Financial Derivative Company has placed a buy recommendation on United Bank for Africa shares based on an analysis of the bank’s interest earning potential and asset quality.
The recommendation also comes on the heels of rising interest rate environment, expansion strategy and favorable regulatory policies aimed at ensuring stability in the financial system.
The analysts noted that though the downturn in the oil and gas sector has led many banks to impair loan assets belonging to oil and gas firms that have issued servicing their obligations, the bank’s total oil and gas exposure of 19.2 per cent has limited its asset write-offs on its loan books.
According to FDC, the bank’s Non-Performing Loan, NPL, ratio of 1.7 per cent is one of the lowest in the banking industry, and it underscores the bank’s commitment to a sophisticated and enhanced risk management structure.
“Though more than half of UBA’s oil & gas exposures are to the troubled upstream sector, they are to large international oil firms and a good number of the loans have been restructured.
“Furthermore, with yields on government securities increasing due to the adoption of a tighter monetary policy, UBA stands to gain from its investment securities,” the analysts said.
Additionally, it added, a possible hike of the Monetary Policy Rate, MPR, due to inflationary pressures would lead to a high interest rate environment, thereby positioning the bank to benefit though increased interest income.
It explained that as the regulatory bodies become concerned about financial system stability, there may be less stringent regulations that could affect banking profitability, adding that the introduction of the negotiable current account maintenance fee reflects the CBN’s desire to maintain a stable financial system.
The FDC stressed that the fee mitigates the loss of fee and commission income due to the implementation of zero commission on turnover, COT, fees.
“The bank’s Q1’16 result shows an 11.2% increase in net fee and commission income. The combination of the economic and banking system factor, alongside the UBA’s strategic expansion drive, shows that UBA is a company with a significant upside.
“We derived our valuation for United Bank for Africa Plc using the dividend discount model (DDM) method. Our fair value estimate for UBA Plc is N5.31, which is a 56.2% upside on its current share price of N3.40 as at 09 May, 2016.
“ The discount rate used in the DDM is the cost of equity (20.7%), which is computed via the capital asset pricing model (CAPM). The terminal P/BV, which is factored into calculating for exit multiple, was derived using the formula (Return on Equity (ROE) – Net Income Growth)/ (Cost of Equity – Net Income Growth). The intuition behind using this formula is considering how much of UBA’s ROE is being allocated to grow dividends and how much does it cost,” the analysts said.