Unity Bank is currently facing a significant challenge with negative retained earnings of N379.786 billion and negative shareholders’ funds of N139.797 billion as of Q1 2023. These figures highlight the obstacles the bank must overcome to restore profitability and positive shareholders’ funds.
Negative retained earnings indicate that the bank has accumulated losses over time, resulting in a deficit in its retained earnings account. This situation signifies that the bank’s net income has not been sufficient to cover losses or meet financial obligations, raising concerns about its ability to generate sustainable profits and fulfill commitments.
Additionally, negative shareholders’ funds imply that the bank’s liabilities exceed its assets, indicating a weakened financial position. This can hinder the bank’s ability to attract investors, raise capital, and generate returns for shareholders.
While companies may temporarily accumulate losses for valid reasons such as research and development or market expansion, Unity Bank’s negative retained earnings primarily stem from transfers from a non-distributable reserve. The non-distributable reserve is created by comparing impairment of risk assets under IFRS and provisions for risk assets using CBN Prudential Guidelines. This difference between IFRS impairment and prudential guidelines provisioning is charged to retained earnings and transferred to a non-distributable reserve.
To address this issue, Unity Bank needs to enhance profitability and restore positive retained earnings organically through sustained profitability and prudent financial management. While the bank’s profit after tax grew by 21% YoY to N1.048 billion in Q1 2023, this growth rate alone is not substantial enough to significantly reduce the negative shareholders’ funds.
To enhance profitability, Unity Bank must expand its income base, particularly 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, as it can have a significant impact on interest income, earnings, and the restoration process.
Unity Bank must exit the negative shareholders’ funds situation to safeguard potential returns for investors. Inability to generate profits and restore positive shareholders’ funds may hinder the bank’s ability to distribute dividends, resulting in diminished returns for dividend-dependent investors. Currently, Unity Bank is not paying dividends due to this situation.
Despite the financial challenges, Unity Bank’s share price has managed to remain stable and even gained 1.82% YTD, indicating some investor confidence in its prospects and value.
However, Unity Bank needs to implement strategies to enhance profitability, such as increasing revenue, reducing expenses, improving operational efficiency, and managing risks effectively. These measures will be crucial in restoring positive shareholders’ funds, meeting financial commitments, and creating value for investors.