By Omoh Gabriel, Business Editor
The year 2006 presented a tough challenge for most operators of the Nigerian banking industry. The struggle to handle issues arising from the recently concluded consolidation, the advantages conferred on some and disadvantages placed on other threatened to alter the competitive structure of the industry.
For Union Bank of Nigeria Plc, the year was very challenging as most indicators of size and performance of this, only witnessed marginal growth. But irrespective of this, it remained a leading institution in the market and as at 31st March 2006 reported the industry’s second highest balance sheet size (total asset plus contingencies) of N535 billion and deposit liabilities of N275 billion.
But the bank took a number of strategic measure not only to preserve leadership position, but also remain banks of choice to key stakeholders in the preferred sectors of the economy. Perhaps, some of the key shareholders it devoted sufficient energy and resources to provide financial and advisory assistance in the review year include small and medium scale entrepreneurs, exporters, farmers and manufacturers. It is interesting to observe that even though the disbursement rate on the SMEEIS funds has been generally low in the industry (less than 40%), Union Bank’s effort in this area was particularly outstanding. But of the N4.9 billion already set aside in accordance with CBN/Bankers committee initiative, it had actually committed N3.38 billion (which of course is inclusive of N1.49 billion investment in SME subsidiary РUnique Venture Capital Limited in 2006). Twenty companies were listed as haven benefitted from the scheme as at March 2006.
Another critical support area to the economy in which the bank have done well is the agricultural sector. For the past decade or more the bank has been in the forefront of providing the much needed support to this sector. It is indeed, about the first to establish a full fledged unit aimed at working out a close partnership and thus provide informed solution package to the numerous constraints of the sector in our environment.
For its numerous success in this sector measured by number and quality of interventions, Union Bank has won more awards than all over banks combined in the past decade.
One other area the bank made appreciable impact during the year and which helped define a new capacity to offer quality service to customers is investments in information technology infrastructure. During the 2005/2006 period, it completed the process of linking all its branches to the online, real-time network under the robust flexible banking application platform with plans to migrate to the latest version in the current financial year. With the new investments in ICT, its ability to develop and market such products as ATM, internet banking, electronic purse, payment, v-pay etc is now enhanced just as it is now more convenient for customers to effect their transactions.
In the course of the review period, Union Bank also took steps to strengthen group operations. It upscaled shareholding interest in Banque Internationale du Benin Cotonou from N390 million to N1.15 billion, set up Union Capital Markets Ltd and subsidiarised Union Registrars Ltd. Before now, the company operated as a mere department in the bank. It is interesting that this subsidiary is now the largest in that sub-sector distributing an average of N12.0 billion dividend annually and handling the highest number of companies in the market. Other subsidiary and associate companies within the Union Bank Group include Union Homes Savings & Loans, Union Trustees, Consolidated Discount House, Union Property Company, Union Bank (UK) and HFC (Ghana) Ltd.
Apart from accounting for a significant part of the group accounts, the subsidiaries and the associates also contributed towards growth recorded by the bank during the review year just as the acquisitions it consumated.
After carrying out a series of the due diligence studies on a number of banks during the consolidation period, it eventually narrowed its choice and subsequently acquired the erstwhile United Trust Bank, Broad Bank. Because of the painstaking effort that went into the exercise at the due diligence stage, substantial progress has been made towards integration of people, processes and systems. However, a few challenges still lie ahead and these relate more to harmonisation of culture and technology. With massive investment in ICT Infrastructure lately and coverage of all branches in the online real time network, significant aspect of the challenges will soon be fully overcome. During the period, personnel was harmonised and remuneration packages upscaled for higher productivity. About 3831 staff benefitted from the training programme or the other out of total employee base of 6931 representing about 55%. While about 500 employee exited the bank following the consolidation, about the same number of fresh graduates were recruited thereby helping to reduce youth unemployment and contributing to the economy.
Being one of the banks that have benefitted immensely from the public, Union Bank also makes a number of contributions to the society with remarkable interest in sports, health and education. In all it spent about N30.7 million for such causes during the year. The bank encourages its staff to take interest in extra-curricular and sports activities and by this, it spend a vastly equipped ultra modern sports complex for staff and general public and yet another one for management at Ikoyi.
Definitely, the bank have tried in one way or the other for society out of the abundance of what it has achieved over the years in the form of solid financial performance and 2006 was no exception.
Earnings and Profitability
Over the past five years, a consistent pattern of growth in earnings of the bank was recorded. There has been an absolute increase in gross earning by overage of N5.05 billion every year the level of N50.74 billion achieved in 2006.
In line with the trend among its peers, the proportionate contribution of interest income though high, has declined successively. During the review year interest component was 68%, down from 76% in 2005, 77% in 2004 and 79% in 2003.
But leveraging on its dominant position in the money market, its was able to hold cost of funds from increasing remarkably even as deposit base expanded. Hence, gross margin in funds business remained extraordinarily high at 79%, same as recorded as far back as 2003. It however declined marginally from 81% achieved in 2004 and 2005.
However because of the relatively show growth in earnings relative to over costs, both analytical measures of efficiency in terms of earnings and cost management declined in 2006 to 20%^ and 24% from 22% and 27% respectively.
But because o of higher from N9.4 billion to N10.04 billion in 20056 in line with all other size parametres. However, al relative measures performance trend downwards in a manner that understand the tough challenges faced by the bank during the year and also the fact that proceeds the bank’s issues only came in towards the end of the period and could not be utilised to improve the figures. Accordingly earnings share did not only declined from N2.10 to N11.11, return on average shareholders fund also declined from 25% to 15%, lowest in the past five years.
Equally shareholders received lower reward the way of cash dividend of 69k per share against N1.40 in the proceeding year. They also received a scrip dividend of one ordinary share for every ten previously hold. This however received less than enthusiastic response from the capital market.
Adequate of capital base
This is perhaps one area Union Bank made the most appreciable acquisition impact during the period. In addition to its acquisition of Union Merchant Bank, Broad Bank and United Trust Bank, it made a highly successful outing to the capital market to raise fresh funds. Although the intent was to raise about N40 billion from both public and rights issues embarked upon between November 2005 and January 2006, it succeeded in raising about N55.1 billion. This was an expression of confidence on the bank’s ability to create value for investors. With these exercise, the banks’ shareholders fund closed 2006 financial year with a figure of N95.7 billion which till date remains the highest (valided) in the industry, up from N39.13 billion in 2005. Accordingly the Adjusted Risk Weight Asset Ratio rose sharply to 30% after remaining that at 21% in 2004 and 2005. This no doubt provided the necessary cushion and confidence required to expand the scope of business and compete effectively for number one spot in the industry in the post consolidation period. It is expected that this competition will be fierce and may not be easily resolved in the next three years. But with the current leading position in capitalisation level and margin of comfort, Union Bank appear ready to offer a credible challenge.
Quality issues
For any bank the size of Union Bank, quality issues must continually be the front burner else there will be easy compromise, high dead weight costs and significant value erosion. Being aware of substantial carry over quality problems in the past, the bank in the last five years have implemented a number of measures to ensure the integrity of assets, liabilities and processes.
Particularly the risk asset management process received sufficient attention and the result is that quality of risk assets improved consistently with an all time best reported performance in 2006. For instance non-performing loans ratio which was as high as 26% in 2003 improved to 23% in 2004, 19% in 2005 and 17% in 2006. This is now favourably comparable to average industry performance.
Traditionally, Union Bank had in the management of its balance sheet skewed investments towards riskless and low risk short term assets with short term to total assets ratio remaining at levels above 67% up to 2005. However, in 2006 slight departure was recorded in response to competitive. Like most of its peers in revved up the process of risk asset creation in order to generate sufficient earnings to reward investors. As at close to the 2006 period, adjusted liquidity ratio came down to 55% from 71% in 2005, 75% in 2004 came down consistently the position in 2006 remained comfortably above the minimum prescribed threshold of 40% and suggests that ability to meet obligations to, and demand of customers not compromised. On balance therefore it is the opinion of analysts that quality of assets and liabilities as reported turned out better in 2006.

File name Union Bank.wpd February 3, 2007 Peter