Union Bank December profit dips; sour assets climb

Union Bank of Colombo PLC suffered a setback in both its top and bottom lines as the bank failed to capitalise on the rising market interest rates although the loans grew at a healthy rate. 

The interim results released to the Colombo Stock Exchange yesterday showed the banking group denting its after-tax profits by 4.0 percent to Rs.130.4 million for the October-December period (4Q17) over the same period last year. 

The earnings per share stood at 12 cents. 

The bottom line was buttressed by lower tax charges for the period as the profit before corporate income tax was a 17 percent lower at Rs.117.4 million for the period. 

The bank took advantage of a tax reversal of Rs.23.6 million during the quarter to soften the bottom line performance. 

At the top line, the net interest income dropped by 7.0 percent to Rs.912.2 million during the quarter under review as the interest expense rose double the pace of increase in interest income. 

The net fee and commission income was also weak, growing by only 5.0 percent for the period over the same period last year. 

Meanwhile, for the financial year ended December 31, 2017, the banking group, which also has a licensed finance company, reported earnings of 47 cents a share or Rs.514.8 million in total earnings, up 2.0 percent.

The bank provided new loans worth of Rs.15.4 billion during the year. This translated into a robust growth of 28 percent. 

The bank has a total loans and receivables book of Rs.71.5 billion. 

The deposits funded bulk of the growth in assets as the customer deposits grew by Rs.18.5 billion or by 36 percent to Rs.70 billion. 

The growth in both advances and deposits however came with a cost to the bank’s margins as the net interest margin shrank to 2.87 percent from over 3.0 percent a year earlier. 

When the interest rates in an economy rise, the banks are generally able to increase their margins in tandem.

When the interest rates were low during 2015 and 2016, Union Bank gave out fixed rate loans at extremely low rates and the bank perhaps was unable to reprice these facilities in tandem with the rising interest rates. 

Meanwhile, the bank’s asset quality also weakened slightly as the gross non-performing loan ratio rose to 2.69 percent from 2.40 percent in 2016. 

In 2014, Culture Financial Holdings Limited (CFHL), an affiliate of TPG, a USA-based leading private investment firm, invested US $ 117 million or Rs.15.44 billion in return for a 70 percent stake in the bank.