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UBA PLC Company Update - EPS accretion as bank cancels shares

EPS accretion as bank cancels shares

UBA crosses shares following shareholders’ approval

Prior to the UBA and Standard Trust Bank (STB) merger in 2005, we gathered that STB had a Staff Share Investment Trust Fund. The scheme was established to give employees the right to buy shares of the company. The trust deed was then renewed post-merger to cover the staff of the combined entities. We understand that the new entity - UBA, acquired its shares and transferred same to the Staff Share Investment Trust Fund to hold in trust for its staff. However, at the Annual General Meeting last year, the shareholders of the bank agreed to cancel the portion of the shares yet to be vested held under the SSITF. Following this, UBA repossessed the unvested 2.08 billion units of its ordinary shares accounting for 5.7% of the amount outstanding. We highlight that as at the end of Q1’17, the Staff Investment Trust Scheme was the top shareholder – holding about 6.3% of the bank’s shares outstanding. We are of the opinion that an additional 0.6% of the shares outstanding must have been vested since the end of Q1’17.

No liquidity or capital adequacy impact, possible EPS accretion

We note that this transaction is not a share buyback but a cancellation of shares, hence it has no direct cash impact. In our opinion, the decision to cancel the shares rather than selling it in the secondary market is an indication of the fact that the bank believes its shares are currently undervalued. After obtaining necessary regulatory approval, we expect the bank’s equity position to be reduced by the transaction value of ₦19.7 billion (Share Capital: ₦1.04 billion and Share Premium: ₦18.66 billion). Whilst we expect the corresponding entry to reduce the bank’s asset (previously classified as financial instrument), we highlight that the share cancellation will have no impact on the bank’s liquidity and capital adequacy ratios. Given that the transaction is non-cash, we do not expect it to have a direct impact on UBA’s liquidity ratio (FY’16: 39%). Also, although the cancellation is expected to reduce the bank’s capital buffer as highlighted above, we note that UBA has historically deducted the value (accounted for as treasury shares) from its shareholders’ equity before computing its capital ratios. With this, we also do not expect the cancellation of shares to impact the bank’s capital ratios – particularly CAR (FY’16 CAR at 20%). On the contrary, we expect an EPS accretion from the transaction. With the bank cancelling a portion of its outstanding shares, we estimate an increase in EPS. Although we do not expect this to impact H1’17 result as the bank is yet to get necessary regulatory approvals, we expect this to reflect in the post 9M’17 result. Whilst we maintain our FY’17 PAT forecast at ₦77 billion, our basic EPS estimate post-share cancellation is ₦2.25 (Pre-cancellation: ₦2.12).

Board sits, Interim dividend in view

At its meeting held yesterday, the Board of UBA approved the payment of interim dividend subject to the approval of the CBN. We highlight that the decision is in line with our expectation. Supported by the impressive Q1’17 performance, we expect H1’17 numbers to come in strong despite our relatively weaker Q2’17 expectations – pressured by higher loan loss provision estimates. Amidst our conservative loan growth forecast of 4% for H1’17 (2% growth recorded in Q1’17), we expect top line to be largely supported by the high interest rate environment. With our ₦77 billion PAT forecast for FY’17 (7% y/y growth forecast) and a dividend payout ratio expectation of 38.5%, we estimate a DPS (ex-share cancellation impact) of ₦0.75 (FY’16A: ₦0.60). Overall, we estimate an interim dividend of ₦0.25 for H1’17 (final for FY’17: ₦0.50).