Union Bank Rights Issue: Why I May Not Buy

Union Bank Plc, one of Nigeria's oldest banks has for over a month now offered for sale shares in its company to it's own shareholders by was of a rights issue. The bank if you recall was one of the banks that failed the stress test in 2009 leading to it being bailed out by the CBN with N120b of tax payers money. The bank was further given a lifeline by Amcon which bought its NPL's (non Performing Loans) valued at N370b for N228b. Even at that the bank is still underwater as it still has a negative shareholder funds of about N136b as at 2010. They are selling 1,407,291,667 at N6.81035 per share rasing about N9.584b in the process. As can be inferred that is not near enough to get them out of the woods.

Their Plan

The bank via a series of cancellation and readjustments of its share capital therefore decided to raise equity to help plug the gaping hole in their balance sheet. To achieve that they had in realising that the stock market wasn't going to be smiling at them, resorted to loking for institutional investors locally and abroad who will be willing to take the risk on them. They claim to have reached an MOU with a consortium called African Capital Alliance (ACA) under an Investment Vehicle called UGPL. (Amcon will also be investing via that vehicle) to invest tier one capital into the bank. This deal results in a sale of 11,008,274,206 and 3,394,407,265 ordinary shares to ACA and Amcon respectively given them 60% and 19% shareholding in the bank respectively. Original shareholders of Union Bank (assuming they fully subscribe the rights issueis left with 18% bringing the total outstanding shares of the company to 18,343,098,138. All of this it is believed will bring the company into positive territory and increasing their Capital Adequacy Ratio to 25%. The CBN currently ask for 15% I believe.

My Observations

» By giving the existing the Investors a combined 79% (ACA has 60%) of the equity of this bank controlling interest has obviously changed. The bank can as well delist itself from the NSE if it so wishes. This is also dicey as existing shareholders no longer have a controlling stake in the back and as such cannot influence decisions that affect the strategic direction of the bank,

» The prospectus strangely avoids any mention of 2011 Financial Statements. It does not give you their quarterly unadited accounts for that year which I believe should have been available.

» I am assuming that everyone gets to buy the shares at N6.81 thus generating a sum of N107,665,917,069.8 (15,809,973,138.00 shares at N6.81). Still not enough to plug the hole considering that we just have 2010 Accounts as the most recent and only available reference to historical figures.
The bank hope to generate profit after tax of N64b for the next 3 years, made up of N9.1b, N17.9b, N19.4b 2012, 2013 and 2014 respectively. Yet no mention of 2011. To put things into proper perspective, Zenith Bank for example reported an unaudited profit after tax of N42.5b as at third quater 2011. That is two thirds what Union Bank plans to make it 3 years.

» Zenith Bank currently trades at about N12 with a price earnings ratio of 7.8x (8.89 using their 2011 Q3 EPS). Union Bank using the 2012 projection has a PE of 12.7x, 6.85x and 6.04x for 2012, 2013, 2014 respectively. A seemingly attractive price if their projections are achievable. But then they are not. Stanbic Bank currently has a PE of 13.3x.

» The banks profit before tax projection for 2011 is a meagre 19% of the turnover, a considerable low profit margin for a bank like that.

» I also think there is still a likelihood of more provisioning for their non-performing loans. This is likely to impact on profit more.

» The bank has a related party loan of about N13b with most of them either unsecured or secured with shares or goods. Sahara Oil has a related party loan of about N4.1b though performing but secured on trust reciepts and goods. Notore Chemicals as N6.8b unsecured and non performing related party loans with the bank.

» As at 2010 their loan value was put at N254b with 49% representing short term loans of under 1month. Not large enough to make generate significant interest income imperative to their ability to meet their targets.

» Customer deposits is just N598b with nearly 90% held for just under one month. This shows customers have little faith in the bank to hold their month beyond one month explaining why most of their loans short term in nature.

I could go on and on but then without 2011 it is difficult to correctly estimate if the share price is worth it. It will take a lot to convince to exercise my rights and buy the shares based on my concerns above. There are a lot of other banks with lesser problems than Union Bank that seem a better alternative.

http://www.ugometrics.com/2012/02/why-i-may-not-buy-union-banks-right.html

Please what is the relationship between the first two posts and this topic?

P/E ratios are generally useless for evaluating banks. Where are the ROE and Price/Book numbers and how do those compare with the others?

It's pretty difficult to file audited 2011 results this early. They should have postponed the rights issue until they could provide those results (unaudited results mean jack shit, especially in Nigeria!).

The biggest red flag (and most disturbing) here is the short-term operations of the bank. All on-demand deposits are by definition short-term so i am guessing the article is referring to short-term fixed deposits. Short-term fixed deposits by who? By a few related parties? Who is parking money at Union Bank to make it look good to mugu- investors? Union Bank can't find on-demand customers even with the explicit guarantee of deposit insurance?! Are things that bad? Then it's little surprise that there isn't any maturity transformation and the bulk of their liabilities are also short-term. What kind of loans gan sef are they making on a month-month basis besides letters of credit and overdraft facilities? The whole thing just sounds like an elaborate scam: just like round-tripping but without the juicy, cost-free profits.

I don't know too much about banking but the little I know makes me worried that most of these salvaged banks are zombie banks. Better run for your dear life before they use your funds to issue special dividends to their private equity owners!

MY SEUN, can you please explain to me wot is wronge with UBA bank shear, the price is just going down why

FYI