UNITY BANK PLC
|Ticker: UNITYBNK||Nature of Business: Banking||Location : Nigeria|
|Recent Price: NGN0.50||52-Week High/Low: NGN0.75/0.43||Estimated Fair Value: NGN1.05-NGN1.78|
|Expected Return: 20.3%||Consider Buy: Below NGN1.42||Business Risk: Average|
|Financial Risk: Average||Economic Moat: Weak||Corporate Governance: Average|
Unity Bank Plc (UNITYBNK) started as Intercity Bank Plc in April 1987. The name Unity Bank Plc was adopted when Intercity Bank Plc merged with other eight banks following the bank’s recapitalisation which began in 2005. The other eight banks were Bank of the North Limited, Centre Point Bank Plc, First Interstate Bank Plc, New Africa Bank Plc, NNB International Bank Plc, Pacific Bank Limited, Societe Bancaire Limited and Tropical Commercial Bank Plc.
The two investors with the highest number of shares in UNITYBNK are Asset Management Corporation of Nigeria (AMCON) and Panafrican Capital Nominee (PCN). AMCON’s shareholding as at 31st December 2020 was 34.2% while PCN had 12.7% equity participation in UNITYBNK. The other major investors in the bank are Thomas A. Etuh (9%), Ibad Limited (6.1%) and El-Amin (Nig.) Limited (5.3%).
Alhaji Aminu Babangida was named chairman of the board of directors in 2017. Mrs. Tomi Somefun, the managing director, heads the management team.
Gross and net earnings growth is weak. Gross earnings have lost 3.9% on a 10-Year Compound Annual Growth Rate (CAGR) basis. Though profits were declared in most of the years, the losses have outweighed the profits. In the last ten years, UNITYBNK announced profits eight times and losses twice. But the losses surpassed the profits leading to the accumulation of losses by the company. UNITYBNK’s rising accumulated deficit has made it difficult for the company to have. a positive shareholders’ fund. The accumulated deficit stood at NGN372.7 billion as at 31st December 2020. The company has not been able to make adequate profits to wipe out the accumulated losses made. The negative shareholders’ fund has risen by 4.4% to -NGN275.4 billion over the past three years.
UNITYBNK is not adequately capitalised and is prone to liquidity problems; the Capital Adequacy Ratio has been below the minimum required by the regulatory authority for eight consecutive years.
It has tapped into the Anchor Borrowers Programme of the Central bank to grow its loan portfolio. It receives loans from CBN for on-lending to farmers through the Anchor Borrowers Programme. Over 80% of gross loans have been extended to the agriculture sector in the last three years. We are of the opinion that the bank could mitigate the impact of default from farmers by granting more loans to other promising sectors of the economy. Being a national bank, UNITYBNK’s loan portfolio should be diversified in terms of industrial and geographical spread. Gross loans to the northern part of Nigeria stood at NGN178.5 billion or 86.5% of the total loans granted in 2020 (2019:NGN98 billion or 91.7% of the total loans). The attraction of finance from other sources would help in extending more loans to other sectors of the economy as facilities from governmental organisations are usually directed to those sectors specifically stipulated by them.
The bank, which had been finding it difficult to grow customers’ deposits, expanded customers' deposits by 12.2% on a 3-Year CAGR basis in the year 2020. Gross loans to customers have grown at a compound rate of 179.3% over the past three years. Impairment provision on gross loans has dropped to 2% at the end of the 2020 fiscal year; 26.8% of gross loans were expected to become bad four years earlier. The quality of its loan portfolio improved with less than 1% non-performing loan ratio in the last four years. The gross loans to deposit ratio rose from 41.5% to 57.8% between 2019 and 2020. We are of the belief that the proportion of total loans that are non-performing could rise due to the impact of COVID-19 on businesses and individuals. Total assets have also increased by a 3-Year CAGR of 46.5% as against a 15.9% decrease in the earlier year.
It is worthy of note that there have been some improvements in the performance of the bank. Although UNITYBNK trades below our fair value estimate, we maintain a hold recommendation on its shares. We would like to see how things pan out.
A share of UNITYBNK should trade between NGN1.05 and NGN1.78. The stock, in our opinion, is currently undervalued. The expected return on the company’s shares is 20.3%.
Gross earnings fell by 4.2% to NGN42.7 billion in the year 2020 as against a year-over-year increase of 19.5% in the preceding year. However, interest income, a major component of gross earnings, gained 8.8% to close at NGN39.1 billion or 91.6% of gross earnings. A non-interest income of NGN3.6 billion was announced in 2020, down 58.5% year-over-year. Net trading loss was responsible for a decline in non-interest income. Securities trading losses of NGN4.5 billion resulted in a net trading loss in the year under review.
Profit Before Tax (PBT) of NGN2.2 billion was tantamount to a 39% decline over the figure for the previous year. Profit After Tax (PAT) dropped from NGN3.4 billion in 2019 to NGN2.1 billion in 2020. Despite expanding by 46.5% year-over-year, total assets trailed total liabilities by NGN275.4 billion (2019: NGN278.9 billion). Consequently, Book Value Per Share was -NGN23.56 compared to -NGN23.86 in the prior year.
Net interest income rose by 7.6% to NGN17.7 billion in 2020 from NGN16.5 billion in 2019. The net interest margin of 41.6% was equivalent to a 4.6% improvement on 2019’s performance. PBT margin shed 3%: PAT margin fell by 2.7%. Shareholders’ fund has been eroded by accumulated losses over the years. UNITYBNK declared negative shareholders’ fund for four straight years. Shareholders’ fund for the year 2020 was -NGN275.4 billion owing to an accumulated deficit of NGN372.7 billion. Returns to shareholders were not encouraging; Return on Equity (RoE) and Return on Assets (RoA) were -1.3% and 0.7% respectively.
Interest-bearing liabilities rose by 32.6% to NGN728.2 billion in 2020 compared to NGN549.2 billion in 2019. Interest expense increased by 9.9%; it rose by 25.2% in the previous year.
UNITYBNK has no edge on the competition. It may find it relatively difficult to vie for deposits and other cheaper sources of finance to shore its capital and boost its liquidity position. Interest income and, by extension, gross earnings may be adversely affected if there is a default as its credit is concentrated on agriculture.
In NGN thousands