Union Bank records modest 1Q; PAT impacted by higher taxes

Union Bank of Colombo PLC pulled off some modest performance for the first quarter in 2019 amid lackluster economic conditions, the interim financial accounts released to the Colombo Stock Exchange showed yesterday. 

But the bottom line of the lender ebbed due to the absence of some crucial tax exemptions enjoyed by the banking sector on its financial investments, which were taken away by the new Inland Revenue Act which came into effect from the second quarter of 2018. 

Union Bank reported earnings of 11 cents a share or Rs.117.6 million for the January – March 2019 period, down 17 percent from 13 cents a share or Rs.141.4 million reported for the corresponding period in 2018. 

However, the bank reported Rs.401.3 million in profit before all taxes, up 31 percent year-on-year (YoY). 

The lender paid Rs. 176.8 million in Valued Added Tax (VAT), Nation Building Tax (NDB) and Debt Repayment Levy (DRL) for the three months while another Rs.105.4 million was charged as corporate income tax at 28 percent. 

The increase in VAT, NBT and DRL is 53 percent and corporate income tax was a significant 178 percent. 

The effective tax rate of the bank rose to a staggering 72 percent from 52 percent a year ago. 

“The Increase in the effective tax rate was due to the withdrawal of tax exemptions on profits earned on investments in Sri Lanka Development bonds, investments in units, investments in debentures and also due to introduction of debt repayment levy. In addition, the withdrawal of notional tax credit further impacted the effective tax rate”, Union Bank said in an earnings release.

Sri Lanka is among one of the very few countries where its banks are taxed at an exploitative rate as the sector has become an easy target for policy makers to fill the State coffers. This is akin to treatment meted out to sin industries such as gaming, alcohol and tobacco.  

The government last year brought the DRL in a kneejerk reaction to tackle the mountainous foreign debt and the tax only applies to banks. 

Meanwhile, Union Bank with Rs.125 billon in assets earned a net interest income of Rs.1.22 billion during the quarter under review, up 17 percent YoY.  The bank, which has slightly under Rs.80 billion loan book, gave fresh loans of Rs.2.5 billion during the quarter largely marred by subdued economic activity. 

The net interest margin – the spread between the return earned from interest earnings assets and the cost of funds – rose to 3.24 percent from 2.98 percent three months ago. 
But the lender’s non-performing loans reached 4.32 percent.

The deposit base shrank by Rs.1.4 billion as the bank lost some of its rupee term deposits during the period under review.

Union Bank in March announced that it would repurchase 7.88 million shares or 0.72 percent stake at Rs. 15 a share which is to commence on May 15.  Culture Financial Holdings Limited has 70 percent stake in Union Bank while Vista Knowledge Private Limited has another 5.93 percent stake in the company.