Union Bank’s aggressive credit card push boosts FY19 performance

Union Bank of Colombo PLC managed to pull off an impressive financial performance for the period ended December 31, 2019 (4Q19), as the bank’s strategy to churn out as many credit cards as possible proved successful but the asset quality showed weakness. 

Union Bank recorded Rs.1.2 billion in net interest income for the three months under review (4Q19), up 7 percent year-on-year (YoY).

“Despite the policy rate revisions, the demand for credit to the private sector remained subdued, affecting the balance sheet growth. 

The bank’s loans and advances stood at Rs.77,358 million and recorded a growth of Rs.3,609 million (full-year growth), which was a 4.9 percent increase in comparison to the previous year. 

The growth was mainly attributable to the contribution from loans in the retail segment, including a significant increase in the credit cards portfolio and the expansion of the corporate loans portfolio,” Union Bank stated in an earnings release. 

The bank’s credit card portfolio grew by close to a billion rupees during 2019, to a portfolio of Rs.1.2 billion. 

The strategy reflects the bank’s heightened focus on the card business since its launch a couple of year ago—a gamble which could prove extremely risky as cards are clean loans but fetch interest rates as high as 28 percent. 

The higher rates enabled Union Bank to defy the pressure on margins as the bank stretched the net interest margin to 3.62 percent, from 2.98 percent a year ago. 

The bank’s conscious efforts to raise a low-cost funding base also may have helped the margins. 

The bank’s deposit base narrowed by Rs.2.8 billion as either the bank lost some rupee fixed deposits or let them slip as it was eying to boost its low-cost fund base. 

The fee and commission income of the bank for the three months was Rs.257.8 million, largely assisted by the growth in the cards portfolio.  

“Reflecting the macroeconomic challenges, the bank’s non-performing loans (NPL) ratio increased to 5.03 percent in 2019, in tandem with the increase of the NPL ratios within the banking industry. The SME banking segment showed the highest deterioration of the NPL ratios during the year,” the statement added. 

The bank with assets of Rs.122 billion reported earnings of 18 cents a share or Rs.196.4 million during the quarter under review, compared to earnings of 9 cents a share or Rs.93 million in the year earlier period. 

For the full year ended December 31, 2019 (FY19), the bank reported earnings of 70 cents a share or Rs.765.1 million, compared to earnings of 47 cents a share or Rs.517.8 million in FY18. 

The bank was seen containing the impact from the impairments during the quarter and full year. 

The US-based private equity firm, Culture Financial Holdings Limited, has a 70.83 percent stake in the bank.