Unity Bank’s financial woes turn Providus merger into a high-stakes rescue (2)

As pointed out in the first part, Unity Bank was technically insolvent as at the close of 2023 – the year before merger discussions commenced. It also had a deteriorating capital adequacy ratio and a N7.064 billion ‘insider’ loans. Hence it came into the deal full of financial baggage.

Apart from these negative numbers, Unity Bank had a lot of uncertainty sorrounding it as of 2023. With a loss of N62.6 billion, the bank’s directors practically made it clear that they did not know when the institution would start making profits. The bank sat on N35.83 billion in potential future tax savings, but management was unsure when it would generate enough taxable profits to actually benefit from them, raising questions about the strength and timing of its earnings recovery.

Unity Bank’s liquidity condition became a major challenge that it had to resort to the Central Bank of Nigeria (CBN) for short-term support. The CBN provided N50.7 billion to the struggling bank in 2022 and the same amount in 2023 to help it meet its working capital requirements. It also provided N50 billion financial accommodation to the bank to enable it merge with Providus, as welll as the sum of N700 billion to help the merged entity consolidate its processes. In fact, financial analysts say it was the money that made the Unity merger attractive to Providus Bank.

Unity Bank interest expense (N36.18 billion) was greater than its gross earnings (N9.29 billion) in 2023, which was a serious red flag and meant the bank did not generate enough income to cover the cost of borrowing. Hence it was not surprising that the bank reported an operating loss over the period.

With this, in combination with a low current ratio, Unity Bank would have struggled to pay lenders or meet supplier payments. The bank reported impairment allowance in line with CBN Prudential Guidelines of N203.84 billion on financial assets, which contributed to its overall large loss of N62.6 billion after tax. Banks often make provision for impairment losses if they suspect that some loans will not be repaid. But a high impairment like Unity’s signals credit risk and asset quality deterioration in its loan portfolio. It is also an indication that its Non-Performing Loans are rising and capital is weakening.

READ ALSO: Unity Bank’s financial woes turn Providus merger into a high-stakes rescue (1)

Unity Bank was seriously undercapitalised in 2023 before the merger talks, which explains why N750 billion had to come from the CBN to rescue the bank. It also had legacy issues, with negative shareholder funds, troubled loan book and solvency issues. Its delay in audited financial reporting was also a concern to the market.

All these issues could resulted in shareholders’ unequal compensation. Under the merger, Unity Bank shareholders must decide between a cash payout or share swap into Providus, highlighting that Unity’s equity is not being combined on a 1:1 basis. This explains why the deal is seen more as a takeover than a merger.

However, the basis of the merger is clear: Providus Bank plans to leverage Unity’s national spread to become a national bank. Unity Bank, on the other hand, is leveraging Providus fast growth and technology.

Also, Unity is a bank for the northern Nigeria and several of them will be absorbed into the merger. Hence the new bank, which will become 9th largest, will capture customers from the northern part of the country.

Merger surpasses N200bn

The proposed merger has surpassed the N200 billion capital threshold and received a ‘no objection’ approval from the Securities and Exchange Commission (SEC) and other relevant authorities. Integration activities between the two institutions are currently underway, with the final court sanction expected to conclude the process.

“Through the proposed merger, the combined capital base of Unity Bank and Providus Bank exceeds N200bn, which is the minimum requirement to retain a national banking licence under the CBN’s recapitalisation framework. The transaction marks a significant milestone in strengthening the financial stability and long-term competitiveness of the enlarged institution,” Unity Bank said in a statement released on Wednesday.