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Tuesday, November 24, 2020, / 04:30 PM / By Adaeze Nwachukwu, Proshare Research / Header Image Credit: Unity bank
Unity
bank
improved its corporate performance for 9months 2020, despite its shareholders' fund still being in the red. The deposit money bank's latest result shows
improvements in both top and bottom-line positions, with the bank diversifying
its loan book and getting involved in strategic businesses that may yield improved
their production output in the course of the next few quarters. Managers of the
bank noted that "the bank has remained focused on its niche market, which is
agribusiness, it has also continued to grow its brand franchise in many areas
of the retail market by promoting and leveraging its Agriculture value
businesses".
Highlights/Takeaways
All About The
Profit
Profitability
The
gross income of the bank grew by +8.48%
Y-o-Y from N31.26bn in 9months 2019 to N33.91bn in 9months 2020. Growth in
gross income was achieved on the back of +13.74%
in interest income despite the +6.42% growth
in interest expense. Also, fees and commission grew by +8.26%
Y-o-Y which was driven by +155.0% growth in
credit-related fees and commission (see chart 1 below).
Translating
to USD terms, the gross income of the Bank declined by -14.43%
from $101.84m in 9months 2019 to $88.99m in 9months 2020, while foreign
currency translation cost $21.48m as a result of the devaluation of the
domestic currency. The CBN official rate was used in the conversion during the
different periods.
Chart
1:
Unity Bank Gross Income 9M 2016 - 9M 2020 (N'bn)
Source: Unity Bank Financial
Statement, Proshare Research
The
lenders Profit before tax (PBT) increased Y-o-Y by +6.19%
from N1.61bn in 9months 2019 to N1.71bn in 9months 2020. This was majorly
driven by +12.10% growth in foreign exchange
revaluation, that is net trading income as stated in the financial statement,
and a +10.38% Y-o-Y growth in operating
income. This was achieved despite the +14.75%
Y-o-Y increase in operating expense (see chart 2 below).
Contrary
to the growth in PBT in Naira terms, in USD terms, PBT declined by -14.46% Y-o-Y from $5.25m in 9months 2019 to $4.49m in
9months 2020 while foreign currency translation cost for the period was $1.08mn
as a result of the devaluation of the local currency.
Chart
2:
Unity Bank Profit Before Tax 9M 2016 - 9M 2020 (N'bn)
Source: Unity Bank Financial
Statement, Proshare Research
Backing Away From Bad Loans
Credit
Loss Expense
The
retail lender posted an improvement in its credit loss expense for the period,
credit loss expense declined by -68.86% Y-o-Y,
from N684.55m in 9months 2019 to N213.17m in 9months 2020, the decline in credit
loss expense could be attributed to an improvement in the asset quality which
was driven by an improvement and diversification in the loan book of the bank (see chart 3
below).
Chart
3:
Unity Bank Credit Loss Expense 9M 2016 - 9M 2020 (N'm)
Source: Unity Bank Financial Statement,
Proshare Research
Lending
and Deposit
The
bank's loan-to-deposit ratio (LDR) rose over the period although it remained
below the regulatory minimum. LDR increased to 30.48%
in 9months 2020 from 24.23% in 9months 2019.
Loans to customers increased significantly by +48.50%
while total deposits grew by +18.07% Y-o-Y (see chart 4
below).
Chart
4:
Unity Bank Loan-to-Deposit Ratio 9M 2016 - 9M 2020
Source: Unity Bank Financial
Statement, Proshare Research
Cost
The
cost-to-income ratio increased marginally to 89%
in 9months 2020 from 86% in 9months 2019.
This was driven by a +14.75% Y-o-Y increase
in operating expense while operating income increased by +10.38% which could
not cover the growth in operational expenses. Growth in operating expense was
driven by a +13.73% increase in
administrative expense and a +21.45%
increase in regulatory fees which include NDIC premium and AMCON fees (see chart 5
below).
Chart 6:
Unity Bank Cost-to-Income Ratio 9M 2016 - 9M 2020
Source: Unity Bank Financial
Statement, Proshare Research
Total
Assets
The
growth in total assets of the bank is a product of upside inferences. The
lender has been cuddled by both
macroeconomic and operational factors. For a year-on-year period total assets rose
by +40.15% to N420.87bn in 9months 2020.
Growth in total assets was driven by a rise in cash balances with the bank
which grew by +552.49%, total financial
investment (both at amortized cost and the face value of other comprehensive
income (FVOCI)) grew by +14.46% while
property and equipment increased by +8.63% (see chart 4
below).
In
USD terms, total assets grew by +12.90% from
$978.41m in 9months 2019 to $1.10bn in 9months 2020 using the official CBN rate
during both periods.
Chart 7:
Unity Bank Total Assets 9M 2016 - 9M 2020 (N'bn)
Source: Unity Bank Financial
Statement, Proshare Research
Total
Shareholders Fund
The agribusiness-focused lender still has a negative shareholders fund
which has been a point of concern for
local and foreign investors that are trying to phantom how a bank with
sustained negative capital over the last three years could remain in business. Year-on-year
shareholders' funds declined by +14.73% from a negative
value of N242.57bn in 9 months 2019 to N278.3bn in 9months 2020 (see chart 5
below).
Chart 9:
Unity Bank Total Shareholders Fund 9M 2016 - 9M 2020 (N'bn)
Source: Unity Bank Financial Statement,
Proshare Research
A Profit Gun without Equity Bullets
Unity
banks' steady growth in top-line numbers has been noted by analysts but
concerns remain about its negative shareholder funds. As things stand the
bank's return on equity (RoE) is negative putting investors in a quandary as to
the banks equity valuation. Best practice denominator management would require
that the bank quickly recapitalizes to stabilize its operations. A foreign bank
analyst who made inquiries 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 its equity returns will dip.
Of
equal concern is the rise in the bank's deposit liabilities which are possibly
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 at first glance, the bank may need to quickly grow its organic
deposit base by increasing deposit market share as its lending activities
expand.
Illustration 1 Unity Bank's Generic
Competitive Strategy
The queer structure of Unity bank's statement of financial position and its improving profit and loss account may leave analysts in a haze, but the confusion may clear if, as may be expected, a previously tolerant market regulator becomes less lenient. As noted in Proshare's H1 analysis of the bank, "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 of invincibility until the cold fingers of reality grips the banks operations or the Central Bank of Nigeria (CBN) suddenly wakes up to a new regulatory impetus".
Related
News
1.
Unity Bank AGM
Figuring Out Survival Pre-Pandemic...
2.
Unity Bank H1 2020 Results: A Profit in Rebound,
Despite Negative Shareholder Funds
3.
UNITY BANK Releases FY2019 and Q1 2020 Results;
Declares N3.6bn PBT in 2019
4.
Unity Bank Plc Appoints Adejumobi Alaba
Williams As Company Secretary
5.
Unity Bank Plc Q3 2019 Results: Pulling Out of A
Ditch Slowly
6.
UNITY BANK Declares N1.48bn PAT in Q3 2019
Results, (SP: N0.63k)
7.
UNITY BANK To Hold Its 13th AGM On October 16,
2019
9.
Unity Bank Plc - Profitability Improves; LDR
Still Low At 29.15% in H1 2019
10. Unity Bank Beats Analysts Forecast FY2018; But
Throws Up Equity Concerns
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