Unity Bank Beats Analysts Forecast FY2018; But Throws Up Equity Concerns


Monday, April 01, 2019     8:00PM / By Teslim Shitta-Bey, Managing Editor, with additional reports from Glory Okutue, Proshare Research


Analysts were pleasantly surprised with the FY 2018 result of Unity Bank Plc, as financial figures appeared to be heading in the right direction. The bank’s net operating income (NOI) rose by +112% climbing forwards from N21.63bn in 2018 from N10.22bn in 2017 The bank’s customer deposits fell -4.11% from N252.3bn in 2017 to N241.9bn in 2018. Profit after tax (PAT), however, ramped up from a loss of N14.9bn in 2017 to a profit of N1.27bn in 2018, an important feat in the face of a slow moving economy which grew by a lazy +1.93% in 2018. But the lender also saw net interest income slump by -72.7% as higher than desired cost of funds hurt interest margins.



Unity Bank’s FY 2018 operating numbers throw up interesting turnaround indices:

  • The bank saw gross earnings fall in line with our earlier expectations of a decline in Gross Income. Gross Earnings fell from N89.9bn in 2017 to N37.3bn in 2018, representing a YoY dip of -58%.
  • Profit After Tax (PAT) rose +108% from a loss of N14.2bn in 2017 to a profit of N1.27bn in 2018.
  •  Net operating income rose +111.7% from N10.2bn in 2017 to N21.6bn in 2018
  • Net Asset (NA) loss was larger than projected; NA loss rose marginally by +0.62% from minus N242.2bn in 2017 to minus N243.7bn in 2018.
  • Customer deposit dropped -4.11%  from N252.3bn in 2017 to N241.9bn in 2018
  • Loans and advances sprinted ahead by +387% from N8.96bn in 2017 to N43.66bn in 2018 (essentially the consequence of what analysts call a “low base effect”)
  • Non-Performing Loans (NPLs) were severely shrunk as the bank sold off toxic loan portfolios to a private distressed-assets broker (FY 2018 NPL ratio, 0.69%)
  • Impairment charges tumbled from N443bn in 2017 to N161.2m in 2018. This reflects the massive cleanup of the bank’s loan assets

29th March, 2019: UNITY BANK PLC



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Getting Strategy Right

Unity Bank adopted a niche approach to intensifying bank rivalry in 2018; this is more of a generic as distinct from disruptive competitive strategy.  The bank:

  • Reduced cost to revenue ratio (which is good)
  • Identified an area of competitive market advantage (it has found a competence in agriculture lending)
  • Gradually warmed its way into a younger deposit-mobilizing demography (allowing it to take advantage of the young national population with 60% of the people in the country having ages between 16 and 35 years).  

This has spurred a digital foray allowing the bank to grow service delivery by way of electronic devises (laptops, desktops and telephones) rather than brick-and-mortar branch networks. The bank’s reengineering process has involved going back to the basics by keeping strategy simple and execution intense. This has seen the bank turnaround its net profit at a time gross earnings and net interest income actually declined. 

Nevertheless, the bank’s approach to wriggling from under the rock has been decisive yet bruising as it flattened the level of its business activities while chiseling down capital.


The banks approach of: 

  • Differentiation (rebranding and repositioning)
  • Cost leadership
  •  Focus (niche financing)

Have helped to stabilize its balance sheet but it has also raised issues of overall corporate sustainability caused by a chasm in its capital base. The bank needs to increase equity capital between Q2 2019 and Q4 2019. Its dependence on high levels of liquidity associated with the influence of a Board of Directors with top drawer political influence will be inadequate to guarantee sustainability. In an ecosystem speedily consolidating and reinforcing equity capital, banks with weak shareholder funding will quickly find themselves in the jaws of larger competitors. The management of Unity Bank has said it will not play the size game but leverage on its expertise in specific niches; this is laudable but unfortunately impracticable. Niche players will be as successful as Dinosaurs the lack of maneuverability in an intensely competitive digital financial space will squeeze niche market players until they cave in to the market power of their bigger rivals.


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The bank may also have to deal with issues related to ‘strong man’ influences on its Board with two past Presidents of the country having significant equity interests and Board presence in the lender. This has had the impact of:

  • Creating vantage opportunities  leveraging the influence of the past heads of government
  • Creating challenges in respect of corporate governance and values, the presence of the former Nigerian leaders on the bank’s Board by proxy of their children, limits the Boards ability to take unfettered objective commercial decisions
  • Specialisation in agricultural lending which will create a niche for the bank to build a platform for competitiveness, but a lot will depend on its ability to de-risk lending and leverage this particular lending space to build low cost deposits and low risk assets
  • A major weakness is the banks negative shareholder funds. Indeed, technically the bank has wiped out its capital base to clean up its books. To guarantee operational sustainability, it must urgently raise external capital to plug the hole. By raising additional equity, existing shareholders can expect a major fall in their immediate return on Equity (ROE) and return on assets (ROA). The good news is that the bank has limited ‘free float’ or equity that is unrestrictedly tradable on the stock market; this will stem the potential fall in its market price. On the flip side, the market is likely to overvalue Unity Bank’s equity based on the lack of tradeable volume that would have responded to the fall in ROE and ROA.
  • The bank’s foray into digital banking that appeal to a younger demography is a smart move, but it flies in the face of similar manouvres by other larger institutions. This means that the bank would be taking a ‘frontal attack’ on a market segment targeted by bigger banks, thereby  placing it in the crosshairs of these institutions and setting it up for a battle that would require the grace of the Biblical David to win. Market strategist at Apel Assets and Trust, Olusegun Atere, notes that, “a careful look at the Biblical combat between David and Goliath shows that David did not fight Goliath with infantry strength, if he did he would have been toast. David fought Goliath as an accomplished artillery fighter (the sling) and changed the theatre of battle from Goliaths comfort zone to his, David’s, area of expertise. Engaging a bigger opponent in a battle of sumo wrestling is courting severe injury or perhaps worse, death”, according to Atere, “subterfuge and humility may be seen as weakness, but in the game of survival it is crucial”.

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The ‘Little’ Big Task of Raising Capital

Unity Bank ended the FY 2018 with a negative capital base of minus N234.6bn (up +2.7% from minus N242.2bn in FY 2017).The negative capital of the bank was large enough to set up a new commercial bank in its entirety. This represents a major operating hurdle for Unity Bank’s Board and management. Good enough, the bank is presently in discussions with potential investors to shore up equity and give muscle to its weak balance sheet but the options open to it are mainly three:

  • A merger with another Tier 2 bank or an acquisition by a Tier1 institution. This is not a distant possibility but a practical reality, all things considered; it is one that will require 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 currently control over 60% of total deposits and loan assets.
  • A takeover of the bank by a larger institution. With Unity Bank’s clean loan book, rising deposits, lower cost to income ratio and strong agricultural lending competence, analysts believe that 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 or equity capital. 


  • Fresh funds injection by way of a strategic foreign direct investor (FDI). This is not the most likely scenario given their realities; however, this is more of 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.  


A Final Call

A few things are obvious as the bank pursues a rebound of fortunes:

  • Unity Bank will have to speedily resolve its equity capital deficiency , preferably before Q4 2019
  • The bank will need to find a strategy that gives it sustainable competitive advantage beyond its agricultural lending niche. Conventional competitive market approaches pale in the face of unconventional reworking of the competition rule book
  • The Board of the bank needs reconstitution in a manner that allows the lender leverage uncommon talent, innovative thinking and aggressive digital evolution in a fluid market space
  • The bank will need both rebranding and repositioning to grow a sizeable deposit base on a sustained basis, the bank will need to achieve a careful mix of growth in  demand and savings account deposits to reduce interest expense and widen net interest income
  • ALM needs to be handled strategically to allow for a steady growth in the bank’s loan portfolio (devoid of “low base effects”) and a rise in low cost deposits (this could emerge from the agricultural sector where the bank has so far showed superior competitive advantage)


Unity Bank has shown brave resilience in the midst of a competitive storm but how long it will withstand the winds of competitive aggression will depend on the boldness of its Board to adopt new thinking and adapt to unstoppable change.


Visit Unity Bank Plc IR Page in Proshare MARKETS

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

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