Union Bank’s solid loan growth yet to lift earnings

As banks’ results for the June quarter roll in, Union Bank of Colombo PLC reported solid growth in loans, a notable shift for a bank historically conservative in its lending, even during the best of economic times.

However, despite the surge in loans, the bank’s top and bottom lines did not see significant improvements this quarter. This may be due to the bank’s shift in strategy, amid pressure to offer cheaper loans while still holding substantial high-rate deposits.

This wasn’t totally counterintuitive as this was mostly the case with many banks that saw their margins narrow a bit, which is usual in the early cycle of monetary easing. The bank reported a net interest income of Rs. 1.34 billion for the quarter ended June 2024, a decline of 22 percent from the same period last year, as its net interest margin fell to 3.61 percent by the end of June from 4.68 percent at the start of the year.

The drop in margin, the difference between what it earns from their loans and what it pays for their depositors, is sharp for a six months’ period as it has fallen by 107 basis points. The bank’s total outstanding gross loans grew by a robust 17.5 percent to Rs.81.3 billion while the deposits have grown by 8 percent to Rs. 95.0 billion during the six months.

The bank brought down its Stage 3 or impaired loans ratio to 10.77 percent from 12.51 percent at the start of the year. Its assets as of end June stood at Rs.142.8 billion.

The bank reported earnings of 2 cents a share or Rs.16.6 million in the April – June period compared to 17 cents a share or Rs.185.8 million in the same period in 2023. The net fees brought in Rs.270.5 million, down 9 percent. The bank set aside Rs.78.9 million for possible loans and other financial asset losses, sharply lower from Rs.297.4 million in the year earlier period.

The bank in an earnings release said they have introduced island-wide digital zones to offer banking services around the clock. The share lost 10 cents or 1.12 percent to end the day at Rs.8.90.