ISSN Vol.1 No. 16. UNION BANK OF NIGERIA Plc. March 31, 2009 Annual Report. January, 2009

Transcription

1 ISSN Vol.1 No. 16 UNION BANK OF NIGERIA Plc. March 31, 2009 Annual Report January, 2009 Issued on July 18, 2009

2 Contents The Operating Environment 03 o The Post 2008 Financial Market o Key Concerns in Banking o The Stock Price Performance at the NSE Fundamental Analysis 06 o The 2007 Public Offer o Managing Change The Sustainability Paradigm o The Financials Reviewed Technical Analysis 14 The Analyst Insight 16 2

3 1. The Operating Environment The operating environment and landscape has changed fundamentally; tomorrow s environment will be different, but no less rich in possibilities for those who are prepared. Ian Davis, McKinsey s Worldwide Managing Director The above quote was from the Nigerian Capital Market 2009 Report issued in March 2009 ( This was at the height of the uncertainty that pervaded the Nigerian financial services landscape where a sequence of uncoordinated responses from leaders in the industry coupled with the uncertainty in the public arena on the how the market would recover from the downward spiral gave rise to panic. Our conviction then, and now, was predicated on the leadership meltdown that allowed the poor regulatory environment in place and the inadequate disclosure levels from the capital market to work together in creating and sustaining the panic that enveloped the investment community; leading to a severe decline in share prices and perception of worth for firms traded on the Nigerian Stock Exchange. This challenge this development revealed however ran deeper than that. It caused the reappraisal of the rules of engagement and how Nigerian businesses must manage their business in a global market space. THE POST 2008 FINANCIAL MARKET The post-crisis Nigerian Financial Market, which reached 2006 year lows, has begun the early phases of the dramatic changes that is to come but in strategy, operations and disclosures. The rules of engagement are right now being re-written. The drivers for the new rules can be found within the opportunities these challenge has thrown up for those players with a long term vision of the market. Here are a few: The Nigerian Capital Market, once thought to be immune from global developments has experienced a paradigm shift that impacts the very way business is thought of, 3

4 conducted and regulated. The Nigerian business environment can no longer afford to ignore the impact of global developments on its economic and financial decisionmaking, despite the level of maturity of our markets. The investor, analyst, fund manager, regulator, financial journalists, government, the exchange and its listed companies must now learn a new way to engage the market. This process may prove unsettling at first, but those who are able to raise their game to meet global standards in efficiency and effectiveness will rise to the top of their industry. Alliances and strategic partnerships will have to be undertaken to bridge the immediate gaps that exist in this quest. The impact of oil revenues on the overall economy, business and social life appears overbearing and makes a compelling reason for the nation to pursue diversification of its revenue base as a matter of national interest/policy. The key challenges of instituting a regime of credible and enforceable regulation, transparency, prudent risk management and the significant reduction in the risk of financial instability is now a front and centre issue. The consolidation paradigm must shift towards a new order that emphasizes service brand-worth and quality of risky assets and sustainable earnings. The new era of consolidation will be driven by value based mergers & acquisitions in order to compete. Risk represents responsibility and this becomes a key leadership criteria/issue for organisations that seek to win. The old rules of assessing value within the business landscape (and sectoral reviews) will no longer be based on size, spread and visibility but on values, enterprise, corporate governance, management and staff quality and brand worth/reputation. The leadership changes at the Securities & Exchange Commission (SEC) and the Central Bank of Nigeria (CBN) signpost a new era for re-affirming supervisory responsibility and the enthronement of a level playing field. The level of outstanding shares for quoted companies in the system and its impact on the restoration and repositioning of the capital market will have to be addressed at some stage. The market downturn experienced in the Nigerian Capital Market is without precedence. The early pains have been well worn as the level of negativity is subsiding with a health anticipation of positive information from firms/market. 4

5 KEY CONCERNS IN BANKING The key challenges facing the financial services sector can be described as follows: The level and extent of disclosure in the financial system; Concerns over banking supervision and focus on risk management; The lack of confidence in the financial system by external parties; the need for a stress test to determine credibility of financial statements and going concern issues (capital adequacy); The need for an increase in the level of cover available to depositors in the banking sector (adjusted relative to risk in the environment) as a sign of confidence by the regulators in the banks under their supervision; The quality, skill set and values of management & staff; and The imperative for an improved corporate governance regime. Price Price % Change Price % Change % Change Mar 31 '08 Jan 01 '09 Jan 09 - Mar 08 Jun 17 '09 Jun 09-Mar 08 Jun 09-Jan 09 SPRINGBANK % % 0.00% DIAMONDBNK % % 39.35% FIRSTBANK % % 12.05% UBN % % 35.48% FCMB % % 34.96% SKYEBANK % % -9.06% FIDELITYBK % % -2.99% ACCESS % % 28.63% GUARANTY % % 3.46% IBTC % % % AFRIBANK % % 9.42% Sterling bank % % 10.83% ZENITHBANK % % % OCEANIC % % % UNITYBNK % % -9.33% PLATINUM % % % UBA % % 11.87% FIRSTINLND % % % INTERCONT % % -6.98% WEMABANK % % % Fig 1. The analysis of banking sector performance since Mar 31, 2008 to June 17,

6 2. Fundamental Analysis The Objective: To review the stock valuation by examining the company's financials and operations, especially earnings, growth potential, assets, debt, management, products, and competition through financial ratios arrived at by studying the balance sheet and profit & loss account over a number of years. This analysis is more effective in fulfilling long term growth objectives of shares, rather than their short term price fluctuations. In the Nigerian Stock Market, this has traditionally been the key focus of most players and it remains a guiding beacon as to what could possible happen to a stock. Our approach to fundamental analysis therefore takes into consideration only those variables that are directly related to the company itself, rather than the overall state of the market or technical analysis data, which are reviewed in the second part of this report. THE 2007 PUBLIC OFFER Access Bank Plc raised N70.34 billion from the capital market through an Offer for Subscription of 4.72bn ordinary shares of 50k each at N14.90k per share and realized gross proceeds of N240bn in year The total subscription of up to N136bn was approved by the Securities and Exchange Commission (SEC). The share price of Access Bank Plc was priced at N14.90 for the secondary offering representing a discount of N4.42k, or 22.9% from it closing price of N19.32 (i.e. the price at which NSE halted trading in the stock). Prior to the technical suspension of the stock by the NSE for the secondary offering, the share price was above its 10 day, 20 day, and 50 day cumulative simple moving averages (CSMA) of N18.95k, N16.37k, and N14.42k respectively. The offering price of N14.90 was therefore below the 10 day and 20 day CSMA, but above the 50 day CSMA of N14.42k. Though the stock was offered at N14.90k, a recall of the history of other bank stocks that concluded their secondary offering around the same period indicated that Access Bank Plc stock price would resume trading at or above the pre-suspension price of N19.32k, not at the offering price. See for the public offer analyst report. The report and projections did not anticipate a downturn of such severity and sustained impact. 6

7 Post Offer Analysis: Based on the 341% oversubscription of the bank offer, the shareholders, at its 18 th Annual General Meeting (AGM), passed a resolution to transfer the sum of N10bn from its share premium account to the statutory reserve account. In the current reporting period, Access Bank Plc projected a Profit after Tax (PAT) of N18.136bn for the year ending March, 2009 (in its offer document dated July, 2007) and the company has declared a Profit After Tax of N20.81bn, the bank has surpassed its projected profit by 14.76%. In the same vein, the bank surpassed its Gross Earnings projections for the same period by 18.65%. Return on Investment in the Banking Sector (Public Offer Investors) Taking all the banks that approached the market to raise funds vide a Public Offer and comparing how well they have performed, the conclusions discernable therefrom appears mixed. It appears at first glance that most investors (without exception) lost money due to the meltdown or an overpriced offer relative to the prevailing market conditions at the time; or both. Access Bank Plc on its part, appear to be 36.98% removed from reversing this trend as shown in the table below. Company Offer Price Total Open Date Listing Date Listing Date Price as at % Change Intercontinental Bank ,780,637, Sep Nov Nov % FBN ,600,356, May Dec Dec % Access Bank ,355,420,037 3-Jul Feb Feb % Diamond Bank ,924,764, Nov Feb % Oceanic Bank ,582,985,138 5-Mar-07 8-Jan-08 8-Jan % Fidelity Bank 8 36,707,264, Sep-07 8-Jul-08 8-Jul % Skye Bank 14 17,242,388, Jan-08 3-Sep-08 3-Sep % Bank PHB 17 85,000,000, Nov May May % GTB ,576,000,000 9-Jul Jul Jul % Zenith Bank ,580,700,000 6-Dec-07 7-May-08 7-May % UBA 35 84,537,778,745 1-Mar-07 1-Nov-07 1-Nov % Afribank ,000,000,000 1-Nov-07 1-Sep-08 1-Sep % First Inland ,500,000,000 3-Jan Feb % Fig 2. The performance of individual banks post their last public offer as at June 17, 2009 NOTE: We did not adjust FBN offer price for the subsequent bonus shares, as with others as well. Ordinarily, we would have to adjust the offer prices for the bonus shares to give an accurate representation of the performance of the shares. 7

8 MANAGING CHANGE - THE SUSTAINABILITY PARADIGM Recognising the paradigm shift described above was one of the most important inferences from Access Bank Plc s CEO statement and notes to the financial highlights presented to the public. Mr. Aigboje Aig-Imoukhuede, MD/CEO of Access Bank Plc stated in his address to stakeholders that during the second half of the year, we chose to alter our hitherto aggressive balance sheet growth posture; driven by the rationale that the quality and sustainability of our earnings and franchise took precedence over market share growth considerations. Achieving results against the backdrop of the environmental challenges From September 2008, initiated steps to de-risk and de-leverage the balance sheet to insulate the bank from systemic risks that had begun to emerge within the domestic market; Between December 2008 and March 31 st 2009, paid down $1.1bn of its foreign currency trade facilities from internally generated liquidity regular deposit generation activities; Applied the prudential guidelines to recognise possible impairments and avoid re-scheduling its margin loan exposures as a component of its stress test; Avoided the expanded discount window as a discipline for enforcing a conservative risk management practice bank-wide; Adopted the IFRS in addition to the required Nigerian GAAP standard as a means of strengthening their auditing standards; Commenced a bank-wide implementation of the Basle II requirement on risk management by adopting the Equator Principles to guide lending and financial activities that would ensure a complaint bank come 2011; and Introduced an Ombudsman service to ensure its consumers have a fair and timely resolution of concerns and issues affecting the value proposition it offers. The above was done in a year where the whole market was pre-occupied with a myriad of challenges. It is instructive to note that the bank delivered the above while embarking on an expansion program as revealed thus: 1. The bank commenced banking operations in eight countries including the United Kingdom; 2. It increased its headcount by 34% relative to the 1,067 persons employed as at March 2008; and 3. It managed to maintain a healthy level of market visibility and exposure in the media and in terms of corporate social responsibilities. 8

9 THE DOWNSIDE The adjustments the bank made to align itself to this paradigm shift and return a profitable result cannot be overstated. There are however some salient which it must give considerations to in its quest to build a sustainable enterprise. 1. The decision to embrace the improved disclosure environment must be seen as a necessity driven by an informed appraisal of the market conditions. The game changer however remains its ability to rapidly build upon this shift in focus and approach through the relationship it establishes with its customers, investors (in terms of returns), disclosures and relevance to industry. 2. The decision to embrace a regime of best practice disclosure appears consistent with its strategic 5-year plan. This course of action improved disclosure of factors influencing performance, actions on risk management and timely reporting brings about a new era of responsibility that must be sustained. Beyond this, the disclosures must now include such issues as projections for the next year and quarterly profit warnings. 3. The learning curve for the market to change its reward system to published accounts and announced results will prove a thorny issue. This was evident in the market s reaction to the results, which some have said was below expectations given their 65k DPS for the previous year compared to its proposed 70k DPS for the current year. The bank must learn how to overcome this learning curve as a strategic imperative for the approach it has embraced. 4. The adherence to the prudential guidelines in the case of margin loans tells half of the story. The other half relates to the extent of the exposure (a materiality issue as described by the Basle II requirement) and the impact of their decision on customers who are currently faced with the strain of the loss arising from the market meltdown. The evolution of share loans from a facility driven by relationships to a product created a responsibility gap in the market. Between the banks, regulators and the consumers, there was no regulation on how this would be managed in the event of a downturn (a fact of market reality) nor where their any caveat emptor issued for the less than informed customers who bought into the massive advertisement of the returns from the NCM in an environment with less opportunities or vehicles for wealth build-up. We believe that the thinking of the CBN therefore was informed by the need to protect the banks as well as investors by allowing some restructuring of debts over a 12 month period to allow for a possible reversal or reduction in losses suffered by the public. This remains a contentious issue and banks need to factor this into their decision making on risk management as a feature of our collective learning. The regulators will still have to review the implementation of this rule. 9

10 5. The bank needs to pay attention to the following ratios, which dipped as a consequence of the increase in shareholders funds: Ratios PAT/SHF 21.23% 3.59% 2.55% 21.43% 9.39% 11.25% GROSS EARNINGS/SHF % 53.26% 46.24% 98.23% 33.64% 59.13% 6. The indices suggest that the bank has to address the challenge of the relative decline in its Net Profit after Tax Margin (PTM) and Net Profit before Tax Margin (NPM) ratios which indicates a drop of 30.4% and 26.3% respectively over the previous year s performance. 7. Other observations will become discernable when a more complete result is released by the Bank. It is instructive to note that the results released on the floor of the Nigerian Stock Exchange (NSE) were for the GROUP while that for the press release was for the BANK. We assume that this represents part of the learning curve in the regulator-quoted firm relationship. THE FINANCIALS REVIEWED GROSS REVENUE & PROFIT AFTER TAX The Gross Earnings of the bank increased in 2009 over 2008 by 88.52% to N109.34bn from N57.99bn. Profit Before Tax equally increased by 38.94% from N18.84bn to N26.18bn while PAT increased by 31.29% to N20.81bn from N15.85bn in the comparable period. 10

11 Access Bank recorded a 5-year CAGR of per cent in gross earnings which increased from N5.515bn to N109.34bn between 2004 and Over the same period, after-tax profit grew at an annual compounded rate of per cent from N637.47mn to N20.81bn. (See graph below) Net Profit Margin of bank currently stands at 19.03% from 27.33% as compared to 2008 and is reduced by 30.35% while the operational efficiency marginally increased by 2.29% which is a measure of Cost to Income. LOANS AND ADVANCES Loans and Advances of the first Nigerian Bank with post January 2009 year end to publish its audited result increased by 60% to N391.7bn in 2009 from N244.6bn in 2008, while the non performing loan ratio reduced by 43.24% from N3.7% in 2008 to N2.1% in Bank Deposits and other accounts moved up by 15% from N351.8bn in 2008 to N405.7bn in

12 TOTAL ASSETS AND TOTAL DEPOSITS In terms of total assets and total deposits, Access Bank has grown tremendously over the past five years. Total assets grew with a 5-year CAGR of 84.77% from N31.34bn in 2004 to N 675bn in 2009, while total deposits grew with a 5-year CAGR of 77.98% from N22.72bn to N405.70bn over the same period. The banks total assets decreased by 35% from N1, 032bn in the year 2008 to N 675bn in Bank Deposits and other accounts moved up by 15% from N351.8bn in 2008 to N405.7bn in EARNINGS PERFORMANCE The Bank s earnings performance, as measured by the returns on average assets and returns on average equity, has improved. The banks return on equity (ROE) and return on assets (ROA) as at March 2009 stood at 14.2% and 3.2% increased by 11.0% and 1.6% respectively as compared to March SHAREHOLDERS FUNDS AND TOTAL ASSETS Banks shareholders funds moved up by 7% to N184.9bn, against N172.0bn in March, last year. This makes it among the top five Nigerian banks and has strong adequacy ratio of 35%. 12

13 CURRENT POSITION On its current outstanding shares in issue of 16.43bn units, it recorded Earnings per Share (EPS) of 127 kobo. OPERATING RESULTS OF BUSINESS SEGMENTS Banks Profit before Tax for comprehensive banking products and services to highly structured corporate organizations by way of Institutional Banking increased by 45.12% despite the difficult operating environment. The bank has expanded operations to at least eight countries and increased its presence in most major cities of Nigeria which has contributed to its income earning capability from commercial banking services and products by 43% from 4.9bn in 2008 to 7.0bn in During the current turbulent market conditions, the banks proactive approach of trading to trading the Forex market led to an increase in PBT for the Institutional Banking group by 20%. 13

14 3. Technical Analysis The Objective: To review the stock valuation by relying on the assumption that market data, such as charts of price, volume, and open interest, can help predict future (usually short-term) market trends. Unlike fundamental analysis, the intrinsic value of the stock is not part of the consideration here. More and more investors are beginning to appreciate and rely on technical analysis in reviewing stocks on the Nigerian Stock Exchange because of the proven fact that market psychology influences trading in a way that enables predicting when a stock will rise or fall. For that reason, technical analysis are market timed based and predicated on the belief that technical analysis can be applied just as easily to the market as a whole as to an individual stock. To this effect, we developed a quantitative measure of price action using a unique and practical method of easily predicting the buying and selling pressure on individual stocks as illustrated in the subsequent findings. In this case, we have provided a snapshot of the technical analysis details available for the stock under consideration. MOST RECENT STOCK PERFORMANCE OF ACCESS BANK SHARES Its share price closed at a price of N9.39, a Year till Date appreciation of 28.63%, year high of N10.85 and low of N3.54. From mid February till April 2009, the stock was trading sideways but since April 17, 2009 the stock gained % and reached the year s high of N10.85 on June 1, (See graph below) 14

15 THE ASI AND ACCESS BANK PLC The All Share Index (ASI) has been outperforming Access Bank Plc stock since During the year 2008, the ASI lost 52.05% whereas the share prices of bank dropped by 70.54% and closed the year at N7.07k with a year s high and low of N25.5k and N5.6k. (See graph below) Currently, the stock is trading at N9.39 and is trading below its 20 days Moving average of N9.39, while trading above its 50 and 100 days Moving average of N7.43, and N7.78 respectively. 15

16 4. The Analyst Insight The objective here: This is not an opinion on the stock (given that we still await the detailed financials of the bank). To enable investors make sense of the data released however, and considering the significance of the paradigm shift achieved; we have thus provided an insight into the deductions we are able to make from the information available for further review and professional advice. FUTURE OUTLOOK Using a basic and conventional approach to analysing stock price, we have; on the basis of PAT declared in the year 2009 of N20.814bn (translates to 127kobo EPS); and based on the financial statements made available this week; that the bank's multiple is between 6x and 7x depending on the EPS used. The company projected an EPS of 131, but generated an EPS of 141. A value analysis using the constant growth and earning model reveals that the max value of Access Bank Plc shares is N10.63k based on the reported earnings and projected DPS of N0.70k per share. A discerning investor will buy at this point, but if it exceeds the fair value, the investor should realize at that point it is a trade not an investment. The market is not looking good at this time so buying above fair value is risky, especially for a trader. Investors who seek to buy the stock should keep the above insight in mind when making their decision. The stock traded as high as N10.90k on the day it announced it results and then pulled back. As at today, when the report is issued the price is at N9.00k. CONCLUSION Based on its alignment with, and championing of the paradigm shift in disclosure and focus; we consider the stock a mid - long term interest, from a value perspective. It is growing company with a lot of prospects for market leadership. We believe that the long term prospect of this stock is not impaired in any way by the developments in the market at this time and investors with this investment horizon are encouraged to give it some consideration with regards to their previous entry point into the stock. The revised projections for 2010 will be a useful tool in assessing the stock further. 16

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