By Omoh Gabriel,Business Editor
UNITY Bank Plc is a unique creation out of the consolidation exercise implemented under the economic reform programme of government in 2005. It is unique in that in so many ways, it stood out of the pack.
This is one merger that incorporated the highest number of component banks. Under the arrangement, nine banks including Intercity, First Interstate, Tropical, Centre-Point, Societe Bancaire, Pacific, Bank of the North, NNB and New Africa Banks fused together under multi-phased business combination deals that drew the attention and applause of regulatory authorities. In fact, the Bank won one of the two awards instituted by the Central Bank of Nigeria for outstanding performance in this area.
Apart from the large number involved, the merger attracted merging parties with entrenched ownership from all the geographical zones of the country and thus qualifies as a truly Nigerian consolidation programme.
But beyond this, it also was one merger that ensured that the Northern Economic Zone remained firmly part of the Nigerian financial system.
It could therefore, serve as one of the most complicated but exciting merger of the era and was handled by some of the leading financial advisers in Nigerian capital market including DEAP CAPITAL and IBTC.
It is interesting to see that notwithstanding the large number, the post-merger Unity Bank has done appreciably well in integrating its human resources and processes. Although technological integration of its expansive branch network remains a challenge, the progress already made and success achieved have been a pleasant surprise not only to industry watchers but also discerning insiders.
But full technological integration remains a key challenge largely due to the large branch network that resulted from the merger and also the fact that several of the merging banks abinitio had very weak information technology foundation. It should be noted that Unity Bank emerged with a post-merger network of about 216 branches in 2006 making it the fourth biggest bank in Nigeria by that measure. It is the 12 biggest in asset base. Unity Bank has not rested its ambition with this organic size. It acquired a number of subsidiaries with interest in several sub-sectors of the financial market and is continuing with the drive to further spread its tentacles.
Among these are First Ventures Ltd. In the share registration business and New Devco in the stockbroking and Issuing House business. An insurance subsidiary may be unveiled in the next few months as the Bank intends to offer one-stop financial solution in the market place.
To the benefit of the Bank‚Äôs shareholders, most of the merged banks owned their properties before the merger and these assets have since appreciated in value. It is believed that this will go a long way in driving up the post-merger shares of the Bank. To appreciate the importance which directors place in assuring good value for shareholders, the Bank recently completed a share restructuring exercise with the listing of 14.74 million ordinary shares of 50 kobo each at N7.50 per share in the Nigerian Stock Exchange. This exercise gave the Bank an initial market capitalisation of N110.53 billion and a place among the top 20 capitalised stocks in the market.
It would be recalled that prior to this exercise which conserved value for shareholders, an ordinary share of the Bank was priced at N2.50 per share on a total of 44.2 billion ordinary shares. This represents a reverse stock split of one for three shares previously held by shareholders.
The pro-forma balance sheet of the post-merger Unity Bank as at June 31, 2006 showed a total asset base of N190 billion which placed the Bank on the 12th position in the industry. This compares with the pre-merger asset base of N92.5 billion, which though excludes figures from three of the merging banks, namely Bank of the North, NN and New African Bank.
With these figures, it has become clear that Bank is one of the post-merger groups that has gained the most competitively from the consolidation exercise.
Prior to the exercise, virtually all the component banks operated peripherally in the competitive space, but now the group is one to be reckoned with as can be seen from the latest pro-forma figures as at June 2006. The Bank has yet to release the current actual figures for the year.
EARNINGS AND PROFITABILITY
Relying on the pro-forma figures, the Bank reported a gross earning of N19.9 billion. This represents about 10.5 per cent of total asset base and hence below some critical money market rates for the period. For the period, treasury bill rates hovered around 14 per cent while the Minimum Rediscount Rates (MRR) was 13 per cent. Annual inflation was about 12.5 per cent.
Although the Bank‚Äôs gross earnings expectation was lower than these critical rates, it reflected the industry‚Äôs pre-occupation with the consolidation exercise and integration issues for most of the period covered. As a matter of affirmation, the N19.9 billion gross earning reported by the bank in its scheme document represented its fair market share of four per cent of earnings of post-consolidation banks in the industry. Out of this figure, N11.9 billion or 60 per cent was accounted for by interest and discount income.
Operating costs (including direct cost of consolidation) was N12.0 billion with operations resulting ultimately in pro-forma after tax profit of N3.1 billion. This translated to 7.2 per cent return on shareholders‚Äô fund and 21 kobo earning per reconstructed share.
This also translates to just 7 kobo earnings per pre-reconstruction shares. Due to issues related to integration, the Bank did not propose to pay any dividends, on its 2006 results. However, management is optimistic that synergistic effect of the business combination will begin to reflect in a more profound way from its 2007 results which will be due in a couple of months.
CAPITALISATION AND SAFETY ISSUES
As at June 2006, Unity Bank emerged with a core equity capital of N30.1 billion. If tier two capital of N12.8 billion is added, shareholders‚Äô fund becomes N42.9 billion.
With this new capital base, the Bank got enhanced capacity to expand scope of its business operations both organically and inorganically. This is particularly important for re-creation of risk assets for enhanced earnings. During the process of merger, a sizeable proportion of risk assets of the merging banks were de-capitalised due to severe levels of delinquency resulting in a low post-merger book loan assets of N29.1 billion.
In fact, tier one capital as a proportion of estimated risk weighted assets was about 27 per cent, a figure considered comfortably high to support significant risk asset expansion.
Apart from expansion of risk assets, it is to be noted that the Bank has since embarked on building and strengthening of strategic alliances in the areas of stockbroking, shares registration, mortgage banking and risk-underscoring.
ASSET QUALITY AND LIQUIDITY
As mentioned earlier, a number of component banks in the Unity Bank merger Group faced significant challenges of assets that did not perform to expectations. In one particular instance, Bank of the North was reported to have as much as N50 billion out of its N58 billion loans non-performing as at March 2005. But Unity Bank benefitted substantially from the forbearance given the Central Bank of Nigeria to enable hitch-free consolidation process. Under the arrangement, the CBN granted a waiver of 80 per cent of the accommodation bill initially issued to cover this facility among others, while the balance was restructured over a number of years. The post-merger Unity Bank carried only N8.2 billion of this bill and this has helped the balance sheet quality of the Bank. Accordingly, the Bank commenced on a clean slate with virtually all the N29 billion recorded currently as loans in the balance sheet performing up to prudential standards.
Moreover, the entire asset portfolio only had 55 per cent of its proportion subject to differing risk of default. This is moderate and within the industry average exposure.
On liquidity, the scheme report showed that as at end of June 2006, about 51 per cent of assets were estimated as invested in cash, marketable securities and other short-term assets. Again, this is modest and sufficient to meet obligations to creditors and other customers. This was particularly important as expectations were high on the new Unity Bank to prove that the coming together of nine hitherto small and medium-sized banks really resulted in a strong bank that inspires confidence. This is moreso as it acquired in the process, a large customer base and deposit liabilities estimated to be about N112.3 billion as at end of June 2006.