Unity Bank: From high growth to a slowdown

Unity Bank achieved one of the highest profit advances in the banking sector in 2014 but is experiencing a sharp slowdown so far in 2015. The full year outlook indicates a likely drop in gross earnings and a moderate improvement in profit against a rise of 147% in after tax profit   in 2014.

Actual earnings outcomes are however subject to the unstable pattern the bank has displayed since its post consolidated operations. Close to 38% of its full year revenue in 2014 was generated in the final quarter during which a loss occurred and lowered the full year profit below the third quarter figure. A stable track record of earnings performance is yet expected from the bank.

Gross income was flat at N49.20 billion for the bank at the end of the third quarter at 2.2% growth year-on-year. The drag was interest income, which declined by 9.3% to N35.16 billion over the period. Non-interest income provided the strength for revenue performance during the review period at an increase of 150% to N14.04 billion. The contribution of non-interest income to gross earnings therefore increased from 19.5% in the third quarter of last year to 28.5% at the end of September this year.

If the growth rate in the third quarter is maintained to full year, gross earnings are expected to stand in the region of N67 billion for Unity Bank at the end of 2015. This will amount to a drop of over 13% from the gross income of N77.28 billion the bank posted in 2014. The weakness in interest income appears to follow the declines in the various lines of investment assets in the current year. Revenue growth may still pick up in the last quarter.

The bank reported an after tax profit of N9.31 billion at the end of the third quarter, which is a drop of about 16% year-on-year. Despite the drop, the full year outlook is promising a moderate improvement over the closing profit figure of N10.27 billion in 2014. This is in view of the fact that the bank’s full year profit last year was lower than the N11.06 billion it reported at the end of the third quarter.

The weakness of the year-on-year drop in profit at the end of the third quarter this year is somewhat remedied by a likely moderate growth at full year. A cautious projection of N11 billion net profit is made for Unity Bank at the end of 2015 subject however to a possible change in the growth rate in the final quarter. The bank’s earnings pattern still lacks the reasonable stability needed for dependable earnings projections.

Credit loss expenses were the main culprit for the loss of profit growth momentum in the last quarter of last year. The picture of a drastic reduction in net impairment charges in the third quarter changed suddenly at the end of the year. From only N2.18 billion provision for credit losses in the third quarter, the figure soared to N15.28 billion at the end of the year.

A repetition of the same pattern in impairment charges isn’t ruled out for the bank this year. Credit loss expense dropped by 20% year-on-year to N1.74 billion at the end of the third quarter but the full year position is subject to an unpredictable change. Whether the current profit growth momentum is sustained or lost at full year depends largely on the direction that loan loss expenses will follow in the final quarter.

The bank’s ability to convert revenue into profit has weakened this year on flat revenue and rising costs. Net profit margin is down from 23% in the same period last year to 18.9% at the end of the third quarter, which remains quite good by the banking industry standard. It is an outstanding improvement from the profit margin of 13.8% the bank recorded at the end of 2014.

Two major expenditure lines account for the decline in profit margin this year. These are interest expenses and operating cost, which grew by 9.4% and 9.3% respectively at the end of the third quarter against a flat growth in gross earnings. Operating cost margin has increased from 43.3% to 46.3% over the review period and from 40.4% at the end of last year.

Should loan loss provision change direction from a drop to a rise in the final quarter, the profit margin seen in the third quarter will decline further at full year and the full year profit projection will not be realised. The bank earned 79 kobo per the currently outstanding shares of 11,689 million at the end of the third quarter. The full year outlook indicates an earnings per share of 94 kobo for Unity Bank in 2015.

PHOTO: Tomi Somefun, MD/CE, Unity Bank.