United Bank for Africa Plc recently released its audited results for the year ended December 31, 2021. Despite a challenging operating environment during the year which significantly exacerbated the credit risks of loans and advances across the industry, and multiple devaluations of the naira, UBA’s performance year-on-year and overall, was much improved.
The performance was however not totally unexpected given the trend from its unaudited First, Second, and Third Quarter Results. The Bank’s gross earnings came in at N620.4 billion compared to N559.8 billion in 2019, a 10.8% YoY growth.
This was on the back of a 24% YoY growth in loans and advances to customers and the attendant interest income earned from. Interest expense was also driven down because of a decline in interest expenses on customer deposits which was policy-driven by the Central Bank of Nigeria.
Profit Before Tax, therefore, grew to ₦131.9 billion, compared to N111.3 billion in 2019 (18.5% YoY growth) while Profit After Tax grew to N113.8 billion in 2020, a 27.7% YoY growth, compared to N89.1 billion in 2019. Other improvements were in the 37.0% YoY growth in its Total Assets of N7.7 trillion, compared to N5.6 trillion in 2019, and customer deposits growth to N5.7 trillion, compared to N3.8 trillion as of 2019 representing 48.1% YoY growth.
The Bank played heavily to its strengths in achieving this result including maintaining;
- (i) a good liquidity profile with the Bank’s ratio of net liquid assets to deposits at the reporting date being 44.30% (2019: 43.99%);
- (ii) a good liability generation strategy that targeted low lost retail deposits;
- (iii) a good capitalization for current business risks with its shareholders’ funds rising by 21.1% YoY to N724.1 billion compared to N597.98 billion in 2019
- (iv) its a Pan-African franchise.
The performance notwithstanding, several weaknesses were observed from its results particularly stemming from its complex structure, the sustainability of its performance over time, as well as the underlying numbers.
UBA is a Nigerian pan-African financial services group headquartered in Lagos with subsidiaries in 20 African countries and offices in London, Paris, and New York. Several of its subsidiaries are however loss-making, or at best, make marginal profits compared to capital employed. For example, in 2020, UBA Mali Limited (owned 100% since 2017), UBA Mozambique Limited (owned 96% since 2011), and UBA UK Limited (owned 100% since 2012) all made losses after tax.
In 2019, UBA Mali Limited, UBA Mozambique Limited, UBA Guinea Limited, and UBA Congo DRC Limited were loss-making while UBA Tanzania and UBA UK made marginal profits.
Secondly, UBA Nigeria’s performance continues to dominate group performance despite a concerted effort by the Bank to increase its footprints across the African Continent. Indeed, it appears as if the growth in its African footprint comes with an increase in the performance of its Nigerian segment of the bank performance.
For example, the group’s Profit Before Tax was N113.8 billion with the Nigeria segment contributing N94.8 billion of that amount while the other subsidiaries in the other countries where UBA has a presence, contributing N19 billion with the loss-making subsidiaries worsening the performance.
UBA UK Limited in particular, made a loss after tax of over N1.4 billion. UBA Nigeria accounted for 68% of the UBA Group’s total assets and contributed 73% to the overall Group’s pre-tax profits for the financial year to December 31, 2020. To put this in perspective, a typical tier 2 Nigerian Bank will make more than N19 billion in PAT in one year. It then begs the question why the rush for African expansion with the nature of returns on equity and returns on capital employed from this venture? The answer probably lies with its history and vision of being a pan African bank.
In terms of asset quality, UBA’s total assets grew by 37% year-on-year to approximately N7.7 trillion as of 31 December 2020 compared to N5.6 trillion as of 2019. This growth in total assets was driven by deposit mobilization increase to N5.7 trillion in 2020 compared to N3.8 trillion in 2019 (a 48.1% growth YoY) with most being low-cost deposits, and an increase in loans to support governments, customers, and their businesses.
Despite this asset growth, however, loan loss allowance grew by 29% from N86.14 billion in 2019 to N111.35 billion in 2020. Impairment charges also significantly grew by 47.5% to N27 billion in 2020 compared to N18.3 billion in 2019, suggesting an increase in non-performing or sub-standard loans.
This is not immediately obvious as non-performing loan ratios are a function of the total amount of outstanding loans in the bank’s portfolio. Thus, while loan loss allowance and impairment charges for credit losses grew in 2020 relative to 2019, the NPL ratio declined to 4.7% in 2020 (5.3% in 2019) driven by the significant growth in the bank’s loan book and payment of past-due obligations.
Finally, Eligible Tier 1 capital stood at N449 billion as at 31 December 2020, higher than the minimum requirement of N50 billion for Nigerian banks operating with international banking licenses. In addition, the Bank’s capital adequacy ratio computed in line with Basel II accords remained acceptable at 22%, above the regulatory minimum of 15% for international banks (although the Bank’s capital adequacy ratio was 24% in 2019 and is indicative of an increase in the amount set by the bank for credit risk, market, or operational risk). We expect UBA’s capitalization to remain adequate in view of the Bank’s current business risks.
The Bank’s earnings per share of N3.20 is a 26.8% growth compared to N2.52 in 2019. Subject to approval at the upcoming AGM, UBA has proposed a final dividend of 35 kobo for every 50 kobo ordinary share, bringing the total dividend for the financial year ended December 31, 2020, to N0.52.
Ecobank: Pan African challenges weigh in on the company’s results
The group, through its Nigerian subsidiary, continued to take a hit resulting from its 2011 acquisition of Oceanic Bank.
ETI recently published its audited consolidated financial statements for the year ended 31 December, 2020.
Year-on-Year, revenues were up 4 percent to USD1,679.8 million while operating profits before impairment losses were also up 14 percent to USD625.7 million. Net interest income also increased by 21 percent on the back of a 27 percent decrease in interest expense, while customer deposits increased by 13 percent to USD18.3 billion.
However, apart from these, not so much else was great about the results. For example, profit before tax and goodwill impairment was down 17 percent to USD337.88 million, while profit for the year was down 68 percent year-on-year to USD88.32 million.
ETI faced several headwinds during the year that ultimately contributed to the performance. The group, through its Nigerian subsidiary, continued to take a hit resulting from its 2011 acquisition of Oceanic Bank. The effect on the profit after tax in 2020 was a USD163.56 million impairment charge in FY 2020.
In addition, a USD61million monetary loss was charged to the group’s profit resulting from the hyperinflationary economies of Zimbabwe and South Sudan where it operates. According to the Zimbabwe National Statistics Agency, Zimbabwe’s annual inflation eased to 348.59 percent in December 2020, compared with 401.66 percent in the previous month. To put this in perspective, South Sudan’s inflation rate on the other hand was estimated at approximately 58 percent at the end of 2020.
Perhaps further exacerbating the not-so-good results, the group effectively incurred a significant tax rate of 52.25 percent in 2020 compared to 33.3 percent for the same period by December 2019. A combination of these events caused a year-on-year decline in profit after tax by 57 percent, to USD174.32 million at the end of 2020 (2019: USD405.8 million).
The tough operating environment brought about by the global pandemic also impacted the results. While loan and advances and impairment charges were relatively flat in 2020, a significant portion of its loan book received regulatory forbearance, which meant that customer repayments of loan principals were deferred by up to 12 months.
Also, the group’s NPL ratio remained higher than the regulatory NPL limit while Ecobank Nigeria’s NPL was higher than the Group’s NPL ratio. The write-offs arising due to goodwill impairment in Ecobank Nigeria as well as hyperinflation in Ecobank operations in Zimbabwe and South Sudan affected the group’s regulatory capital ratios.
Although the group remained compliant with the minimum regulatory capital adequacy ratio requirements, its Tier 1 Capital Adequacy Ratio declined from 8.8 percent FY2019 to 8.5 percent FY2020 while Total Capital Adequacy Ratio also declined from 11.6 percent FY2019 to 11.5 percent FY2020. The minimum capital requirements were 7.25 percent Tier 1 and 9.5 percent, Total Capital, respectively.
In January 2021, Ecobank Nigeria raised N50 billion in subordinated debt from Development Bank of Nigeria with a 10-year tenor at 6.5 percent. It also in February 2021 raised USD 300 million in form of a 5-year, fixed-rate, US dollar-denominated bond. These amounts will improve the Nigerian subsidiary’s capital adequacy ratio.
ETI groups its African operations into four geographical regions. The reportable operating segments are Nigeria, Francophone West Africa (UEMOA), Anglophone West Africa (AWA), and Central, Eastern and Southern Africa (CESA). Unlike other Nigerian Deposit Money Banks with International presence that outperform their African and international subsidiaries, the reverse appears to be the case with Ecobank Nigeria within ETI. Among the four geographical regions, Ecobank Nigeria contributed the least to the operating income, operating profit, as well as profit before tax in FY2019 and FY2020. Reported RoE were also 26.9 percent, 18.6 percent, 16.1 percent and 4.2 percent in the AWA, UEMOA, CESA and Nigeria regions in 2020 (against 30.1 percent, 22.8 percent, 23.6 percent and 0.4 percent in 2019 respectively).
ETI’s overall performance depends on whether the results are reviewed from a Naira or Dollar perspective as some of the results were better in Naira than when reported in Dollars. The group lost about USD8.6 million as a result of exchange differences on foreign currency translation of foreign operations. ETI perhaps also seems to be affected by the poor performance of some of its acquisitions as well as its operations in some African countries where it has its presence.
Its earnings per share as of December 31, 2020 was 0.010 (cents) as against 0.778 (cents) for the same period in 2019.
Analysis: Sterling Bank, foreign exchange to the rescue
The bank’s foreign exchange trading income includes gains and losses from spot and forward contracts and other currency derivatives.
Sterling Bank Plc recently published its audited Annual Report, and Financial Statements for the year ended 31 December 2020. While the results indicated an underperformance based on expectations and compared to the prior year, the outcome was not totally unexpected given that the bank faced severe headwinds from the effects of the COVID-19 pandemic. Indeed, while commenting on the results, the bank’s Chief Executive Officer (CEO), Abubakar Suleiman, had explained that 2020 was an extraordinary year, defined by the global pandemic, which disrupted the society and severely impacted economic activities.
Gross earnings fell by 7.5 percent to N138. 9 billion (compared to N150.2 billion in 2019). The bank’s Interest income also dropped by almost 12.5 percent from N127.29 billion in 2019 to N111.45 billion in 2020. This drop is mostly attributable to a drop in interest income from loans and advances to customers, which dropped to N82.88 billion in 2020 compared to N97.89 billion for the same period in 2019. The bank’s net fees, and commission also reduced to N13.1 billion in 2021 compared to N14.61 in 2020 as Other fees and commission (mostly advisory fees) fell to N2.9 billion in 2020 (2019: N5.9 billion) while the bank’s e-business commission and fees reduced to N4.98 billion (2019: N6.79).
The bank reported that total non-performing loans (NPL) as a percentage of gross loans improved from 2.2 percent in 2019 to 1.9 percent in 2020. While this appears to be good, a closer look at the bank’s loan portfolio shows a somewhat different picture. First, loans and advances to corporate entities reduced in 2020 (corporate entities N570.88 billion and individuals N42.48 billion) compared to 2019 (corporate entities: N582.94 and individuals N48.76 billion), yet impairment allowance on loans to corporate entities and individuals increased in 2020 (N14.11 billion and N2.42 billion respectively) compared to 2019 (N11.12 billion and N1.85 billion respectively). Secondly, the bank’s credit loss expense (made up of impairment on loans and write-offs) also increased by 36 percent to N7.91 billion from N5.84 billion in 2019, thus raising the bank’s cost of risk by 10 basis points to 1 percent.
Also, during the year, the bank sold off N19.5 billion of its loans and advances portfolio to Cambridge Springs Investment Limited, hence further explaining the significant drop in its total loans and advances portfolio from N618 billion at the end of 2019 to N596 billion by the end of 2020. It is worth noting that as at the end of 2020, the bank was yet to receive consideration for the loans and advances sold to Cambridge Springs Investments Limited worth N19.5 billion as this amount appears as a receivable in the bank’s financial statement (other assets) and explains why its accounts receivable increased from N18.62 billion as at end of 2019 to N39.33 billion by the end of 2020.
Although well within regulatory limits of 30 percent, the bank’s liquidity ratio deteriorated from 39.2 percent at the end of 2019 to 33.87 percent by the end of 2020. The reduction in its total loans and advances portfolio while the total deposit liability improved explains the reduction in the loan-to-deposit ratio of 62.36 percent (2019: 65.29 percent).
It was not all bad news as the bank did very well in several areas. First, as already implied, total deposits increased by 7.5 percent to N972.12 billion at the end of 2020 compared to N892.66 billion at the end of 2019. You will also recall that the Central Bank of Nigeria directed in 2020 to all banks to reduce interest rate payable on savings deposits from a previous minimum of 30 percent of MPR to a new minimum of 10 percent of MPR, effectively reducing interest rates payable on savings account deposits from 3.75 percent to 1.25 percent per annum. During the year, it appeared that one of Sterling Bank’s strategy was to significantly reduce its interest expense, as its interest expense improved by 21.3 percent from N62.59 billion in 2019 to N49. 31 billion at the end of 2020 driven by a 39.5 percent year-on-year growth in low-cost customer deposits.
Note that the bank also increased its savings account portion of total deposit liability from 13.55 percent as at the end of 2019 to 20.5 percent by the end of 2020. The bank also significantly increased the ratio of Current and Savings Account to Total Deposit to 78.95 percent compared to 62 percent in 2019. Compared to term or fixed deposits, savings and current accounts offer the least interest to depositors. This positively and significantly impacted the bank’s cost of funds and ensured that the cost-to-income ratio declined year-on-year to 77.4 percent.
The bank did extremely well in its trading activities as its net trading income more than doubled to N11.72 billion (2019: N5.06 billion). This performance is attributable to a more than doubling of income from trading in bonds (2020: N5.07 billion; 2019: N2.53) and income foreign exchange trading (2020: N 3 billion; 2019: N415 million). Note that the bank’s foreign exchange trading income includes gains and losses from spot and forward contracts and other currency derivatives. Despite the pandemic and the other parameters earlier described, the bank was able to post N11.24 billion profit after income tax for financial year 2020 compared to N10.6 billion recorded in 2019 a 6 percent growth in profit after taxes.
There was also a significant increase in the bank’s effective tax rate or Income tax expense from less than 1 percent at the end of 2019 to over 9 percent by the end of 2020. This increase impacted its Profit after income tax which would have been much higher than the N11.24 billion reported if the same effective tax rate of 2019 had been maintained for 2020.
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