Company profile
Union Bank of Nigeria Plc was established in 1971 as Colonial Bank, with its first branch in Lagos. In 1925, Barclays Bank acquired the Colonial Bank, which resulted in the change of the bank's name to Barclays Bank (Dominion, Colonial and Overseas), which was later incorporated as Barclays Bank of Nigeria Limited in 1969 following the enactment of the Companies’ Act in 1968.

As a result of the Nigerian Enterprises Promotion Act of 1972, the Federal Government of Nigeria acquired 51.67% of the bank's shares, and Barclays Bank of Nigeria International Limited fully disposed of its shareholding to Nigerians in 1979.

To reflect the new ownership structure and in compliance with the Companies and Allied Matters Act of 1990, it assumed the name Union Bank of Nigeria Plc.

In line with the Central Bank of Nigeria’s banking consolidation policy, UBN acquired three other banks – Universal Trust Bank Ltd, Broad Bank Plc and Union Merchant Bank Ltd – which now operate under the brand name of Union Bank of Nigeria Plc.

Within the Union Bank Group are the following subsidiaries and associated companies:

Subsidiaries:
(a) Union Homes Savings and Loans Limited
(b) Union Bank Trustees Limited
(c) Union Assurance Company Limited
(d) Union Bank UK Plc.
(e)Banque Internationale du Benin, Cotonou
(f)UTL Communications Services Limited
(g) UBN Property Company Limited
(h) Union Capital Markets Limited
(i) Union Registrars Limited

Associated companies:
(a) Consolidated Discounts Ltd.
(b) HFC Bank Ghana Limited.
(c) Unique Ventures Capital Management Co. Ltd.

Investment thesis
With an asset base of over N100.500 billion, UBN remains one of the biggest and strongest banks in Nigeria. Over the years it has leveraged on its name as a big, strong and reliable bank, which has earned it patronage. Its wide network of branches (359) has also contributed to the growth it has achieved.

UBN represents a high risk investment judging by its high NPL to gross loan ratio of 19% (peer average 7%) and credit loss ratio of 16% (industry average 10%). Its coverage ratio of 0.82 is also low when compared to that of peers and industry.

We expect UBN to deliver a total return of 25% over the next three years, this being a combination of a 20% CAGR in earnings and a dividend yield of 5%.

UBN currently trades at N33.4, representing a fairly valued stock when compared to our DCF valuation of N34.9 and N41.3 and DDM of N40.0 and N43.0

Strategy
To enable UBN compete in the market for deposits, the bank adopted a competitive interest rate structure to attract and retain deposit, generating higher deposits in the process.

UBN is also expanding its business outside the shores of Nigeria. The bank is now in Ghana through its significant shareholding in HFC Bank (Ghana) and only recently recapitalised Banque International Bank in Benin thereby taking over the bank. UBN has continued to invest in technology, with customers now able to transact business at any of its branches.

The bank’s investment in modern ICT has also provided the platform for numerous value-added e-banking services, including ATM, Internet banking, telephone banking, electronic purse, pay direct, e-salary administration, v-pay, etc. The bank's new strategy for ICT is to create integrated business relationships and network in which its suppliers, producers, and customers act as one company, thereby streamlining and enhancing the bank’s internal processes for greater productivity.

Union Bank Group operates an interlocking organisational structure whereby some board members of Union Bank of Nigeria Plc act as external directors in the subsidiary companies while the Group Managing Director /Chief Executive Officer of the bank doubles as the Chairman of all the subsidiaries except Union Registrars Limited and Union Stockbrokers Limited. The same structure is in place for associated companies. This arrangement ensures oversight and participation in the decision making process of these companies thereby safeguarding and diversifying the bank’s investments across the globe.

Historical performance
UBN has remained a stable, though slow growing, bank when compared to peers, despite consolidation and the acquisition of two other banks. In our estimation, the 22% and 16% (CAGR) top and bottom line growths achieved over the last three years are quite low. We believe growth has been hampered by its inability to effectively attract deposits, which has seen a shrinking of its NIM to 5.8% from 6.2% two years back, though it still stands out when compared to peers’ 7.2%.

We believe the bank’s returns to shareholders are low, with RoE and RoCE at 13% and 16% (growing), though it can be argued that some shareholders’ funds have not been fully deployed to generate earnings.

We, however, are of the opinion that shareholders may not see significant increases in both ratios in the short to medium term, as the bank may not be able to grow its earnings in line industry’s growth. While we believe that management has not done much to curtail cost, it certainly has not done much either to grow it beyond historical levels.
This is reflected by the 61% efficiency and the 46% cost of operations to gross income ratios; both still within historical averages. This is more aptly captured by the company’s net profit margins of 16% recorded in the last two years; average over the years, 2003 to 2007, remains at 17%.

Growth prospect
We expect UBN to benefit from the opportunities available in the industry and grow its earnings by more than 35% (CAGR) over the next three years. We expect to see growth arising from a new focus on marketing, as the bank is beginning to make significant investment in marketing. We believe also that the bank will continue to monitor its expense ratios despite these new investments. The over N8 billion capex in 2007, which were mainly in the acquisition of property, plant and equipment, should deliver significant returns as the bank targets the retail end of the market.

Valuation
Our fair value estimate for the bank is between N34.1 and N41.3 using DCF, while our two-stage DDM produced N40.0 and N43.0, though it recently traded at N33.9, representing a fairly valued firm in our estimation.

Its P/E multiple stands at 23.7. On this basis, it is trading at a 3% discount to peers’ average. Also, on a P/B multiple basis, the bank currently trades at 3.9x, which represents a 9% discount to peer average. On the whole, UBN looks cheap on a price multiple basis.

Competitive advantages
The presence of UBN in UK, Johannesburg and Ghana offers the bank an edge over its competitors. Its offshore banking services are handled by its International banking department through its subsidiary Union Bank (UK) Plc. UBN recently took controlling interest in Banque International Du Benin (B.I.BE).

Financial strength
We consider UBN strong financially, as it carries more than N100 billion net assets. However, while about 58% of the bank’s total assets are cash, only 23% are in loans and advances, which in our opinion do not reflect a good mix, as it significantly affects its income generating ability. Also, the bank, when compared to peers, has not been able to grow both its balance sheet size and deposit liabilities substantially, achieving only a 6% and 22% rise, with great impact on its ability to grow revenue. However, growth in capital market assets (an increase of 107%) showed the largest increase.

Management and corporate governance
UBN’s board of directors comprises 17 members – eight executive and nine non-executives. We believe there is a distinction between the chairman’s roles and that of the managing director/chief executive.

The bank’s code of governance provides that the chairman of the bank shall not serve as chairman/member of any of the board committees. The chairman of the bank is Prof. Musa Yakubu. He was a former director with CBN and joined the bank in 2002.

B. B. Obong is the managing director/chief executive and was appointed in 2005 following the retirement of its erstwhile Managing Director, Dr. T. A. Oboh, who served the bank for several years. Mr. Obong joined the bank in 1977 and has served in various capacities. Until his appointment as MD/CEO, Obong was director, financial services.

Government, regulatory and environmental risk
The banking industry is the most regulated industry in Nigeria. We believe that this is good as the interest of depositors is better protected. Other regulatory bodies include: SEC, NSE, CIBN, etc. These bodies act as checks on the activities of banks. We are, however, worried by the pronouncement by CBN that the consolidation process will be in 13 phases.