Why I may not buy Union Banks Right Issue

Union Bank Plc, one of Nigeria’s oldest banks, has for over a month now offered for sale shares in its company to its own shareholders by way 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 N120bn of taxpayers’ money. The bank was further given a lifeline by AMCON, who bought its NPL’s (Non-Performing Loans) valued at N370bn for N228bn.

Even at that, the bank is still underwater as it still has negative shareholder funds of about N136bn as of 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 looking 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 to the rights issues 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 Observation

• 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 unaudited 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 hopes 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 the third quarter 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 bank’s 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 receipts 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 are 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.