Union Bank kicks off March banking sector earnings with subdued profits

Union Bank of Colombo PLC (UBC) saw its loan book continuing to shrink during the quarter ended on March 31, 2023, reflecting tighter credit standards and extreme caution practiced by the small-sized lender amid the volatile
macroeconomic conditions.  
UBC, with assets less than Rs.119 billion, reported a 27 percent year-on-year (YoY) decline in profits to Rs.171.9 million for the January-March 2023 quarter.

Sharply higher yields and rates enabled the lender to report a 33 percent YoY increase in the net interest income in the three months under review to
Rs.1.88 billion. 
“The resultant increase in revenue was mainly derived from the increase in the bank’s net interest income by 49 percent to Rs.1,622 million, due to improved yields from the repricing of the loan portfolio and treasury assets,” UBC said in a press release of its standalone performance. 

The bank’s share ended 50 cents or 5.88 percent higher at Rs.9.00 on Friday.  
Investors and analysts were waiting to parse the banking sector earnings reports in the March quarter to assess how they did with their provisions, asset quality and earnings, as the economy showed signs of recovery from the worst depths it hit last year. 

UBC had set aside Rs.482.5 million for loans and other losses in the quarter, up 52 percent from the same quarter in 2022. 
The bank’s loan book contracted from Rs.72.8 billion in December 2022 to Rs.68.5 billion, due to the contraction in the rupee and foreign currency loan books. 
The latter appears to have seen the impact of the appreciated rupee in the first quarter, as the assets and liabilities get retranslated at the exchange rate stood at the balance sheet date.

The bank’s impaired loans or Stage 3 loans ratio, which is somewhat equivalent to the gross non-performing loans ratio, rose to 10.58 percent, from 8.19 percent at the end of December 2022. 
The cumulative deposits too fell from Rs.92.6 billion to Rs.90.3 billion in the first quarter, mainly due to the revaluation of the foreign currency-denominated deposits. 

The rupee appreciation brought an adverse impact to the bank’s income statement too, as its other operating income fell sharply by 92 percent to Rs.24.7 million, bringing opposite results to when the rupee depreciated last year. 
The bank also reported a net fee income of Rs.343.4 million, up 27 percent. 

The banking sector analysts expect the back half of the year to bring growth to the sector, as inflation and interest rates decline while the conditions in the economy improve. 
The private equity firm Culture Financial Holdings Limited held a 70.84 percent stake in UBC by the end of March.
A bid to purchase the stake held by Culture Financial Holdings Limited by Nepali billionaire Binod Chaudhary, which was announced in December, last year, is yet to materialise.