Last November, Unilever Nigeria announced the resignation of its CEO, Yaw Nsarkoh. Prior to his resignation, Mr Nsarkoh was placed on a leave of absence. Nsarkoh, a Ghanaian citizen, has had a long career within the Unilever Group.
Before assuming the role as CEO of Unilever Nigeria, he had headed several regional headquarters of the global manufacturing company, especially in Africa. He also served as a Strategic Assistant to Unilever’s President for Asia, Africa, Central, and Eastern Europe.
His exit surprised a few analysts considering how he was able to grow revenues over the years and overseeing the massive deleveraging of the company’s balance sheet. It’s latest results perhaps explain why he had to leave.
Unilever Nigeria Plc reported a pre-tax loss of N8.3 billion in the full year ended December 2019, sending shock waves around the equities market. For a company that has over the last 5 years reported astronomical revenue growth, the loss reported was a rude awakening.
Just last year, the company reported record revenue of N92.9 billion and pre-tax profits of N12.6 billion for the year ended December 2018. Just 5 years before in 2014, Unilever reported a revenue N55.7 billion and a pre-tax profit of N2.8 billion.
So what happened in 2019?
A cursory look at the result shows the company’s reported losses stem from a massive 34.6% drop in revenues to N60.7 billion, it’s lowest revenues since 2015 when it reported revenues of N59.2 billion. Unilever’s reported revenues from 2 major segments, Food Products, and Home & Personal Care. Each division experienced declines.
Revenues from its Food Products Division went from N44.3 billion in 2018 to N31.9 billion in 2019. Home & Personal Care also saw revenues go from N47.7 billion in 2018 to N28.8 billion a year later. Despite the drop in revenues, the cost of sales and operating expenses remained high, resulting in much lower margins.
To understand why revenues declined this badly, one will have to flashback to a series of events that occurred in 2019 and perhaps the year before.
Nairametrics first observed a disconnect between Unilever’s rising revenue and its cash in an article published on the site in 2016. Then we observed that the company was finding it difficult translating some of its income to cash. Out of the revenue of about N32 billion in the first 6 months of 2016, the company only collected N8.6 billion in cash.
The situation continued in subsequent years. As the company’s revenue grew, so did its receivables. For example, between 2015 and 2016, as revenues grew by N10.5 billion, receivables also grew by N8.8 billion. In fact, between 2014 and 2018, revenues had grown by as much as N37 billion just as receivables grew by N21.6 billion. Trade receivables were N8.5 billion in 2014 compared to N30.1 billion in 2018.
In other words, most of the sales the company booked were backed by cash as most of its distributors either had unsold inventories or had challenges paying. For years, it appears Unilever had been booking revenues without backing it up with cash. When this happens and auditors believe the chances of recovering the receivables are slip, they request that the company write down the debts.
In 2019, Unilever wrote down about N721 million in impaired receivables. Investors will be concerned that the company still has about N24.45 billion in receivables down from N30.1 billion a year earlier. The company reported that trade receivables declined by N5.7 billion in 2018 as its distributors paid up.
Why the high receivables?
Unilever’s aggressive revenue drive commenced right after 2015 when the company raised over N50 billion in right issues. It used most of the money to pay down its loans. As then-new, CEO Yaw Nsarkoh assumed the position, the company embarked on an aggressive sales push. However, as sales personnel grew revenues, they did so by offering their distributors healthy credit lines in exchange for pushing their products.
Most Nigerian sales distributors lacking bank credit rely heavily on lines of credit from manufacturers to stock up inventory in the hope that they can sell, keep a margin and repay their supplier. It’s designed to be a win-win situation provided that the inventory does end up in the hands of the final consumer. Unfortunately, the influx of cheaper and often more reliable products from smaller competitors may have negatively impacted sales.
Unilever stops credit Policy
In a research note read by Nairametrics, Unilever informed analysts that it was tightening its credit policy to its distributors to enable the company to manage its huge receivables. The implication of this decision started to impact sales in the third quarter of 2019. The company’s revenues fell from N23.4 billion in Q2 2019 to N8.9 billion and N9 billion in the third and 4th quarters of the year. This is essentially why Unilever reported a loss in 2019.
Results like these often throw up casualties, so it was no surprise that erudite CEO Yaw Nsarkoh was asked to resign and shipped out of Nigeria. prior to his resignation, Mr. Nsarkoh was placed on a leave of absence. In his place, Mrs. Adesola Sobande-Peters (who was poached from Guinness some years back) was delegated to act as an interim Managing Director of the company.
Just last week, the company announced Carl Raymond Cruz as the Company’s new Managing Director. Cruz, a Filipino, is currently the Chairman of Unilever Sri Lanka. He is credited for turning around the Sri Lanka entity and establishing Unilever Sri Lanka as a market leader across key categories.
Perhaps more heads will roll or continue to roll as the company rolls back on its aggressive sales strategy amidst mounting losses.
Unilever’s new CEO will first need to face investor scrutiny over the state of the current receivables. Investors will want to know how much of the N30.1 billion in receivables can be recovered and how much further write-downs the company might need to take.
They will also want to know how it intends to compete now following its new stiff credit policies. A 34.6% drop in revenues without a marginal drop in the cost of sales and operating expenses is unsustainable. It’s either it finds ways to grow topline or it will need to cut down severely on operating expenses. There are bound to be tough decisions in the coming months, if not years for this company.
Unilever’s share price fell 9.7% on Friday and is down 49% in the last one year.
Strong performance from Stanbic IBTC, despite weak retail banking position
Will Stanbic IBTC be able to generate profit from its personal banking division by full year?
Stanbic IBTC made a profit after tax of N45.2billion, growing its profit by 24.7% when compared with this period last year.
The feat is remarkable; given that a majority of financial institutions responded as expected to the economic downturn triggered by inflationary pressures, oil price instability, and lack of notable business activities, necessitated by the corona-virus pandemic that has characterised the 2020 business calendar year.
These other organizations reflected positions worse off than their escapades in 2019. In cases where improvements in bottom-line were seen, it was only marginal.
Stanbic IBTC was not exempted from these economic trials, their immensely diversified business portfolio boosted their numbers on multiple fronts. Robust presence in Asset Management paid off, as commissions and fees represented a massive 62% of general fees and commission income. It’s Corporate and Investment division continues to produce astoundingly, contributing the highest and growing profit after tax of 49.2%.
This focused and efficiently monitored diversification, is turning Stanbic IBTC into world-beaters, reflecting in the expansion of its gross earnings by 7.8%, from N117.4billion in HY’2019 to N126.6billion so far this year.
This position could have appeared even better; had STANBIC been able to demonstrate in its personal and business banking segment, the same excellence, noticeable in its other business segments (Wealth, Corporate and Investment).
It’s Personal banking (generally regarded as Retail banking), encompasses the provision of banking and financial services to individual customers and SME’s (Small and Medium scale enterprises), mortgage lending, leases, card products, transactional and lending activities such as telephone banking, ATM’s, etc. The segment suffered this year, closing with a loss of N3.2billion, despite being responsible for over 58.4% of general staff costs. This poor position was sponsored by a reduction in income levels, especially non-interest income from fees and commission.
Unsurprisingly, given CBN’s policy at the start of the year to implement a much-reduced transfer fee rate, an increase in Non-performing loans is another causal factor for its loss this half-year. STANBIC cannot afford to bask in the euphoria of the massive successes of its Wealth and Corporate segment, at the expense of Retail banking.
Retail banking is fundamental to any bank looking to be a force, or preserve its going-concern status in this critically competitive economic environment. It has been the subject of immense research in the last decade, with many banks devising strategies to acquire a large chunk of the market share in this business segment. The banking landscape is evolving amidst growing competition, such that a bank that generally does well in its retail banking segment, is perceived as strong by the public. This has an underrated capacity to effortlessly attract more customers. Banks need to revisit the drawing board and re-embrace their sacred purpose of serving the basic and pure needs of their individual customers.
Michael Lafferty, Chairman of the Lafferty Group, whilst describing Retail banking said, “Retail banking is the foundation on which global banks are built,” It is a vast retail and consumer banking market, pointing out that the world’s biggest banks built their financial empire from the mass market.
Stanbic IBTC must be conscious in its quest to provide universal banking and find a balance in product and service offerings across its business segment.
A summary of the performance parameters in its financial statement, shows growth in gross earnings, from N117.4billion to N126.6billion, and improvement in earnings per share from 342kobo to 419kobo.
Attention now shifts to the impact of the bank’s new super app, supposedly a one-stop-shop for its diverse offerings, including banking, investing, pensions, trading, and insurance, and how it affects the bottom line in subsequent quarters.
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Lastly, will Stanbic IBTC be able to generate profit from its personal banking division by full year? We await their H2’2020 results.
Is Zenith Bank thriving on the strength of sound financial indices?
Zenith Bank posts N103.8bn profit in half-year financial result.
Sound financial indices have made Zenith Bank one of the largest banks in the Nigerian banking Industry. It was recognized as the Most Valuable Banking Brand in Nigeria 2019, in the Global Banker magazine Top 500 Banking brands; and Best Commercial Bank in Nigeria 2019, by the World Finance.
Zenith Bank has successfully bolstered this narrative even further with the release of its Half Year 2020 Financial Report, where it closed with a profit of N103.8 billion.
Growing profit position in these perilous times, speaks remarkably of the suppleness and elasticity of any establishment. A lull in economic activity caused by inflationary pressures, precariousness of the market, and the coronavirus pandemic has forced most Deposit Money Banks (DMBs) to cave in, and reveal achievements worse off than their 2019 results y/y – but not Zenith Bank Plc. The institution has showcased beyond reasonable doubt, that the apparent limitations are incapable of distorting its active growth pattern.
Zenith Bank closed H1 2020, 16.8% better off than it did in 2019 y/y, in terms of profit after tax. Although this massive leap, hugely resulting from tax paid as profit before tax, noted just a 2.2% growth. Further analysis of its HY’2020 results, demonstrates more efficiency, a focused cost of fund optimization, and an aggressiveness in generating income across its business heads and segments. This strategy had begun since 2018, and was shared by the bank when it disclosed planned implementation of an improved core banking system, hoping it would ultimately enhance efficiency while reducing costs.
Zenith Bank has thrived on the strength of its sound business model, corporate governance, conservative risk management, and strategic corporate social investment. The bank has been very forceful in the market, improving massively across all of its income generating segments, despite the plausible and obvious hindrances. This is a testament to its superiority, and sponsors its claim for supremacy.
The bank made N22billion from foreign exchange revaluation gains and despite evidence to the contrary, it endeavored in operating expenditure (OPEX). OPEX may have grown by 7.7%, but disclosures and note to the accounts shows that in virtually every expense head, costs dropped. The 7.7% was triggered majorly by Information Technology related costs, fuel and maintenance, and an increase in the compulsory banking cost fund, set up for the Asset Management Company of Nigeria (AMCON) by the CBN.
Now, like every hero susceptible to their hubris, Zenith has its own problems, which questions its position at the top. Yes, the bank may have an amazing and constantly improving interest expense to interest income ratio, but it does not possess the finest result in this regard as of yet. HY 2019 interest expense took as much as 33.6% of its income, while HY 2020 dropped to 27.4%. This is good, but still considerably high, if we carry out a peer-to-peer analysis with Guarantee Trust Bank Plc (masters of low-interest expenses), whose ratio stands at 16% for HY 2020.
However, Zenith has sustained the momentum of positioning itself as the crème de la crème in the Nigerian Banking Industry for quite some time. The bank’s pattern of growth and performance, strongly indicates its capabilities to manage its interest expense in subsequent quarters. It will be interesting to see how this pans out by year end.
In summary, despite economic difficulties this year, with most bank’s bottom-line at a worse position than the corresponding period last year, Zenith posted improved profit yet again. Could this be enough to portray supremacy?
UBA Plc H1’2020 results, a true reflection of its rightsizing decision?
UBA’s H1 2020 result is yet another demonstration of the resilience of its business model.
The upward review in benefits of some employees and directors this year, coupled with the rising operational costs, constitutes the hot topics from the 2020 semi-annual results released by UBA Plc.
Widely regarded as the banking sector’s largest employer of labour in Nigeria, the bank in December 2019, embarked on a ‘rightsizing’ exercise, which partly resulted in new hires, as well as promotions, improved remunerations, and benefits for existing employees.
The Group Head, Media and External Relations, UBA Plc, Nasir Ramon commenting on this said, “over 5000 staff of UBA Plc, started the new year with a lot of cheer, as the bank promoted to new grades, coupled with salary upgrades. Beneficiaries of this exercise will receive up to 170% increase in their salaries and benefits, whilst a good number have been moved to higher grade levels.”
Directors saw their emoluments amplify by 177.7% (Fees and Sitting allowances) as demonstrated in the financial statements of the bank. Rising to N50million in June 2020, from N18million in 2019 y/y.
Now, Deposit Money Banks (DMB’s) might be adjudged to be honorable in all of their objectives, but the truth is they are neither self-sacrificing nor are they expected to be. DMB’s are established for profit, and would incessantly prioritize business good sense over social empathy, for the sake of their owners. The import of this is, UBA Plc expects its colossal investments in employees and directors to overwhelmingly reflect in its bottom-line.
Half-year 2020 results is clearly not in sync with this philosophy, as it reflects a weakened position compared to the corresponding period last year, despite the investments in human capital. Profit before tax dropped by 18.7%, from N70.3billion recorded in HY’2019 to N57.1billion in the current period. Profit after tax waned as well by 21.7% to N44.4billion from N56.7billion in HY’2019.
Interestingly enough, the top-line fared pretty well. Interest income and fee income showed improvements, albeit marginally by 0.3% and 6.7% respectively. This makes it illogical to attribute the entirety of the decline in profit to the recent austerity measures put in place by the CBN, reducing funds transfer fees and card maintenance charges.
The Coronavirus pandemic played a big role too, by widely stunting the economy in the second quarter of 2020, and negatively impacting profit. But even these do not provide substantial and sufficient convictions as to why the Tier-one bank did not hit the profit-bar it set for itself, from its truly emphatic 2019 financial year. Does this mean that UBA Plc got the decision wrong at the start of the year?
Six months seem too short a period to immediately class management’s decision to jack up the benefits and emoluments of its internal customers as a failed one. Although, no one anticipated the travails of COVID-19 and its resulting consequences, investments in human capital is widely proven to yield tremendous growth in the long haul. Besides the fact that it has given UBA Plc a solid reputation in the market place, it also makes the company very attractive to the very best of industry talents. Furthermore, employee engagements of this nature, foster brand loyalty which ultimately trickles down to how passionately these personnel undertake their tasks and deliverables. The true bearing of this investment is expected to reflect in due course, in subsequent quarters.
Commenting on the result, UBA’s Group Managing Director/Chief Executive Officer, Mr Kennedy Uzoka said, “Our H1 2020 results is yet another demonstration of the resilience of our business model in an extremely uncertain and tough operating environment. We recorded commendable growth in our underlying business in terms of customer acquisition, transaction volumes, and balance sheet whilst inflation, depressed yield environment and exchange rate volatility impacted our net earnings as anticipated.”
In today’s increasingly aggressive marketplace, where consistently generating revenue, is paramount to preserving the longevity and going-concern status of any establishments, costs must also be accorded as much attention and significance. Tightening and managing costs with the aim to improve and generate profit is genius strategy especially in today’s banking industry. The banking industry is under threat from ruthless competitions. Multifarious streams that had hitherto been available for generating income for DMB’s are being severely hindered by the ‘austere’ policies (from the perspective of commercial banks) from the apex bank, making effective cost management a survival mechanism.
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Employee benefits rose by 20% from N37.2billion in HY’2019 to N44.6billion in HY’2020, while Directors’ emoluments (Fees and Sitting Allowance) as earlier stated, surged by 177% from N18million in 2019 to N50million in 2020 y/y. The total operating expenses increased 22.6% in 2020. UBA Plc, unavoidably expended N22.4billion on Banking Sector Resolution cost trust fund, in compliance with the CBN’s requirement to contribute to the cause of the Asset Management Company of Nigeria (AMCON). Security and other payments for core services experienced increase as well compared to the preceding year.
Avoidable expenses like Penalties and Premises Maintenance Charge, should be extensively reviewed and extinguished wherever possible, to improve bottom line. UBA plc has forked out N565million in penalties so far in 2020, representing 6177.7% increase from just N9million in 2019 y/y. This is a prime example of the operational brick walls, UBA Plc must properly address to improve its fortunes in subsequent quarters.