UBA's Competitive Advantage : Tony Elumelu

"The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage." - Warren Buffet

Standard Trust Bank/ UBA at NYSC

I moved back to Nigeria in Feb. 2005 (after 12years away) with little knowledge of the Nigerian Banking Sector. My first encounter with Standard Trust Bank (“STB”) was at National Youth Service Camp in March 2005. At the Camp there were over ten (10) banks providing services to youth corp members. I noticed something very peculiar – The STB tent was well patornized, while the other bank tents stood empty. I was curious as to why this was the case hence I made inquires from my fellow corp members as to why they seemed to prefer STB to all the other banks. Most of the corp members I spoke to pointed to a map of Nigeria with red dots all over it (that indicated STB branches) as if to say “see stupid American boy STB is in every corner of Nigeria.”

“THE NEW UBA” at HBS

On February 8^th, 2006 at the Africa Business Conference at Harvard Business School, Boston, Massachusetts, Mr. Tony Elumelu, the Group MD of United Bank for Africa(“U.B.A”) gave a keynote address. I sat attentively in the audience absorbing every word Mr. Elumelu spoke.

In his speech Mr. Elumelu detailed his journey from a Bank Manager to his establishment of BGL LTD , and BGL’s takeover of the struggling Crystal Bank (later STB). At the helm of STB, Mr. Elumelu took the bank where no other bank would go (a strategy paid off heavily). STB went into every corner of the country – To the Grassroots; STB developed innovative new products and targeted markets (i.e youth corp. members) that other banks ignored. Mr. Elumelu and his team drove the STB brand into the psyche of most Nigerians as a bank that was easily accessible and welcomed everyone, regardless of social class. The most intriguing aspect of the STB story was that a bank that was practically dead a few years ago became very profitable and took over U.B.A - one of the most prestigious banks in the history of Nigeria.

UBA at the NIGERIAN STOCK EXCHANGE

I am always excited to go to the Nigerian Stock Exchange (“NSE”); hence I find every excuse possible to go there. On June 28^th, 2006 my excuse to visit the Nigerian Stock Exchange was UBA’s Interactive session with financial stakeholders and stock brokers.

At the event, Mr. Elumelu laid out his vision for the future of U.B.A. His vision was clear and simply – UBA is going to be the leading bank in Nigeria, the leading Bank in West Africa, the leading bank in Africa and finally a leading Global player.

Mr. Elumelu and his team reminded the audience of their continued innovativeness and the dominance of the UBA Group in the Nigerian Financial Services Industry.

On an August 1^st, 2005 visit of Mr. Elumelu and the UBA team to the NSE to commemorate STB’s de-listing and the listing of the new United Bank for Africa (UBA) Plc, Director-General, NSE, Dr Ndi Okereke-Onyiuke, speaking on the occasion said: "The emergence of the new UBA shows that Nigerians, when they put their mind into achieving something, can truly perform. Today marks the first truly consummated merger in line with the CBN directive."

I would rephrase Dr. Ndi Okereke-Onyiuke’s statement to say “The emergence of the New UBA shows that Tony Elumelu, when he puts his mind into achieving something, can truly perform..”

UBA’s competitive advantage : Tony Elumelu

In evaluating the stock of any company one should consider many factors like a company’s P/E ratio, history of past performance , profit margins, competitive edge and several other fundatmenatal factors. One of the most important fundamental factors in analysising a business is the track record of the Management. In any analysis of the U.B.A Group Mr. Elumelu should be considered a strong competitive advantage for the Bank.

Mr. Elumelu is a man with vision that sets his mind to achievieng a goal and delivers. I would compare Mr. Elumelu to Warren Buffet who took over an ailing textile mill (Berkshire Hathaway) and turned it into one of the foremost business empires in the world. Just like Buffet, Mr. Elumelu continues to prove himself time and time again. $10,000 invested in Berkshire Hathaway in 1965 (When Buffet took over the company) would be worth well over $50 million today. How much would your 1million naira invested in UBA today be worth in say 10 years, 30 , 40 years from now?

The Zenith Bank Public Offer - Can an elephant be as nimble as a cheetah?

Zenith Bank’s (“Zenith”) N50bn public offer ended on Monday March 20th, 2006. The offer was previously scheduled to close two weeks earlier on March 6th, 2006. In a recent Vanguard Newspaper article it was suggested that “the offer might have actually been fully subscribed and that the bank’s decision to extend the closing date might be aimed at a bigger target of between N60 billion and N70 billion and would work towards retaining everything subject to SEC approval since government new liberal regulations on financial institutions allow banks to retain any excess proceeds of an offer.” Ummm……. Sounds Interesting?

Whatever the case may be if the public offer is fully subscribed or on the contrary undersubscribed like the rumor mill says, is/was Zenith a good buy?

Jim Ovia (Zenith’s CEO/MD) has done a wonderful job running Zenith Bank over the years; In 2004 Zenith Bank successfully went to the market to raise capital and they are doing it again this year. The issue about raising capital is that one has to be able to use this ‘new’ capital to generate adequate returns for shareholders. Has/can Zenith use/invest this additional capital effectively? Or a more appropriate question is can an elephant be as nimble as a cheetah? Zenith is growing from a cheetah to an elephant in the space of two years - from a N15bn bank (shareholders funds) to a potential 100bn bank.

The dynamics of managing a bank with 15bn in shareholders funds in 2004 is a lot different from managing a bank with 90bn - 100 bn in shareholders funds 2006.

There have been many rumors about what Zenith intends to do with the money, 1. Acquire Union Bank - the 2nd largest bank in the country or 2. Manage external reserves (the Banks in the country require a capitalization of $1 billion or N127 billion to qualify for the management of the external reserves) – apparently this is a very profitable business or 3. e.t.c but whatever the case might be it would be interesting to see how it all plays out..

In summary an investor in Zenith’s offer on has to consider:

Has/can Zenith use/invest new capital effectively?

Can Jim Ovia manage a N100bn bank as well as he did N10-15bn bank?
I don’t have a clear cut answer to these questions, hence buying the shares will be purely speculating (There is a clear difference between speculating and investing). But I think regardless of how Zenith turns out its shares are probably going to go up substantially because the Nigerian stock Market is highly inefficient.

How and Why Do Companies Pay Dividends?

How and Why Do Companies Pay Dividends?:

"Arguments Against Dividends
First, some financial analysts feel that the consideration of a dividend policy is irrelevant because investors have the ability to create 'homemade' dividends. These analysts claim that this income is achieved by individuals adjusting their personal portfolio to reflect their own preferences. For example, investors looking for a steady stream of income are more likely to invest in bonds (whose interest payments don't change), rather than a dividend-paying stock (whose value can fluctuate). Because their interest payments won't change, those who own bonds don't care about a particular company's dividend policy.

The second argument claims that little to no dividend payout is more favorable for investors. Supporters of this policy point out that taxation on a dividend is higher than on capital gain. The argument against dividends is based on the belief that a firm who reinvests funds (rather than pays it out as a dividend) will increase the value of the firm as a whole and consequently increase the market value of the stock. According to the proponents of the no-dividend policy, a company's alternatives to paying out excess cash as dividends are the following: undertaking more projects, repurchasing the company's own shares, acquiring new companies and profitable assets, and reinvesting in financial assets.

"

Empowering Financial Decisions

A study of Graham Value Investing Principles in the South African Markets

Long-term Investing

Dah Hui Lau (David): Long-term Investing:

"Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, you will find only a few companies that meet these standards - so when you see one that qualifies, you should buy a meaningful amount of stock. You must also resist the temptation to stray from your guidelines: If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio's market value.'

'We try to price, rather than time, purchases. In our view, it is folly to forego buying shares in an outstanding business whose long-term future is predictable, because of short-term worries about an economy or a stock market that we know to be unpredictable. Why scrap an informed decision because of an uninformed guess?" by Warren Buffett

UNION BANK's Public Offer

Union Bank Nigeria Limited's shares went on sale by way of a public offer and rights issue on Wednesday, November 23, 2005. The offer which was initially scheduled to close on December 21, 2005 will now close on January 9 2006, while the rights issue will close on January 17 2006 (Why the extension?).

As most of us know, Union Bank (formerly Barclays Bank of Nigeria) has been one of the foremost banking institutions in Nigeria for several decades. The bank has the largest amount of the savings deposit in Nigeria, second only to First Bank. The bank has also produced solid financial results over the last few years. But are the bank shares currently an attractive buy?

The recent banking consolidation exercise has changed the landscape of the Nigerian Banking Industry. It is essential to analyze Union Bank’s competitive advantage in the post consolidated banking industry as guidance in buying the bank's shares.

Qouting Warren Buffet:
"The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors."

So what is Union Bank’s competitive advantage?

• It is absolutely no secret that the bulk of Union Banks clients are pensioners and baby boomers. What plans or strategies are being implemented by Union Bank to target the younger generation -key drivers of the banking business in years to come?


• Pre- Consolidation, Union Bank’s major competitive advantage had to do with its size. Post Consolidation will Union Bank be much larger than its competitors?


• Has Union Bank produced commendable return on capital compared to its peers and will it do so in the new dispensation?Avg Return on Equity over three years - First Bank : 33% , Union Bank : 22%, Zenith : 30%

These questions are among a very long list of questions an investor should ask in consideration of purchasing Union Banks Shares.

Economic Development Bulletin

Cato Institute:

"According to the president of the Institute of Chartered Accountants of Nigeria, Chief Jaiye K. Randle, individual Nigerians are currently lodging $170 billion in foreign banks – far more than Nigeria’s foreign debt of $35 billion."