Tier two lender, Unity Bank Plc recently
released a backlog of financial statements dating to the full year ended
December 2017. The move took place, the very day trading in the bank’s
shares was suspended by the Nigerian Stock Exchange for failing to
release them on time.
The bank’s latest results contained a lot of
pointers that should send shivers down the spine of investors. For
starters, retail investors in the bank are likely to lose their entire
shareholdings if the bank is unable to generate enough profits to cover
its N242 billion hole.
On the brink of insolvency
Going by the bank’s Q3 2018 results, the
bank is on the brink of insolvency if it does not raise cash to plug the
hole. Total assets amounted to N254 billion while total liabilities
stood at N496 billion. However, a cause of worry to investors was the
bank’s total equity which stood at a negative of about N242 billion,
suggesting that the bank is technically insolvent. When a company has
negative equity, it indicates that the company’s ability to operate as a
going concern is questionable.
Negative retained earnings
The bank’s results also include a negative
retained earnings of about N338 billion as at September 30, 2018. The
negative retained earnings of about N338 billion confirms that the bank
will not be able to pay dividends until it is able to generate enough
profits to clean up the accumulated losses. The N338 billion in negative
retained earnings also indicates that the bank had provisioned for most
of its loans.
Unity Bank had kept its results under the
lid for months as speculations increased over a possible capital
injection. Despite not releasing its results for months, the Nigerian
Stock Exchange allowed the stock to continue to trade allowing the stock
to rise as much as N1.9 at the start of the year. Despite its poor
results the share price is up 35% year to date, perhaps still riding on
speculations that capital injection might be coming soon.
In the pipeline
Managing Director of the bank, Tomi Somefun
last week disclosed that the bank was in talks with several investors to
inject funds, including the Asian Development Bank. She, however, did
not give a timeline for when this would be concluded. Going by the
balance sheet of the bank, investors will have to cough up about at
least N250 billion to give the bank a lifeline. By our calculations,
this banks needs more than a lifeline. Any capital injection less than
$1 billion will not get the bank out of the woods. Important to note
that the bank posted a loss after tax in the 3 months ending September
2018 and we project that it may close the year red.
Mission (im) possible?
Would be investors may have an uphill task,
injecting funds into the bank as that would require fresh capital of at
least N360 billion. A far lesser sum would enable one buy a stake in any
of the other tier two lenders in need of funds.
A new investor would also have to contend
with key stakeholders in the bank who may be unwilling to dilute their
holdings. Private equity firm Milost Global, had stated that it had
decided against an investment in the bank following threats it had
received.
At a market capitalisation of N8.8 billion,
any major investment of N50 to N100 billion could lead to major dilution
for existing investors.
If all fails
In the event of the bank not being able to
raise fresh capital, the Central Bank of Nigeria (CBN) may be forced to
inject more funds into the bank, as it did with Skye Bank. Unity bank
currently has a loan of N50 billion from the apex bank on its books.
Are shareholders online
Negative equity could mean investors are
already on a red line, either through dilution effects from capital
invested by a new investor or In the possible or unlikely case of the
CBN injecting funds. In fact, from experience, current shareholders of
Unity Bank have basically lost their investment except a miracle
happens. Anyone investor injecting funds into this bank will basically
own the bank if the funds being injected is enough to cover the negative
equity.
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