Unity Bank FY 2019 Results: The Highs and Lows of A Corporate Rebound

Culled—Proshare

June 11, 2020

By TheAnalyst

Unity Bank’s financial results for 2019 exceeded analysts’ expectations as the bank’s profit numbers turned around from a loss of N7.69bn in FYE 2018 to a profit of N3.38bn in FYE 2019 representing a +148.21 growth in the last financial year. Regardless of the bank’s strong profit before tax (PBT) growth between 2018 and 2019, a few areas of the bank’s operations create a looming shadow of what may appear to be a reversal of the bank’s fortunes. The fact that the bank has managed to survive three consecutive years of operations with negative shareholders fund above N250bn annually between 2017 and 2019 raises concerns over the bank’s operational stability, or at least should.  

Some of the speed dial highlights of the bank’s financial statements released on the floor of the Nigerian Stock Exchange (NSE) in the week include a reduction in its cost-to-income ratio (CIR), a fall in its impairment losses, an increase in its loan-to-deposit ratio (LDR), and a turnaround in its profit before and after-tax.

Highlights/Takeaways

  • Gross earnings grew by +28.69% Y-o-Y
  • Total assets climbed by +39.01%.
  • Profit before tax rose by +148.21% FYE 2019, this was an improvement from a loss of N7.55bn in FYE 2018.
  • Net interest income rose by +18.04% FYE 2019.
  • Non-performing loans increased marginally by +0.90% FYE 2019.
  • Fees and commission went up by +116.43% between FYE 2018 and FYE 2019, meaning that there was an improvement in sundry fee-based activities and a growth in earnings from customer retail transactions.

Earnings; Running Against The Grain

Despite the myriad problems the bank faced in 2019, its gross earnings rose by +28.69, rising from N34.65bn in FYE 2018 to N44.59bn in FYE 2019. The rise in gross earnings was a result of an increase in interest income, fees, and commissions.

Chart 1: Unity Bank Gross Earnings (N’bn) 2017-2019

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Source: Unity Bank Financial Statements, Proshare Research 

Understanding The Profit Bounce

Unlike the case in the previous two years where the bank recorded a decline in its profit before tax, the bank’s profit soared by +148.21% in FYE 2019. Its profit increased to N3.64bn in FYE 2019 from a loss of N7.55bn in FYE 2018. The rebound in profit was against the backdrop of an increase in net interest income from N13.97bn in 2018 to N16.49bn in 2019, while its operating expense declined to N19.57bn in 2019 from N20.71bn in 2018 (see Chart 2).

Chart 2: Unity Bank PBT (N’bn) 2017-2019

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The Asset Pump

The Bank’s total assets sustained a steady climb, as total assets grew by +39.02% in FYE 2019. Total assets increased from N210.8bn in FYE 2018 to N293.05bn in FYE 2019 (see Chart 3).  

Chart 3: Unity Bank Total Assets (N’bn) 2017-2019

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Lending and Deposits; Walking The Knife Edge

Unity Bank’s LDR ratio rose by +40.37% in FYE 2019 from +17.8% in FYE 2018, however, this was 25% below the Central Bank of Nigeria’s (CBN’s) statutory ratio of 65% advised to banks in Q4 2019. A perusal of the bank’s financials for 2019 reveals that the growth in its loans to customers was not matched by a corresponding growth in deposits received from customers. The bank’s loans to customers increased by +135.93% while its deposit from customers increased by +40.63%. The disparity between the growth of loans to customers and deposits from customers, raises the question of how Unity Bank was able to increase lending against slow growth in deposits?

The Bank’s books suggest that lending in 2019 was financed increasingly by a rise in borrowings. The Bank’s borrowings increased by +45.23% between FYE 2018 and FYE 2019, as borrowings rose from N126.21bn in 2018 to N183.3bn in 2019 (see Chart 4). 

Chart 4: Unity Bank LDR (%) 2017-2019

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A Bear in The Ceramics Shop

Unity Bank’s negative shareholder’s fund has so far been a drag on the bank’s capacity to grow its business, even though liquidity has not been a problem, its weak equity position has served as a hindrance to its ability to expand its business. Negative returns on equity (ROE) in the face of strong growth in earnings and profit remains a raging bull in a mid-sized ceramics shop (see Chart 5).

Chart 5: Unity Banks Shareholders Fund (N’bn) 2017-2019

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Source: Unity Bank Financial Statements, Proshare Research  

Costs; A Needed Surgery

Unity Bank’s cost-to-income ratio (CIR) dipped to +77.88% in 2019 from +108.3% in 2018. The slice in costs was against the backdrop of a slight decline in operating expenses from N20.71bn in 2018 to N19.12bn in 2019, as well as a significant increase in its operating income from N19.57bn in 2018 to N25.13bn in 2019 (see Chart 6).

Chart 6: Unity Bank Cost-to-income Ratio (%) 2017-2019

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Source: Unity Bank Financial Statements, Proshare Research

Impairment Charges-Breaking Bad

The bank’s asset quality improved noticeably in 2019 as it sold off the bulk of its toxic assets and cleared up its loan book to allow for a fresh start. Its impairment losses on financial assets declined to N1.92bn in FYE 2019 from N5.96bn in FYE 2018 (see Chart 7).

Chart 7: Unity Bank Impairment Charges (N’bn) 2017-2019

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Source: Unity Bank Financial Statements, Proshare Research 

Strategic Repositioning of L&As

A review of the bank’s profit and loss account reveals that there was a major change in strategy. There was a major increase in risk assets, as its loans to customers rose from N44.1bn in 2018 to N104.02bn in 2019 (see Chart 8).

Chart 8: Unity Bank Loans and Advances to Customers (N’bn) 2017-2019

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Source: Unity Bank Financial Statements, Proshare Research

The loan growth were largely intervention loans for Anchors Borrowers’ Programmes (ABP) of the CBN, as its deposits from customers did not record any significant increase between FYE 2018 and FYE 2019. Its deposits from customers increased slightly to N257.69bn in FYE 2019 from N247.63bn in FYE 2018 (see Chart 9).

Chart 9: Unity Bank Deposit from Customers (N’bn) 2017-2019

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Source: Unity Bank Financial Statements, Proshare Research 

COVID-19 and The Q1 2020 Scorecard

Despite the uncertainties caused by the coronavirus pandemic in the first three months of the year 2020, Unity Bank kept its head above troubled waters. It posted a rise in its profit, gross earnings, and net interest income in Q1 2020, thereby continuing a trend and rebound story set in FYE 2019.

Highlights/Takeaways

  • Gross earnings grew by +18.01% in Q1 2020
  • Total assets rose by +36.55%
  • Profit before tax (PBT) grew by +9.00%
  • Net interest income climbed by +14.09% in Q1 2020.
  • Fees and commission jumped by +256.95%

Gross Earnings

Despite the COVID-19 pandemic, Unity Bank recorded an +18.01% increase in gross earnings. Its gross earnings rose to N11.86bn in Q1 2020 from N10.05bn Q1 2019 (see Chart 10).

Chart 10: Unity Bank Quarterly Gross Earnings (N’bn) Q1 2017-Q1 2020

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Source: Unity Bank Financial Statements, Proshare Research  

Profitability

In Q1 2020, the bank recorded an +8.87% increase in profit before tax. Its PBT moved to N550.1m in Q1 2020 from N505.3m recorded in Q1 2019. The growth in its profit before tax was driven mainly by a spike in fees and commission of over +257% as well as an increase in net interest income (see Chart 11).

Chart 11: Unity Bank Quarterly PBT (N’bn) Q1 2017-Q1 2020

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Source: Unity Bank Financial Statements, Proshare Research

Total Assets

Unity Bank’s total assets increased by +36.55% in Q1 2020. Its total assets climbed from N268.59bn in Q1 2019 to N366.77 bn in Q1 2020 (see Chart 12).

Chart 12: Unity Bank’s Quarterly Total Assets (N’bn) Q1 2017- Q1 2020

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Source: Unity Bank Financial Statements, Proshare Research  

Shareholders’ Funds

Unity’s Bank shareholders fund deteriorated in Q1 2020. Its negative shareholders’ funds worsened further to negative N279.09bn in Q1 2020 (see Chart 13).

Chart 13: Unity Banks Quarterly Shareholders Fund (N’bn) Q1 2017- Q1 2020

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Source: Unity Bank Financial Statements, Proshare Research

Cost-to-income Ratio (%)

Unity Bank recorded a slight decline in its cost-to-income ratio to +84.62% in Q1 2020 from +86.46% recorded in Q1 2019.  The decline could majorly be attributed to the increase in operating income by +23% which outgrew the +20% increase in its operating expense (see Chart 14). 

Chart 14: Unity Bank Cost-to-income Ratio (%) Q1 2017- Q1 2020

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Source: Unity Bank Financial Statements, Proshare Research 

Deposit from Customers

Unity Bank’s deposit from customers increased by +22.22% in Q1 2020. The increase in its deposits from customers implies a reduction in the cost of risk, as it had been previously funding its loans to customers through borrowings (see Chart 15). 

Chart 15: Unity Bank Deposit from Customers (N’bn) Q1 2017- Q1 2020

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Source: Unity Bank Financial Statements, Proshare Research

Loans and Advances to Customers

Unity Bank recorded significant growth in its loans and advances to its customers. Its loans and advances increased by +110.70%, as it grew from N60.08bn in Q1 2019 to N126.59bn in 2020 (see Chart 16).

Chart 16: Unity Bank Loans and Advances to Customers (N’bn) Q1 2017- Q1 2020

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Source: Unity Bank Financial Statements, Proshare Research 

What has changed strategically?

Unity Bank from 2018 has adopted a niche-play generic strategy with the nexus between loan creation and gross earnings tightly tethered to the agricultural sector and a mushrooming retail market. The bank appears to have adopted a market penetration strategy that leverages a heavy retail presence in the country’s rural farming communities, especially in the country’s Northern states.

The strategy has been clever as it has keyed into the federal government’s aggressive agricultural expansion policy to improve domestic food security and economic diversification. The strategy has been accompanied by a deliberate deemphasize of corporate and investment banking businesses as it grows a strong affinity with smaller businesses as it builds a retail savings advantage. The hope is that with time, growth in retail savings deposits would enable the bank to develop a lower-cost, lower-risk, long-term financing structure that would boost future profitability and operational sustainability.

Illustration 1 Unity Bank’s Generic Competitive Strategy

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Although the bank still posts negative shareholder’s funds for the year 2020, investigations indicate that the bank is addressing the issue as it has entered into negotiations with prospective offshore investors.

The pressing of one of the suitors suggests that an injection of N200bn by way of equity and N800bn by way of debt is on the table. The debt-to-equity ratio of 4-to-1, however, does not appear to be the appropriate capital structure at present for the bank, even though leverage of 6 to 7 times equity is not unusual in the local Nigerian banking industry. Another sore point would appear to be the cost of debt which at the higher single-digit figures is expensive compared to the cost of dollar funds in other markets that have been more adversely affected by the COVID-19 pandemic.

Also, one of the larger tier-1 banks has already commenced a detailed ‘tyre-kicking’ exploratory exercise to see if the bank would be a good fit for its non-organic expansion aspirations, especially as discussions with another smaller bank seems to be stalled by some stone-walling tactics of the management of the non-listed commercial lender. The tier-1 bank’s management is particularly impressed with Unity Bank’s agricultural loan portfolio and its competitive advantage in managing and funding agricultural risk assets. Another plus according to the larger bank’s corporate finance analysts is that Unity Bank has been able to turn a profit corner even though its books still carry a negative share capital. The bank’s sliding CIR has become an aphrodisiac for potential acquirers. The bank’s cost-to-income ratio dipped significantly to +77.88% in 2019 from +108.3% in 2018. Its cost containment strategy was evident in the turnaround of its profit, as profit increased to N3.64bn in 2019 from a loss of N7.55bn in 2018. Likewise, its profit increased in Q1 2020 to N550.07m from N505.29m.

The prospect that the bank may close a capital raise deal within 180-days provides some comfort for traders and investors willing to take a long position on the bank’s equity. Indeed as part of the deal to convince potential investors of a new commitment of the bank to best corporate governance practice from its FYE 2019 accounts the bank has employed the services of international accounting giant KPMG as its auditor.

Fast Forwarding Growth

The bank in its strategic plan for 2019-2022 identified five key performance drivers required to stimulate growth. The five areas include; redefining the customer experience, reinvigorate platforms by investing in IT infrastructure and investing in customer analytics, re-establish prudence and strengthen foundations, Sweat the bank’s assets (reduction in the cost-to-income ratio) and focus on retail markets, SME activities, Agriculture, and commercial businesses.

C-suite executives of the banking lender hope that the various planks of its corporate strategy would reposition it for improved stability as well as increased profitability going forward. How this will pan out depends on several imponderables but so far the bank appears to be turning the sails of fortune along the right course.

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