Introduction
United Bank for Africa is one of the fastest growing banks in the African continent. It was formed in 1961 in Nigeria and has its headquarters in Lagos. Universally, it has more than 6 million customers, and has 750 operational branches distributed in almost 20 countries in Africa. It prides of its existence in USA, France and UK. The bank was formed through a merger agreement with Standard Trust Bank in 2005. The bank is listed in Nigerian Stock Exchange. It became the holding company in 2011.
UBA uses the International Financial Accounting Standards (IFRS) as its major accounting principle, and Base Two Prudential Standards. It is also compliant with COSO (Committee of Standards Organization) principles. The values of the company are based on four main pillars, that is Sound, Progressive, Efficient and Personal pillars. The employees of the company follow the HEIR principle which is an acronym for Humility, Empathy, Integrity and Resilience.
Financial ratio analysis
Financial ratio analysis of the company is important as it helps the management to know how the company is performing. It will act as a source of decision making and a benchmarking tool in the ever expanding banking industry in Nigeria and beyond. A number of ratio analyses will be performed so as to determine the company’s financial performance.
Practically, there are various ratios which would be used in order to reveal whether the company is performing or underperforming. As such it is important to first understand what these ratios are and the implications of their figures on the company performance trends.
It is important to start with the profitability ratios of the bank. Basing on the summary of the company, it is indicated that the profit after tax was up by 90% up to N40, 825 million. The profit before tax (gross profit) is N26.2 billion. The exceptional items together with profit before tax increased by 82% in 2008 to N56 billion. However, there were challenging conditions especially in the second and third quarters. These challenges were as a result of deposit taking, hence putting great pressure on the profit margin. However, the bank has demonstrated its ability to leverage the level of profitability due to the bank’s huge economies of scale.
Net profit ratio for the bank shows the relationship between the net profit (after taxes) and the sales. The company’s net profit ratio increased to 35.48% in 2008 from 27.77% in 2007. Getting the difference in these percentages it means that there was an improvement of 21.37% in the net profit margin during that period.
Net profit is found by dividing the net profit by net sales.
Net profit margin=net profit/net sales*100
For the year 2008=
40002/112744*100=35.48%
For 2009=45678/102345*100=44.63%
As per the computed ratios above, the bank is showing increased profitability with time. The reason is because of increased focus on managing the banks financial efficiency. The capital retention ability is also shown by the above calculated net profit ratio.
Dividend coverage ratio. This company paid 11.48% as dividends in 2007, compared to 12.2% it paid in 2007. Hence from the above ratios it can be seen that the company was able to retain 88.52% and 87.8% of earnings in the two consecutive periods.
Dividend coverage ratio
This ratio is found by dividing earnings per share with the dividend per share. Looking at the two periods, that is 2007 and 2008, the later year has a higher dividend coverage ratio than the earlier year
Current ratio
This ratio is found by dividing current assets by current liabilities
Looking at the above ratios it one gets an understanding that the bank’s ability to pay its short term debt as they fall due is declining. Despite an increase in profitability ratios the bank’s assets never rose, but they declined. This means that the bank will not be in a position to settle its short term obligations using the liquid assets (Koch, et al, 2009).
It is therefore important that the bank should critically review its liquidity policies and get a way of improving its current ratio index. Decline in current ratio implies that the bank’s liquidity is questionable. Therefore the bank should improve on ways of handling its working capital. The bank’s current assets include cash due from financial institutions, cash and short term funds and treasury bills. The managed funds and current account deposits make the bank’s current liabilities.
The bank can also increase its current ratio through paying selling unproductive assets. When these assets are sold the bank can then be able to increase cash hence increasing the current ratio index. More so through increasing shareholders funds the bank can be in better position to improve its current assets. If the bank’s current assets are financed by equity, instead of creditors, the current asset level would rise while the current liabilities remain constant. This will hence increase the current ratio (Koch, et al, 2009).
The bank should also devise ways of how to improve its cash flows so as to enhance working capital management. The bank should thrive to have a comprehensive overview of its cash positions any time. There need to be increased visibility on these cash balances so as to reduce idle balances. Perfect knowledge of how the branches handle their accounts is also crucial if UBA is to improve on its working capital management.
Improving working capital involves various steps. The company should first forecast its effective cash. The bank’s cash needs should be projected and ways of attaining the projections to be evaluated. The forecasting should take into account any unseen contingencies like the delays of payment and other adverse business cycles.
The risk management in the firm should be improved. The volatility of profits should be made evaluated and ways of improving profitability ratios be sought.
External funding should be sought if there are difficulties facing the company. This could be due to economic downturns, where the bank’s financial performance might be affected. To shield the bank’s operations the bank should get access to foreign funding or even external funding. Reduction of costs in the bank is also another way of improving the working capital management. Payment of rent should be mutually shared with another firm in order to reduce the tax burden (Koch, et al, 2009).
Other very important ratios which should be taken into consideration include the debt ratio. Debt ratio is found by dividing total assets by total liabilities.
Debt ratio for 2008=1332095/1674560*100=79.54%
Debt ratio for 2007=937682/1200455=78.11
The company should be able to evaluate what other companies owe it in order to facilitate the debt repayment.
The bank should target at improving the quality of its services in order to improve the efficiency. The bank’s performance depends on how much effort the bank is taking in ensuring that the provision of high quality services is promoted. In case there is any short fall in expectations, the bank management should seek ways of correcting the problem.
The bank should also concentrate on the major activities which are central to its operations. This may include practically sacrificing the organizational and geographic scope of the business and lowering complexities and bureaucracies in the business.
The bank should also be able to mitigate both financial and non-financial risks. The bank’s ability to fight against risk depends on the strength of its financial statements. If the bank is underperforming in banking efficiency then there are chances that the risks associated with lack of inefficiency in banking operations might occur. As such risks mitigation policies should be put in place so as to increase the level of efficiency of the firm.
The decision as to whether to make new investments or not depends on the profitability of the business. If the bank has not made any substantial profits ever since it started operating or the profits keep fluctuating then the possibility of venturing into new investments will be adversely affected. More so the profitability of the investment should be such that the payback periods should be shorter and that the cash flows being realized regularly should not be volatile.
Reference
Koch, T. and MacDonald, S. (2009). Bank Management, New York: Cengage Learning.
