A Bitter Pill to Swallow: Unity Bank’s Desperate Merger with Providus Bank
The Nigerian banking sector has been embroiled in controversy over the proposed merger between Unity Bank and Providus Bank, with critics questioning the motivations behind it and the potential risks involved. As the Central Bank of Nigeria (CBN) hails the merger as a step towards strengthening the sector, many are left wondering if it’s a clever move or a recipe for disaster. Is the Unity Bank-Providus Bank merger a desperate attempt to save a sinking ship, or a strategic move to create a banking giant? One thing is certain – the stakes are high, and the outcome is far from certain.
On the surface, it appears to be a strategic move by Providus Bank to expand its market share and assets. However, a closer look at Unity Bank’s financial struggles reveals a desperate attempt to avoid collapse. The merger is nothing short of bringing a distressed bank to marry a lightweight but healthy brand . Unity Bank’s financials are a cause for concern. The bank’s gross earnings have plummeted by 91.17% between 2016 and 2023, with a staggering 528.2% drop in profit before tax. Loans and advances have shrunk by 89.99%, and customer deposits have slipped by 80.34%. The bank’s negative equity of ₦326.87 billion and ₦62.6 billion loss in 2023 are clear indicators of its dire situation.
In contrast, Providus Bank is a relatively healthy institution with assets of ₦2.56 trillion and deposits of ₦1.5 trillion in 2024. The bank’s profit of ₦13.1 billion in 2023 is a testament to its stability. So, why would Providus Bank agree to merge with Unity Bank?
The answer lies in the Central Bank of Nigeria’s (CBN) involvement. The CBN has provided a ₦700 billion bailout to support the merger, citing systemic importance and the need to prevent a potential collapse. This raises questions about the CBN’s decision-making process and whether it is prioritizing stability over prudence.
The merger’s financial structure has raised eyebrows, with the CBN’s N700 billion accommodation being designated as Tier 1 capital despite being a repayable debt. This has sparked fears about the potential for creative accounting and regulatory arbitrage. The Central Bank of Nigeria’s (CBN) decision to approve a N700 billion financial accommodation to support the merger between Unity Bank and Providus Bank has raised eyebrows among analysts. The move, aimed at strengthening the banking sector, has been criticized for its unconventional approach to financial regulation.
The CBN initially approved the financial accommodation as a 20-year term loan with bond-like features, which was expected to be classified as Tier 2 capital. However, the regulator later revised its position, designating roughly N540 billion of the accommodation as Tier 1 capital. This move has sparked concerns about the incongruence of debt as Tier 1 capital.
Tier 1 capital is meant to be permanent and absorb losses immediately when they occur. However, the CBN’s accommodation is a repayable debt, which raises questions about its classification as Tier 1 capital. According to Proshare analysts, this move “falls short of the required maturity of a perpetual financial instrument” and “does not meet the convertibility requirement”. The analysts argue that the CBN’s accommodation should not pass the Tier 1 capital test, citing the Bank for International Settlements’ (BIS) Basel guidelines, which Nigeria is a signatory to. The guidelines state that Common Equity Tier 1 capital (CET1) is the highest quality of regulatory capital, and Additional Tier 1 capital (AT1) provides loss absorption on a going-concern basis, but with specific criteria.
The lack of clarity surrounding the CBN’s revised position is a major concern. It is unclear what conventions were relied upon to designate the accommodation as Tier 1 capital, and this lack of transparency raises questions about the regulator’s decision-making process. The move also sets a precedent for future bailouts and regulatory interventions, potentially undermining the sector’s stability.
Furthermore, the accommodation may fail a thorough accounting/IFRS test, potentially attracting scrutiny from auditors and the Financial Reporting Council (FRC). This could have far-reaching implications for the banking sector, and it is essential that the CBN provides clarity on its decision and ensures that the regulatory framework is robust and transparent.
Ultimately, the success of the merger depends on the CBN’s ability to address these concerns and ensure that the regulatory framework is robust and transparent. As Proshare analysts noted, “We hope to learn from the clarification on the application and conventions relied on.”
The significant increase in Unity Bank’s PPE value has also sparked questions about the fairness of the valuation. The recent merger between Unity Bank and Providus Bank has been touted as a strategic move to strengthen Nigeria’s banking sector. However, a closer look at the financials reveals a concerning trend – a staggering 2,800% increase in Unity Bank’s Plant, Property, and Equipment (PPE) value, from N24 billion in 2023 to over N690 billion in the Scheme of Merger. This significant jump has raised eyebrows among analysts, who are questioning the valuation methodology and the implications for the merged entity.
The increase in PPE value is particularly striking, given that it is the highest in the industry. While it is possible that the professional firm of valuers engaged by the acquiring bank deployed a ‘fair value’ methodology to justify this outcome, the sheer magnitude of the increase raises questions about the accuracy and reliability of the valuation. The concern is not necessarily about the valuation itself, but about the potential implications for the merged entity’s financials and the precedent it sets for future mergers and acquisitions.
Under IFRS 3 (Business Combinations), the focus is on the initial measurement of assets and liabilities acquired in a business combination, requiring them to be measured at their acquisition-date fair values. IFRS 10 (Consolidated Financial Statements), on the other hand, deals with the ongoing valuation of assets within a consolidated group. The question is whether the valuation of Unity Bank’s PPE meets the requirements of these standards.
A comparative analysis of the PPE numbers for Unity Bank and Providus Bank over the last four years reveals a significant disparity. The increase in Unity Bank’s PPE value appears to be an attempt to resolve the capital adequacy conundrum that exists, rather than a genuine reflection of the assets’ fair value. This raises concerns about the potential for creative accounting and the impact on the merged entity’s financials.
The implications of this valuation are far-reaching. If the merged entity is allowed to recognize this increased PPE value, it could set a precedent for other banks to revalue their assets, potentially leading to a surge in asset values and a distortion of the financial landscape. On the other hand, if the valuation is deemed to be aggressive, it could undermine investor confidence and impact the merged entity’s ability to attract capital.
The Central Bank of Nigeria (CBN) should provide clarity on the valuation methodology and ensure that the merged entity’s financials accurately reflect the fair value of its assets. The regulator should also ensure that the valuation is consistent with international best practices and does not set a precedent that could have unintended consequences for the banking sector. Ultimately, the goal of the merger should be to create a stronger, more resilient banking institution, not to create a financial house of cards that could come crashing down in the future. The recent merger between Unity Bank and Providus Bank has been touted as a strategic move to strengthen Nigeria’s banking sector. However, experts are questioning the Central Bank of Nigeria’s (CBN) unconventional approach to supporting the deal, citing concerns about the lack of clarity, accounting irregularities, and potential risks to the sector’s stability.
One of the major concerns is the CBN’s decision to classify a N540 billion long-dated debt instrument as Tier 1 capital, despite its 20-year maturity date. According to a source with over 35 years of banking and finance experience, “the CBN and the current owners of Unity Bank may have already set a trap for the future, ironically for the new owners. There is a reason why the bank without equity capital has not been able to get fresh funding from the many suitors that approached it over the last 3 years.”
Experts argue that this move is an anomaly and aberration, and may not meet the requirements of the Bank for International Settlements’ (BIS) Basel guidelines. “The current structure of the equity composition of the Unity-Providus Bank merger as presently represented falls short of the required maturity of a perpetual financial instrument,” says an analyst.
Another area of concern is the significant increase in Unity Bank’s Plant, Property, and Equipment (PPE) value, which has jumped by 2,800% to over N690 billion. A banker in the Corporate Finance department of a local Lagos-based deposit money lender notes, “The key stakeholders knew that the deal won’t pass without their finding a structure that will morph the debt into qualifying capital.” This raises questions about the accuracy and reliability of the valuation, and whether it meets the requirements of IFRS 3 (Business Combinations) and IFRS 10 (Consolidated Financial Statements).
The CBN’s approach has also raised concerns about the potential risks to the sector’s stability. “We should recall that when a revived New Nigeria Bank (NNB) was doing well before it merged with some illiquid banks that gave birth to the current Unity Bank, the initial outlook was grandly optimistic. After the merger, everything went sideways. I hope Providus Bank’s merger expedition will not become a similar, but avoidable, tale,” says an analyst.
The experts are not convinced that the merger is a solution to Unity Bank’s problems, and are calling for more transparency and clarity from the CBN. As one analyst puts it, “Fixing a crack by plastering over a house wall does not resolve the underlying foundational defect.” The CBN should ensure that the merger is structured in a way that prioritizes the stability of the banking sector, rather than just providing a lifeline to a struggling bank.
In conclusion, while the merger may provide a short-term boost to the banking sector, it raises several concerns that need to be addressed. The CBN should provide clarity on its decision-making process and ensure that the merger is structured in a way that prioritizes transparency, accountability, and the stability of the sector.
The CBN’s decision has also raised concerns about prioritization of stability over prudence and potential moral hazard. The treatment of debt as Tier 1 capital may not meet IFRS standards and BIS guidelines, which could have implications for the bank’s stability and profitability.
The merger can be seen as a rescue mission, with Providus Bank taking on Unity Bank’s toxic assets and liabilities. This is a significant risk for Providus Bank, and it remains to be seen how it will impact the bank’s stability and profitability.
The implications of this merger are far-reaching. It sends a signal to the market that even struggling banks can be bailed out, potentially creating moral hazard. It also raises concerns about the CBN’s ability to regulate the banking sector effectively.
The integration of the two banks poses significant cultural and brand integration risks, particularly with Unity Bank’s importance in Northern Nigeria. The merger terms may create a precedent for future bailouts and regulatory interventions, which could undermine the sector’s stability.
Despite these challenges, there is optimism about the merger’s potential to strengthen Nigeria’s banking sector. The combined entity is expected to have a stronger capital base and improved competitiveness. The CBN’s intervention demonstrates its commitment to maintaining stability in the sector.
The merger also presents opportunities for growth and expansion, particularly in the northern region where Unity Bank has a strong presence. Providus Bank’s expertise in digital banking and financial inclusion could complement Unity Bank’s traditional banking strengths.
The Unity Bank-Providus Bank merger is a high-stakes gamble that raises important questions about regulatory oversight and accounting standards. While there are concerns about the merger’s structure and potential risks, there is also optimism about its potential to strengthen Nigeria’s banking sector. Ultimately, the success of the merger will depend on the CBN’s ability to ensure transparency and accountability in its decision-making process.
The Unity Bank-Providus Bank merger is a desperate attempt to save a sinking ship. While it may provide a temporary lifeline to Unity Bank, it poses significant risks to Providus Bank and the broader banking sector. The CBN must be transparent about its decision-making process and ensure that the merger does not create a precedent for future bailouts
