UT Bank set to dominate SME market

With fresh capital injection from International Finance Corporation (IFC) and German Investment Corporation, coupled with myriad of experiences in dealings with the SME market, UT Bank  is set to dominate operations in the informal market in addition to establishing a strong image in the formal sector.
Initially, UT Bank focused on SME financing but sustainability and risk diversification have necessitated an extension to cover the formal sector, all of which have helped the bank offer an array of value added services to its clients.

UT Bank in switching from a financial house to a universal bank, has not lost sight of its focus since its inception. The bank still maintains the theme “…loans in 48 hours’’.

Capital requirement via strategic investors

In  the first quarter of 2012, UT Bank met the regulator’s new capital requirement of GH¢60 million for all universal banks in the country through an equity injection of $15 million by the IFC Corporation, a member of the World Bank group.

In addition, IFC provided a $5million senior loan and a $10 million trade finance guarantee facility to the bank, thus totalling $30 million.

IFC’s vision is that “people should have the opportunity to escape poverty and improve their lives”. We believe this vision provided guidance in taking a shareholding stake in UTB.

With IFC’s global experience in providing value in emerging markets, UTB will benefit, both tangible and intangible, from the expertise and competence of IFC.

Banking on wheels

In April 2013, UT Bank unveiled its latest banking innovation known as ‘’UT Bank on Wheels.’’

The rationale behind this concept is to provide full mobile banking services, including international money transfers and automated teller machine services, hence enabling customers to conduct their transactions close to their businesses.

Considering mobility and flexibility of this strategy, UT Bank  has initiated a major step to extend its coverage to the unbanked population of the working age group in other areas in Ghana.

2012 Operational performance

UT Bank released its audited financial report covering the 2012 fiscal year, posting a top line of GH¢134,110,000.

This represented a 34.24 per cent jump from previous year’s figure of GH¢99,901,000. Revenue growth was majorly catapulted by high lending rates on retail loan portfolio.

Also, interest from investment securities more than doubled in 2011 to an estimated year end value of GH¢5,062,000, compared to GH¢1,223,000 in 2011.This translated into a net interest margin of 9.00 per cent.

The bank reported an operating margin of 16 per cent, a 100 basis point above previous year’s rate. Operating expenses shot up by 36.68 per cent due to extensive advertising and marketing of the UT brand to attract deposit from the banking public.

Impairment charges for year under review was GH¢13,153,000, a 7.66 per cent drop from previous year’s figure of GH¢14,244,000.

The bank recorded a net profit of  GH¢20,931,000, citing a net profit margin of 16.00 per cent,  three per cent above prior year’s margin of 13 per cent.

Despite the growth in UT Bank’s bottom line, Return on Average Equity (RoaE) at the end of the 2012 dropped by a one per cent to 22 per cent due to an increase in UT Bank’s equity base.

Released financials

Top line for half year of this year rose by 42.70 per cent as against previous year’s jump of 46.73 per cent.

This is attributed to  the periodical percentage decline in interest income to a reduction in credit customers base as UT Bank held its base rate at 25.90 per cent whilst other industry players reduced their base rate in response to Bank of Ghana’s new interest rate formula implementation.

Nevertheless, a 35.90 per cent surge in other operating income, coupled with a drastic reduction in operational cost led UTB to post an operating profit of GH¢14,816,000.

The bank’s non-performing loan ratio witnessed a decline from 10.54 per cent in the second quarter of last year to 9.06 per cent  in the second quarter of 2013.

Competition, value and growth

With competitors trumpeting a strategy of targeting the informal sector due to saturation of the corporate sector, margins are likely to be stretched in the current year.

Nevertheless,   UT Bank is set  to dominate operations in the informal market considering its experiences and familiarisation with operations in the SME market.

The propensity to hold onto its leading position in the informal market has inclined UTB to introduce medium term loans (MTL).

Industry position

At the end of 2012, UT Bank ranked 9th position in terms of industry share deposit. This represented a major jump considering the bank’s previous position of 13th in 2011.

UT Bank  recorded a loan portfolio size of GH¢679,648,000, representing 5.60 per cent of total industry loans and advances, hence occupying an industry position of 8th compared to 7th in 2011.

The bank  maintained its loan allocation in the same band for 2011. Commerce and finance continue to represent a higher percentage of total loans and advances.

Risk management

UT Bank, like any financial institution, faces a major risk in the area of loan delinquencies.

But the bank’s risk terrain extends into unchartered areas where competitors have avoided. UT Bank significant exposure in the informal sector continues to raise red flags considering the high default rate in the informal sector.

With loads of experience in being a Small and Medium Enterprise (SME) before graduating to a deposit bank, UT Bank possesses the necessary experience to mitigate the embedded risk in the SME sector.

UT Bank’s liquidity risk remains well managed as both assets and liabilities are matched accordingly. Current ratio improved from 1.01x in 2011 to 1.06x in 2012.

Acid test ratio remained strong at 0.17x compared to 0.16x in 2011. This was equal to the industry’s average of 0.17X at the end of 2011.

In the medium term, we expect liquidity risk to improve especially as the decline in interest rate is likely to push savers into long term instruments.

Stock market performance

UT Banks stock has cumulatively performed well. The stock opened the year at a price of GH¢0.38, but currently trades at GH¢0.47, translating into a yield to date of 23.68 per cent.

UT Bank touched a year to date high of GH¢0.52 in May 2013, but due to the lack of activity in UT Bank’s stock, a resultant from dominant institutional holding, investors allocated more funds to UT Bank’s peer competitors.

Peer competitors such as CAL and HFC posted a yield to date of 157.90 per cent and 44.44 per cent.

In arriving at a 12 month price target of GH¢0.76,  two valuation methods were weighted.

The price earnings model (P/E) and the price to book value per share model (P/BV).

The P/E model is allocated with a weight of 40 per cent to capture UT Bank’s earnings growth prospect.

A weight of 60 per cent was allocated to the book value per share model to reflect investors perceive growth in fundamentals of the company’s operation.

In a developing economy, where the private sector serves as the engine of growth, Small and Medium Enterprises (SME) have played an integral role in economic expansion. With 26 banks operating in Ghana, the niche sector, usually the corporate banking unit is now saturated.

Enhancement in information technology

Speed banking is one of the core attributes that UT Bank thrives on. The likely introduction of electronic cash cards,  VISA and MASTERCARD will surely create a new source of operating income.

This will be duly backed by the enhanced progress in online (Internet) shopping in Ghana and the increase usage of point of sale terminals (POS)

A 12 month price end target of GH¢0.76 for UT Bank stock is feasible. This represents a 38 per cent discount to current price of GH¢0.47.

Source: First BanC Financial Services/Graphic Business