There are indications that all may not be well with four Nigerian banks, after all, judging by their negative retained earnings and raising concerns among analysts and investors that the situation may impact some of their healthy peers.
According to data by analysts at Investdata Ltd, the quartet: Unity, Sterling, Union, and Jaiz banks reported negative retained earnings of N384.784bn in the 2019Q1, slightly better than the N401.282bn in the full year ended December 31, 2018.
Directors of companies with negative retained earnings cannot propose the payment of dividend to shareholders for as long as the situation subsists.
In the period, Unity Bank recorded the biggest negative retained earnings of N339.556bn at the end of 2019Q1, which dropped by 2.71% from N349.021bn at the end of 2018, just as shareholders funds was negative N243.686bn. up from the prior year’s N242.193bn.
It was followed by Union Bank with N40.102bn negative retained earnings in the first quarter of 2019, after dropping from N44.38bn in 2018Q4, representing a decline of 9.63%.
Jaiz Bank’s negative earnings stayed flat at N4.574bn, just like in the 2018 full year; while Sterling Bank at N552m in the first quarter, recorded the most significant decline of 83.3% in the period under review, from the N3.307bn full year level.
The good thing, Unity Bank’s directors say, is that it is currently carrying a zero non-performing loan book, thereby extremely minimizing the bank’s credit exposure.
Its external auditors- Ahmed Zakari & Co, may not have shared that sentiment, given its recommendation in the report to shareholders urging them to consider a capital raising exercise, which says remains a key audit matter. The success of the exercise, it noted, would “reverse the bank’s negative shareholders’ funds and capital adequacy ratios and to provide assurance on the bank’s ability to carry on operations as a going concern.” The fresh capital is also expected to provide trading funds to strategically reposition the bank in the industry and improve its capacity to operate sustainably.
The auditors also noted that “a number of potential investors have indicated interests in participating significantly in the bank’s equity. Some have concluded their due diligence on the bank and are at various stages of negotiation.
Shareholders of Union Bank of Nigeria Plc held an extraordinary general meeting on Tuesday, June 11, 2019, and approved the board’s recommendation of a capital reduction and share capital reorganization.
The directors sought to free the company of all encumbrances that has prevented it from paying dividends.
Specifically, the board wants to clean up its balance sheet by writing off Union Bank’s established accumulated loss of N54.458bn in its profit and loss account arising from legacy transactions, in addition to the N247.868bn approved by shareholders in 2017.
The N54.458bn losses will, subject to shareholders’ consideration and approval at the EGM, be written off the bank’s N187.091bn share premium account, reducing it at N132.633bnwhile leaving the aggregate shareholders’ funds unchanged.
According to an explanatory note on the capital reduction, “it would have no impact on the bank’s creditors but rather, pave the way for the bank’s investors to receive dividends out of the bank’s future profit.”
The retained deficit will, therefore, be cleaned out post-transaction, leaving N6.722bn earnings.
This will make it the second time Union Bank is cleaning its books in seven years, after doing same in its 2012 financials when it concluded its “recapitalization and clean up of our loan portfolio.”