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Unity Bank released its Q3 earnings forecast last Friday on the Nigerian Stock Exchange (NSE) and the bank forecasts that it expects to report a net income of around N380m out of the N10.89bn it expects to generate as gross earnings in the third quarter of 2021.
This profit performance indicates that the net profit margin on the bank’s gross earnings will drop from around 6.3 percent in Q1 2021 to 3.5 percent in Q3 2021. This means previously low efficiency levels are expected to half in the space of just 6 months.
The bank’s net earnings are also expected to drop by nearly 50 percent between Q1 2021 and Q3 2021. In Q1 2021, the bank reported a net profit of N721.5m compared to the N380m it expects to earn in Q3 2021 based on its earnings forecast, representing a decline of around 47 percent.
This earnings performance shows that the bank continues to struggle with low asset yields, high cost of funds and high operating expenses, cumulating to deliver less than satisfactory profitability to investors.
Asides the decline in net earnings, analysts also observed that the interest income is expected to decline by around 25 percent from N9.6bn in Q1 2021 to N7.2bn in Q3 2021. Interest expense is also expected to climb from N4.8bn to N5.35bn in Q3 2021, an increase of around 10 percent. A simultaneous decline in interest income and an increase in interest expense has led to a complete squeeze in the net interest income in the bank which is causing the significant drop in forecasted profitability.
Net interest income is expected to print at N1.85bn which is 61 percent lower than the N4.86bn the bank recorded in the first quarter of the year. However, non-interest income is expected to double from around N1.8bn to N3.6bn in the space of just 6 months.
Analysts say this superlative growth in such a short period may be overly optimistic. If the bank fails to meet this target though, it could easily report losses in the third quarter of the year considering its very high operating expense relative to its income.
The bank expects to spend around N4.2bn in operating expenses which is around 91 percent of its net operating income of N4.6bn, translating to a very high cost to income ratio.
If the bank’s non-interest income does not exceed N3bn in Q3 2021 (which is a growth of around 67 percent in just 6 months), it is very likely that the bank will end up reporting losses in Q3 2021 than the profit it is expecting.
Analysts say the only way out for Unity Bank to avoid losses will be to improve its cost efficiency levels and strengthen its net interest margin.