Union Bank records subdued profits for 3Q on higher provisions

Kicking off the banking sector earnings, Union Bank of Colombo PLC reported subdued profits for the September quarter (3Q22) on higher provisions against the possible loan defaults and muted growth in new credit, although the higher rates buttressed the margins and thereby the net interest incomes. 

The bank reported a net interest income of Rs.1.73 billion for the July-September quarter, up 46 percent from a year earlier, as the soaring interest rates supported the bank to charge higher rates on its loans and other financial assets such as government securities. 
The bank expanded its margin to 4.23 percent, from 3.53 percent at the beginning of the year.

The higher rates typically bode well for banks to generate profits by way of stretching their loan margins but the growth in new loans slows as borrowers wait in the sidelines until the loan rates ease and the provisions increase on concerns of rising bad loans.   In Sri Lanka however, the situation is dire, as the rates surged overnight, sending the private credit growth into negative territory and pushing many borrowers into default. It caused the banks to provide billions from their profits for possible bad loans that could stem from a deteriorating economy beset by a vortex of factors such as runaway inflation, foreign currency shortages, plunge in consumer demand and real incomes.   Union Bank provided Rs.709.7 million as provisions against possible loans and other losses in the quarter under review, up 274 percent from a year ago. 

The bank’s loan book grew by around Rs.900 million during the quarter to Rs.79.21 billion, bringing the nine-month growth to Rs.8.65 billion, including the translation effect on the foreign currency-denominated loan portfolio, as the rupee value of the foreign currency assets and liabilities swelled since the rupee collapsed in March.    While Union Bank managed to record only marginal growth in its corporate loans, except in the case of some of their existing relationships, it had completely turned its lending spigots off to the SME sector, with the sole focus of shifting to collections to blunt the fallout from loan defaults.   

The bank’s gross non-performing advances ratio rose sharply to 7.29 percent, from 4.46 percent at the start of the year, reflecting the asset quality pressure faced by the bank from the weakening borrower profiles.  Union Bank reported earnings of 10 cents a share or Rs.105.7 million for the quarter, compared to 17 cents a share or Rs.182.2 million in the same period last year, which translated to a 42 percent decline. 

Fee and commission incomes coming from several areas, including card transactions and increased trade business, rose by 43 percent from a year ago to Rs.333.1 million. 
Meanwhile, the bank’s operating expenses rose by 19 percent to Rs.1.24 billion, which it attributed to the impact from the rupee depreciation and revision in the utility tariffs. 
US-based Culture Financial Holdings Limited has a 70.84 percent stake in Union Bank, being its largest shareholder.