Unity bank is one of the tier 2 commercial banks in the country, but has lagged behind its counterparts for several reasons. Here’s a breakdown of the current state of the bank and why we have a bearish outlook.
History
Unity bank was founded in 2006 from the merger of 9 commercial banks namely; Intercity Bank Plc, First Interstate Bank Plc, Tropical Commercial Bank Plc, Pacific Bank Limited, Centre Point Bank Plc, Societe Bancaire Limited, NNB International Bank Plc, Bank of the North Ltd and New Africa Bank Plc. This is following the consolidation exercise mandated by the Central Bank of Nigeria (CBN) in 2004
Strengths
Unity bank’s board comprises several influential businessmen who can channel huge deposits to the bank from their businesses. The bank also has a strong base in the North.
Competitors
By virtue of its capital base, Unity Bank is a tier two bank, thus playing in the same field with the likes of Diamond Bank, Stanbic Ibtc, and FCMB. Going by the recent results released by the bank, it has a lot of catching up to do. HY 2017 results by Unity Bank show it made a gross income of N42 billion and a profit before tax of N2.3 billion. Diamond bank had a gross income of N62 billion and a Profit Before tax of N10.7 billion. FCMB had gross earnings of N77.5 billion and a profit before tax of N3.0 billion.
Factors hindering the bank
Low capitalization
Though the bank has N86.5 billion worth of shareholder funds as at Dec 2016, the bulk of the funds arise from a share reconstruction carried out in 2016, and as such may merely exist on paper.
Insider loans
A large proportion of loans are held by past and present board members of the bank. As at December 2017,a total of N23 billion was held as loans by past and present directors. This same group also has a high proportion of non -performing loans. Non performing insider loans amounted to N15.3 billion as at December 2016. Current chairman of the bank Thomas Etuh has non performing loans amounting to almost N4.5 billion.
AMCON’s stake
AMCON has a huge stake in the bank amounting to 34%. This in effect makes the government the majority shareholder in the bank. Government institutions tend to be poorly run and slow in decision-making.
Negative retained earnings
The bank had negative retained earnings of N237 billion as at the half-year ended June 2016, which is rare for a financial institution. Essentially, the bank is running on borrowed funds and may not be in a position to make more provisions for bad loans.
Limited Branch and ATM Network
Even though banking is increasingly tilting towards digital channels, brick and mortar banking still plays a key role. Unity bank has very few branches and ATMs which would have been a source of income. When customers use ATMs belonging to another bank,, the bank gets a fee. Banks with a large network of ATMs tend to make money from such transactions.
Outlook
Though plans are underway to raise fresh capital, the funds required to bring the bank to shape are enormous. A total of N52 billion has been loaned to the bank by the Central Bank of Nigeria (CBN).Total indebtedness was N50 billion in 2016, and an additional N2 billion was lent to the bank in H1 2017.
Due to the influence wielded by its majority shareholders, the CBN may be unwilling to order a management reshuffle of the bank as it did with Skye bank.
Valuation
Unity bank shares closed at 56 kobo in yesterday’s trading session on the Nigerian Stock Exchange. Year to date, the stock is up almost 2% lagging behind virtually all other banking stocks in terms of price appreciation. Diamond bank is up 36% year to date, while Skye bank is up 26% year to date.
FY 2016 Earnings Per Share (EPS) of 19 kobo means the stock is trading cheaply at almost 3 times earnings, but its poor fundamentals do not make it a buy.
