UBA needs a value booster

Some things are difficult to stomach. How do you grow your earnings at a compounded annual growth rate of 12% over the last 5 years but your share price is stubbornly stuck at 0.23x its price to earnings growth? How do you deliver a return on average equity of 16% over the last 5 years yet investors still value your shares at 2.6x its earnings per share?

At a market valuation of N282 billion, UBA is far from the unicorn status already achieved by younger and less profitable startups. These are the questions, shareholders of United Bank for Africa, one of Nigeria’s most respected banks will be mulling.

UBA released its 2021 full-year results during the week and yet again impressed with a profit after tax of N118.6 billion, one of the only 4 banks that have crossed the N100 billion mark in profits. The latest profit is an 8.7% rise in profits from the year before and yet again delivered double-digit returns on average equity of 16% in line with its 5-year average. In terms of balance sheet strength, UBA has a net asset of N804.8 billion only bettered by Zenith Bank and GT Holdings.

Shareholders of the bank are used to receiving dividends from UBA. The bank has paid out an estimated N144 billion to its shareholders over the last 5 years, a steady return of capital for a commercial bank. In terms of fundamentals, the bank is also solid. So, why is the bank struggling to match the sort of valuation multiples the likes of Zenith Bank and GT Holdings attract?

One quick answer could be with where it currently does well, dividends. Whilst UBA has increased its dividend payout ratio by 4% on average every year its average dividend payout ratio of 32% trails behind the likes of Zenith and GT Holdings with 43% and 44% respectively. This year, it is paying out N1 per share as dividend (20 kobo paid already as interim dividend) 29% of profits. Compare this to Zenith’s 40% which recently zoomed past GTB in being the most valuable bank. Agreed, capital retention is important for banks amidst a growing uncertain global economy and the burden of Basel III requirement.

The Basel III accord increased the minimum capital requirements for banks from 2% in Basel II to 4.5% of their net assets as a percentage of the bank’s risk-weighted assets. They are also required to provide an extra 2.5% buffer capital requirement bringing the total minimum requirement to 7%. This means banks need to retain more of their profits or risk going to the market to raise more capital. The latter is often counterproductive for share price growth. We estimate UBA’s Basel III status should be about 10% well above the required 7%.

Another area where the bank struggles against its peers is with return on assets. At 1.5% UBA might need to push this number above the 2% market that the likes of GTB (over 3%), Zenith and even StanbicIBTC currently enjoy. It is no coincidence these are the three banks that have enjoyed related success when it comes to being valued at a higher price to earnings multiples than industry averages. Suffice to add, UBA last crossed N12 in share price when its ROA was above 2% in 2017.

But as we have come to observe in recent years, solid fundamentals is also not enough to attract the right valuation for quoted companies, especially banks. After 20 years of recapitalization, no Nigerian bank is worth over $2 billion or N1 trillion today. It arguably takes Nigerian Startups less than 5 years to achieve unicorn status. This means one thing. For UBA to achieve the valuation we believe it deserves, it will need a value booster other than just great fundamentals.

It needs to represent itself to investors as a bank of the future by adopting the right actions and narratives that will communicate and drive how it should be valued. It should tap into its ecosystem of startups it has helped provide seed for many years to lead the way in machine learning, artificial intelligence, and contactless financial services. It must adopt new cool technologies like the blockchain to launch a new brand of products that will boost its perception as a bank for the future making its stock irresistible.

In the world of valuation, sentiments and perception matter, so it should focus on a message that depicts growth in a new set of metrics that points to the future of banking. Rather than just report growth in profits, what about growth in customers of a younger generation? How many payment transactions does the bank facilitate locally and regionally? How many customers use its mobile applications and how reliable is it at addressing the modern needs of banking? How much transaction data does it have per customer? What is its e-business income per customer and what are the growth targets? These are a different set of North Star metrics that communicates its view of its future.

It needs to push these narratives harder and consistently whenever the bank’s executives are speaking to investors and investment analysts. Investor relations must be deliberate and measured by how much its messaging has added to the market value of the bank.

This might sound all easier said than done but they are achievable. If there is one bank that can do it then it’s UBA. And when it does, others will follow.