Unity Bank H1 2020 Results: A Profit in Rebound, Despite Negative Shareholder Funds

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Monday, August 03, 2020, / 06:00 PM / By ThAnalyst   /  Header Image Credit: EcoGraphics



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Unity Bank Plc pulled off a strange feat in H1 2020, despite operating on the equivalent of petrol fumes as represented by its negative shareholder funds, the bank was able to muster a half year profit before tax of N1.12bn which was +6.46% higher than its bottom line profit in the contemporary period of 2019. The skip in Unity Bank's profit rode on the back of a major rise in the bank's fee-based earnings for 2020 which rose +67.99% higher than in H1 2019. The key highlights of the bank's 2020 half year results were as follows:


Highlights/Takeaways

  • Gross earnings grew by +11.28% Y-on-Y. The bank was able to expand its top line as increased intervention fund deposits were translated into a fast-paced expansion of agricultural loans.
  • Total assets increased by +66.53%. The rise in lending activity in the year despite the challenges of the coronavirus pandemic helped the bank increase its total assets.
  • Profit before tax (PBT) recorded an increase of 6.46% for H1 2020, from N1.052bn recorded in the corresponding period of the previous year to N1.120bn. Unity banks steady growth in top line numbers has been well-noted by analysts but concerns still remain about its negative shareholder funds. As things stand the banks return on equity is negative as the denominator of the return ratio is negative. Best practice denominator management would require that the bank quickly recapitalizes to stabilize its operations. A foreign bank analyst who made enquiries about the bank asked, "how does a bank have negative shareholder funds of N278.64bn and still stay in business?" The question is difficult to answer, but what is obvious is that the bank needs to move quickly to conclude a capital raise and improve operating returns even though in the short-term equity returns will dip.
  • Net interest income rose by 6.36% for H1 2020. The banks increase in net interest income suggests improvement in its core lending activities but intermediated loans can only be a short-term method of building the bank's loan book and stabilizing its net interest income.
  • Fees and commission grew Y-on-Y by 67.99% against N756mn recorded in H1 2019, this means that there was an improvement in sundry fees-based activities and income from customer trading transactions, seeing that deposit from customers recorded an increase of 26.53%. The rise in the bank's deposits may be tied to institutional funds used for on-lending to designated economic sectors, this is in addition to secondary deposits by loan beneficiaries, as good as this might seem, the bank needs to grow its organic deposit base by increasing deposit market share as lending activities expand.

 

Gross Earnings-Pushing Up The Top Line

Gross earnings grew Y-on-Y by +11.28% from N20.547bn recorded in the corresponding quarter of the previous year, the growth in gross earnings could be attributed to the +22% and +68% increase in net interest income and fee and commission respectively. This is despite the macroeconomic challenges caused by the COVID-19 pandemic (see chart 1).


Chart 1: Unity Bank Gross Earnings (N'bn) 2017-2020

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Source: Unity Bank Financial Statements, Proshare Research


However, gross earnings declined Q-on-Q by -7.14% from N11,855bn recorded in the previous quarter to N11.009bn recorded in Q2 2020 (see chart 2). 

 

Chart 2: Unity Bank Quarterly Gross Earnings (N'bn) 2019 - 2020

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Source: Unity Bank Financial Statements, Proshare Research


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Profitability- A Timely Rebound

Unity Bank recorded a +6.46% Y-on-Y increase in profit before tax, from N1.052bn recorded in the corresponding period of the previous year to N1,120bn recorded for H1 2020, profit after tax (PAT) also recorded a +7% increase for the Y-on-Y performance, the growth in profitability could be attributed a 36% decline in credit loss expense which translated to a 16% increase in the net operating income (see chart 3).

 

Chart 3: Unity Bank Profit before Tax (N'm) 2017 - 2020

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Source: Unity Bank Financial Statements, Proshare Research

 

Also, the bank recorded an +8.06% increase in its Q-on-Q performance, from N546m recorded in Q1 2020 to N590mn recorded in Q2 2020 (see chart 4).


Chart 4: Unity Bank Quarterly Profit before Tax (N'm) 2017 - 2020

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Source: Unity Bank Financial Statements, Proshare Research

 

Asset Quality- Breaking Bad

Total asset of Unity Bank grew by +52.17% Y-on-Y from N293.1bn recorded in the same period in the previous year, to N445,949bn recorded for H1 2020, this was driven by a +53.7% Y-on-Y increase in the bank's loan (see chart 5).


Chart 5: Unity Bank Total Asset (N'm) 2017 - 2020

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Source: Unity Bank Financial Statements, Proshare Research

 

Unity Bank's impairment charges declined by 36.05% from N491m recorded in the same period of the previous year to N314m recorded in H1 2020, the decline in impairment charges could be attributed to an improvement in the asset quality which was driven by an improvement in the loan book of the bank (see chart 6).

 

Chart 6: Unity Bank Impairment Charges (N'm) 2017 - 2020

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Source: Unity Bank Financial Statements, Proshare Research


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Lending and Deposit-A Fine Balancing Act, But LDR Problems Persist

The bank's loan-to-deposit ratio increased to 44.10% from 29.70% recorded in the same period of the previous year, although falling short of CBN's statutory rate of 65% (see chart 7).


Chart 7: Unity Bank LDR (%) 2017 - 2020

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Source: Unity Bank Financial Statements, Proshare Research

 

Deposit from customers increased by +26.53% from N242.220bn recorded in the corresponding period of the previous year to N306.472bn recorded for H1 2020 (see chart 8).

 

Chart 8: Unity Bank Deposit from Customers (N'm) 2017 - 2020

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Source: Unity Bank Financial Statements, Proshare Research 

 

Loans and advances to customers grew by +86.19%, from N70,617bn recorded for H1 2019 to N131,481bn recorded for H1 2020 (see chart 9). Debt issued and other borrowed funds increased by +46% Y-on-Y.


Chart 9: Unity Bank Loans and Advances to Customers (N'm) 2017 - 2020

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Source: Unity Bank Financial Statements, Proshare Research


Shareholder Funds: A Case of A Painful Balance Sheet Toe


Unity Bank recorded a -14.60% decline in its shareholders fund, continuing a stream of declines over the past five years (see chart 10).

 

Chart 10: Unity Bank Shareholder's Fund (N'm) 2017 - 2020

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Source: Unity Bank Financial Statements, Proshare Research

 

 

Costs; Fighting The High and Mighty

 

Cost-to-income ratio increased to 88.2% for H1 2020, from 85.6% recorded in the corresponding quarter of the previous year. The increase in the cost-to-income ratio could be attributed to the +13% increase in total operating expenses (see chart 11)

 

Chart 11: Unity Bank Cost-to-income Ratio 2017 - 2020

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Source: Unity Bank Financial Statements, Proshare Research

 

The growth in the deposits of the bank and asset quality can be attributed to its growing agricultural lending niche, and improving brand franchise in the agricultural retail market value chain.

 

 

Table 1 Snap shot of Unity Bank's H1 2020 Business Scorecard

 

H1 2020

H1 2019

% Change

Gross Earnings (N'bn)

22,865

20,547

11.28

PBT (N'bn)

1,120

1,052

6.46

Loan-to-Deposit Ratio (%)

44.1

29.70

48.48

Net Interest Income (N'm)

4,031

3,790

6.36

Total Assets (N'bn)

445,949

267,790

66.53

Cost-to-Income Ratio (%)

88.2

85.6

3.04

Fees and Commission (N'm)

1,270

756

67.99

Source: The Nigerian Stock Exchange (NSE)

 

The Rebound Race

 

For Unity Bank to remain a key banking sector player in months ahead it must eliminate its negative shareholder funds. Driving on fumes can be heart-pumping and exhilarating but it is not the best way to run a car, likewise making profit with negative shareholders funds might give a sense on invincibility until the cold fingers of reality grip the banks operations or the Central Bank of Nigeria (CBN) suddenly wakes up to a new regulatory impetus.



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