Unity Bank has finished second quarter operations with a significantly improved earnings report. Though revenue failed to grow during the period, the bank’s new managing director, Mr. Henry James Semenitari, has extracted an increased proportion of profit from each naira of earnings. Cost management effort paid off in two major areas for the bank at the end of the second quarter. The new strength in profit raises hopes for a big turnaround for the bank that closed 2013 with a big loss.
The bank closed its second quarter operations in June with a gross income of N30.85 billion. This is only a marginal improvement of 2.2% over the corresponding figure in 2013. Full year projection is N62.70 billion in gross earnings for Unity Bank at the end of 2014. This indicates that revenue growth is expected to be flat this year against the N62.83 billion gross income the bank posted in 2013.
The strength of the bank in the current year is the ability to cut down on key operating cost elements to stretch out profit margin. Major cost cutting has happened in two key lines so far in the year. These are interest expenses and operating cost.
Interest expenses dropped by 15.4% to N8.56 billion in the second quarter over the corresponding figure last year. This remedied the inability of the bank to grow interest income during the period. Interest income improved marginally by 2.4% in the second quarter. The decline in interest expenses raised net interest income by 15.1% to N16.44 billion during the review period.
The second area of cost cutting success is total operating expenses, which declined by 10.1% to N13.78 billion year-on-year at the end of the second quarter. That has lowered the bank’s operating cost margin from 50.8% in the second quarter of last year to 44.6% in the current year. With the decline, the bank’s operating cost margin has fallen in line with the average banking industry numbers.
Other favourable developments that helped the bank’s bottom line in the second quarter include an increase of 16.9% in other operating income to N1.94 billion and a rise of 38.6% in foreign exchange income to N122 million.
Some drawbacks also include a decline of 5.6% in fees and commissions and a rise of 70% in credit loss provisions- which came to N612 million at the end of the second quarter. Provision for loan loss expenses however needs to be watched in view of the unexpected surge in the second half of last year. While provision for credit losses was N360 million at the end of the second quarter of last year, the full year figure was N21.59 billion. That equally overturned the bank’s bottom line position from a net profit of N3.70 billion in the second quarter of last year to a loss of N22.58 billion at full year.
Will loan loss provisioning follow the pattern of the preceding year is a critical point of caution on Unity Bank in 2014. Should the current growth rate in provisioning be maintained, the bank has a big opportunity for a profit rebound this financial year.
Net profit amounted to N7.11 billion at the end of the second quarter, a leap of 92% from the corresponding figure in 2013. Full year net profit is projected at N14.8 billion for Unity Bank in 2014 based on the growth rate in the second quarter. This will be a turnaround from the loss of N22.58 billion the bank incurred at the end of last year.
The difference between last year and the current year for Unity Bank is that costs have moderated relative to revenue and profit margin has improved. Net profit margin is up from 12.3% in June last year to 23% this year. This represents one of the highest net profit margins in the banking industry this year.
The bank earned 18 kobo per share at the end of the second quarter, improving from 10 kobo per share at the end of the corresponding period last year. Based on the forecast net profit for the year, earnings per share is expected to come to 38 kobo for Unity Bank in 2014. Volume of shares outstanding is however expected to change with the rights issue programme of the bank this year as well as anticipated share reconstruction.
Dividend is not expected at the end of the financial current year, as the profit expected for the year will sink into a negative retained earnings hole. The bank carries a retained deficit of N51.59 billion, which is a reduction from the year’s opening figure of N58.70 billion.
Rebuilding the retained earnings account is the main task ahead for Semenitari over the next few years. He has already taken one of two critical steps towards accomplishing this mission. That is the rebuilding of profit margin through cost reduction. The second step will be to step up revenue growth, which will boost profit volume and therefore reduce the number of years it will take to rebuild the retained earnings account. Profit growth could also accelerate further if the bank recovers a good part of the loans in respect of which the large provision was made last year.