million (approx. US$20 billion)

UBA’s financial statement for the first half of 2022 reported a cash deposit of ₦6,729,923 million (approx. US$15 billion) and net loans of ₦2,950,557 million (approx. US$6.5 billion). The bank’s capital adequacy ratio is 25.1% with a non-performing loan ratio of 3.3% indicating an improvement in the bank’s asset quality despite growth in its loan books. The bank’s cost of risk is 0.8%

Note: All currencies were converted from the naira to the USD. The conversion was made based on the naira/USD rates on Thursday, December 29, 2022 (US$1 to ₦441)

UBA Plc Credit Ratings

Credit rating is the assessment of an entity’s ability to meet its financial commitments. Fitch has maintained UBA Plc’s Credit Ratings and Viability Ratings between B+ and B- from 2018 to 2022. This is an indication that the bank can meet its financial commitments and has a margin of safety, although material risks exist. Fitch’s current rating of UBA is B- (as of November 21, 2022)

S&P also rates UBA Plc’s long-term issuer with a B- and short-term issuer, a B with a stable outlook. The rating company believes UBA has the capacity to meet its financial commitments. The B rating also means that adverse business, financial or economic conditions can impair the firm’s capacity or willingness to meet its financial obligation.

Future of UBA

Chaired by Nigerian entrepreneur and Philanthropist, Tony Elumelu, UBA hopes to become a dominant leader in all the markets and geographies in which it operates. The company plans to be the payment rail for funds and trade flows in and out of Africa. UBA aims to be Africa’s financial gateway to the world

With the start of the African Continental Free Trade Area (AfCFTA), UBA plans to leverage its presence in 20 African countries to facilitate intra-African trade by offering trade loans and financing, letters of credit refinancing, trade advisory services, access to international banks for cross border trade, etc.

UBA has recently introduced a product called the UBA Connect which aims to encourage intra-African transfers. The idea is to enable UBA customers traveling within Africa to easily access their funds in local currencies across 20 African countries.

Conclusion

UBA’s growth over the past five years has been impressive. The company’s unaudited financial results for the third quarter ended September 30, 2022, recorded impressive growth across all its major indices. Specifically, the bank’s Gross Earnings rose to $1.4billion, up from $1.13billion recorded in September 2021, while operating income also grew by 27.3% to close at $951.9million as of September 2022, up from $769.6million recorded a year before. 

UBA continues to maintain a strong balance sheet and has benefitted largely from its technology-led initiatives targeted at improving customer experience over the past few years. UBA shareholders’ fund remains strong at $1.85 billion up from $1.84 billion recorded in December 2021, reflecting the bank’s strong capacity for internal capital generation and growth. 

Although the International Monetary Fund (IMF) predicts a tough year in 2023, we expect UBA to continue its growth trajectory because the company has shown reliance in the face of a heightened global risk environment. The company is also fairly rated by credit rating agencies, meaning the risk of default is low.

Rising global inflation and interest rates have pushed down sovereign and corporate SSA Eurobond prices. However, investors seeking to diversify their portfolios in 2023 can consider UBA’s five-year bond which matures in November 2026.

Disclaimer: This article has been prepared by GFX Prime, an African investment firm with its registered office on the 2nd Floor, PWC Towers, Cantonments City, Accra Ghana. This article has been issued for information purposes only. GFX Prime does not recommend or propose that any security referred to in this article is appropriate or suitable for your investment objectives or financial needs.