Ahead Of FY2018 Results: Unity Bank Likely To Turn A Corner?

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Thursday, March 28, 2019     10:30AM / By Teslim Shitta-Bey, Managing Editor, with additional reports from Glory Okutue, Proshare Research

 

Market analysts are keeping vigil over the FYE 2018 results of Unity Bank Plc with a slight sense of unease. Running off the back of a dismal 2017 performance stakeholders are troubled by the fact that the bank’s recent problems with non -performing assets (NPLs) could poke holes in its profit numbers. The bank made a hefty N14.92bn loss in FYE 2017 but showed signs of recovery in Q2 2018 by posting a profit of N492.79bn.

With the economy growing at a sleepy 1.81% by December 2018, not too many analysts hold out much optimism for strong earnings growth in 2018. With half year profits at slightly under N500m FYE post tax earnings have been estimated at N850m at best.

Unity Bank Plc recorded consistent growth in Gross Earnings all through the first three quarters of 2017; which it began on a positive note as it recorded N20.17bn in Q1, growing its earnings by 110% and 53% to N42,35bn and N65,03bn consecutively over the two preceding quarters to year end FYE 2017 with earnings of N89.93bn.

In its Q2 2018 result, gross earnings dipped by -58.72% YoY from N42.35bn in Q2 2017 to N17.49bn in Q2 2018, this was accompanied by a fall in net interest income of -68.34% from N24.45bn in Q2 2017 to N7.74bn in Q2 2018. This dreary outlook was offset by a decline in operating expenses (OPEX) over net interest income averaging out at 134% in Q2 2018 compared to 52.67% in Q2 2017. It would appear that the drop in OPEX in Q2 2018 by -14.87%, as against its Q2 2017 figure reflects management’s aggressive approach to reducing the banks cost to income ratio in the course of the year.   This could play up as a key operational approach to repositioning the bank along a path of profitability by FYE 2018.


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Key Expectations for FYE 2018 Result

·         Gross Earnings of the bank will decline in line with its Q2 2018 result, the slide in GE could come in at -28%

·         Net interest income for FYE 2018 will also likely decline falling between -32%and -45%

·         Profit after tax will likely settle at slightly under N1bn but this will be considered a pleasant reversal of the previous FYE 2017 loss of N14.92bn

·         OPEX will see a major decline as the bank’s management cuts fat off its books, OPEX may slide by as much as -18%

·         The bank is likely to grow its retail loan portfolio by as much as +36% as it expands into a market segments in which it is increasingly showing uncommon financing competence: agriculture and youth demography

·         The banks growing e-banking foot print especially in the agricultural sector may have added some heft to the bank’s non-interest income in FYE 2018, analysts expectations is that non-interest income may have grown by as much as +42% in FYE 2018

·         NPL for the bank in FYE 2018 will be amongst the lowest in the industry as the bulk of its NPLs had been sold off to a private distressed assets investor, the NPLs should be close to zero, thereby de-risking the bank’s balance sheet

·         Growing deposits and a relatively small loan book suggests  a loan to deposit ratio of between 3.6% and 6%; giving massive headroom for future revenue and income growth

·         The elimination of goodwill from the bank’s books in FYE 2018 relieves it of distortions that arise from legacy issues and cleans up its balance sheet. This will position it for a stronger performance in 2019

·         The implementation of IFRS9 in FYE 2018 is not likely to hurt that banks P&L, analysts do not expect a significant diminution in income as a result of implementation of the accounting requirements of IFRS9 and IAS21

·         Negative capital. This is likely to be Unity Banks major bogey bear in FYE 2018. Our analysis indicates that this could fall anywhere between N120bn and N180bn. Obviously the bank needs to receive a fresh injection of equity to optimize growth in key operating indices. Three options are open to the bank:

§  A merger with another healthy Tier2 bank

§  An acquisition by one of the larger Tier1 banks

§  New equity from fresh investors


How Likely is Each Option?

  • This is not a distant possibility but a practical possibility, all things considered, one requiring a board buy-in. The Access-Diamond Bank merger offers a window into what is possible to leverage strengths in an industry where competition will be driven by scale. If another M&A is announced it will consolidate the industry further and make competition intense. A four firm analysis of the banking sector shows that four banks control over 60% of deposits and loan assets.


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    Source: FYE 2018 Audited Annual Accounts of the Banks


    • A possible takeover of the bank by a larger institution is unlikely but not impossible. With Unity Bank’s clean loan book, rising deposits, lower cost to income ratio and strong agricultural lending competence, the bank is looking increasingly attractive as a takeover candidate. The negative equity position and its attendant constraints on balance sheet expansion is less of a problem for a bigger institution with access to long term low interest debt capital.
    • Also, fresh funds is not the most likely scenario given their realities, this is more like a feasible possibility subject to ownership changes and business  focus emphasis that will ensue.With political risk consideration becoming less dominant in the discussions of likely foreign direct investors, the bank should be able to close out a firm (as distinct from standby) arrangement by Q3 2019. For existing equity holders in the short term this would result in a reduction in earnings per share (EPS), but the greater stability and sustainability of the bank’s operations would grow earnings significantly by 2020. The most likely equity option is that the Unity Bank will get fresh investors to put up new equity on the basis of the banks recent impressive narrative. With political risk consideration becoming less dominant in the discussions of likely foreign direct investors, the bank should be able to close out a firm (as distinct from standby) arrangement by Q3 2019. For existing equity holders in the short term this would result in a reduction in earnings per share (eps), but the greater stability and sustainability of the bank’s operations would grow earnings significantly by 2020. 

     

    Unity Bank’s 7S’s

    In line with the seven (7) strategic success imperatives that have been argued by Richard D’Aveni, the Bakala Professor of Strategy at Tuck School of Business in Dartmouth, USA, Unity Bank has moved in a few distinct manners over FYE 2018

    • Superior stakeholder satisfaction- the bank has cut costs, raised revenues and started to experience profitability

     

    • Strategic soothsaying- the bank has proved prescient in feeding into the experiential ‘feelings’ and aggressive ‘outlook’ of a younger demography of customers thereby slowly but surely increasing market share of customers between the ages of 18 and 35 who constitute over half of the country’s current population.

     

    • Positioning for speed- Aware that a younger customer place a premium on the speed of service delivery the bank has ramped up its digital footprints and gone ahead to equally bring banking closer to the retail base by strategically locating Automated Teller machines (ATMs) in densely populated metropolises

     

    • Positioning for surprise- the bank’s digital foray is prepped to introduce a series of products that appeal to its need effort of swinging marketing and customer services towards the younger belt of its customer base. The impatience and low switching cost of this base has, as far as early analytical observations suggest, realigned the banks service delivery channels and touch points to this new phenomenon


    • Shifting the rules of the game-the bank has decided that it cannot win the size game so it has opted for a niche banking strategy, particularly the agricultural and agro-allied market space, whether this is clever or dangerous will require time


    • Signaling strategic talent- the bank still has heavy personnel costs but this seems to be related to its desire to attract new talent and to retain talent that it has already tapped. A lean ship of highly gifted people properly motivated by pecuniary and non-pecuniary incentives may help sustain its corporate intent

     

    • Simultaneous and sequential strategic thrusts- Unity Bank seems to have woken up to the brutal fact that the competitiveness of banking in Nigeria is no longer gentle, but fast, fierce and frontal. This has meant that going forward the bank’s strategy must be pursued at different fronts with limited resources and careful sequencing. Part of this centres on its recapitalization plans and the consolidation of both its present and future operational advantages.

     

    As the clock quietly towards the release of Unity Bank’s FYE 2018 results (expected by Friday 29, March 2019), investors are keeping their figures crossed that the bank’s results are much better than the scary loss posted in FYE 2017. According to one analyst who pleaded for anonymity, “Unity Bank may not have been the best of investments for stockholders in the previous year, but if management can pull the nuts out of the fire in FYE 2018, the bank could prove to be a massive hidden value opportunity; an ugly duckling that turns into a Prince!”.

     

    Visit Unity Bank Plc IR Page in Proshare MARKETS

    Graph 1: Unity Bank Plc – One Year Share Price Movement

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    Table: Q3 2018 Results

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    Footnotes:

    1.       IFRS 9, Financial instruments: Understanding the basics - PwC

    2.      IFRS 9 Financial Instruments - IFRS Foundation

    3.      Basel II - Investopedia

    4.      Capital Adequacy Ratio (CAR) & Basel III - Requirements | Investopedia 


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