When Unity Bank projected a N9.3 billion gross profit forecast for the first quarter of 2021, the economy was deep in recession but now that the economy has clambered up the trough, that projection may be just too conservative. Investors, however, are not having any of that as the bank stock price remain on a horizontal trajectory.
On December 16, Unity Bank sent its earnings forecast to the Nigerian Stock Exchange (NSE) with a projection of N9.3 billion in gross profit and a pretax profit of N341 million and net profit of N312 million. The projection was premised on hard economic conditions, chief of which is the constrained on consumption imposed by the recession from which the economy emerged last quarter.
With improved economic conditions and the leverage on consumption, economic actors including firms are likely to make more profit, all things being equal. Our projection is that the bank is likely to cross the N10 billion marks while Net profit is likely to hit N4 million or above.
Perhaps it is this conservative estimate that is holding back the bank’s stock price causing it to sit on N0.75 since March 23 with no capital gains earned by ardent shareholders. This is also likely to change with an improved bottom line.
A look at the bank’s nine month performance in the last financial year when the economy was deep in recession provides a clue as to the good outing of the bank in the new financial year.
After nine months of gruesome maturity transformation interspersed with some non interest banking given the lesions from a pandemic and a recession, Unity Bank managed a marginal 8 percent growth in gross earnings to N33.9 billion from N31.3 billion. The marginal rise is a reflection of the lean resources available to corporations and households in times of a recessionary gap.
To achieve this level of growth, the bank had to press for improved interest earnings and fee growth. Consequently, it grew interest income by 10 percent to N28.65 billion from N26.2 billion while fee and commission income rose 10 percent to N3.92 billion from N3.62 billion. This as the face off between interest income and interest expenses resulted in net income of N12.6 billion. This is 14 percent better than the previous accounting period when 11.14 billion was recorded.
The bank’s risk appetite appearered stable in the period as its loan deposit ratio stands at 40 percent compared to the previous 40.4 percent.
The bank was able to push up net operating income to N17.7 billion from N15.6 billion, a 14 percent rise despite the rising cost of doing business. A situation where operating profit is rising, is an indication of efficiency in managing operations. That credit should be given to the bank for being in control of its operating costs even if the operating margin difference from the previous time is minimal at 0.2 percent. It grew operating margin to 52.2 percent from 52 percent.
But the rising cost of doing business is reflected in the 15 percent rise in operating expenses to N16 billion from N13.9 billion. The sharp rise took a toll on the bank’s pretax profit, hacking it down to N1.7 billion. The figure though low compared to what it made from operations, is 6 percent better than the previous showing of N1.6 billion. But pretax margin dropped in the period to 5 percent from 5.1 percent. This may suggest that the bank needs to improve on managing interests.
The bank’s bottom line didn’t differ markedly from its pretax situation as it improved 6 percent to N1.7 billion from N1.6 billion, another small but crucial win given that the economy was in recession as at the time of this operation. But the win was not big enough to propel net profit margin, which lost some grounds, to 4.1 percent from 4.7 percent.
While the small win in bottom line had a drag on the bank’s Return on Assets (ROA), it had the opposite effect on its Return on Equity (ROE). It’s ROA dropped to 0.4 percent from 0.5 percent indicating a need to push up profits to justify the level of assets deployed by the bank.
The rise of the bank’s ROE suggests that the profit level compensates enough for the level of equity even if there needs to be an improvement in this metric, after all the bank should be maximizing shareholders’ value.
The bank’s stock price has been stable as it oscillates around the 68 kobo mark although there’s need for some serious improvement to gain the confidence of investors and speculators alike.
The bank’s full year results is not expected to be too different from the foregoing given that it will be a product of the recession just exited by the economy. However, it is expected that with the economy out of the trough, the bank will post significantly better results from the second quarter of the new financial year.