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Unity Bank needs to enhance profitability to restore positive shareholders’ funds



Article Summary

  • Unity Bank is facing significant challenges with negative retained earnings of N379.786 billion and negative shareholders’ funds of N139.797 billion in Q1 2023.
  • The bank’s financials indicate accumulated losses and a weakened financial position, raising concerns about its ability to generate sustainable profits and meet financial commitments.
  • While the issuance of debentures provided some short-term relief, the long-term goal for Unity Bank should be to restore positive retained earnings through sustained profitability and prudent financial management.

Unity Bank’s negative retained earnings of N379.786 billion and negative shareholders’ funds of N139.797 billion as of Q1 2023 pose a significant obstacle to the bank’s profitability and the restoration of positive shareholders’ funds. 

These figures underscore the seriousness of the challenge that the bank is currently facing. 

Negative retained earnings indicate that the bank has accumulated losses over time, resulting in a deficit in its retained earnings account. This situation shows that the bank’s net income has not been sufficient to cover its losses or fulfil other financial obligations. 

It also raises concerns about the bank’s ability to generate sustainable profits and meet its financial commitments. 

Furthermore, negative shareholders’ funds suggest that the bank’s liabilities exceed its assets, indicating a weakened financial position. This can hamper the bank’s ability to attract investors, raise capital, and generate returns for shareholders. 

Companies have valid reasons for temporarily accumulating losses, such as investing in research and development or expanding into new markets. But in the case of Unity Bank, the financials show that the negative retained earnings are primarily due to transfers from a non-distributable reserve.   

  • “The non-distributable reserve is a reserve created by comparing the impairment of risk assets under IFRS and provisions for risk assets using CBN Prudential Guidelines. Where the impairment amount under IFRS is lower than the amount of the provision under Prudential Guidelines, the IFRS impairment figure is used in the accounts. However, the difference between the IFRS impairment and prudential guidelines provisioning is charged to the retained earnings and transferred to a non-distributable reserve.” –Unity Bank

The explanation above, obtained from Unity Bank’s financial statement, provides insight into the reasons behind the negative retained earnings. It suggests that the negative retained earnings are primarily a result of adjustments made in accordance with the International Financial Reporting Standards (IFRS) and the Central Bank of Nigeria’s (CBN) Prudential Guidelines. 

That said, it has continued to add to the accumulated deficit and negative shareholders’ funds, which stood at N380.834 billion and N274. 9 billion respectively in 2022 FY,  

Though in Q1 2023 the negative shareholders’ funds were down 49% YoY to N139.797 billion. That was primarily driven by the issuance of debentures. The bank’s statement of changes in equity reflects the issuance of debentures amounting to N135.181 billion. Issuance of debentures introduces additional debt and carries interest payments and repayment obligations. This has been reflected in the bank’s debt-to-assets ratio at about 80%in Q1. 

While debentures or other forms of capital raising can provide short-term relief, the long-term goal for Unity Bank should be to restore positive retained earnings organically through sustained profitability and prudent financial management.   

In the 2022 financial year, the bank recorded the lowest profit after tax of N941 million in five years, representing a 70% year-on-year decline.  

Although profit after tax grew by 21% YoY to N1.048 billion in Q1 2023, it was not significant enough to have a substantial impact on reducing the negative shareholders’ funds. At this growth rate, it will take much longer to restore positive shareholders’ funds.   

Indeed, it is crucial now for Unity Bank to enhance profitability growth. The bank needs to expand its income base, especially its interest income, which accounts for 80% of gross earnings. The decline in loans and advances by 32% from N293 billion in December 2022 to N199 billion in Q1 2023 is a matter of concern. If this trend continues, it can have a significant impact on its interest income, earnings, and stunt restoration 

Unity Bank must exit the negative shareholders’ fund. Negative shareholders’ funds can impact the potential returns for investors. If the company is unable to generate profits and restore positive shareholders’ funds, it may not be able to distribute dividends to shareholders.

This can result in diminished returns for investors who rely on dividend income as part of their investment strategy. This is perhaps one of the reasons why Unity Bank is currently not paying dividends. 

While Unity Bank’s negative shareholders’ funds may impact the potential returns for investors and limit the ability to distribute dividends, it is worth noting that the bank’s share price has managed to remain afloat and has even gained 1.82% year-to-date (YTD). This suggests that despite the financial challenges the bank is facing, investors still have some confidence in its prospects and value. 

Notwithstanding, Unity Bank would need to focus on implementing strategies to enhance profitability, such as increasing revenue, reducing expenses, improving operational efficiency, and managing risks effectively.