Union Bank 3Q profit down on moratoria, weak trading incomes and loan growth

Union Bank of Colombo PLC saw its profit falling in the three months to September as the back-to-back loan moratoria extended to pandemic-affected borrowers hurt its interest incomes while the exchange rate volatility and limited trading opportunities depressed trading incomes. Loans too continued to slip contracting the assets of the bank. 

The bank reported a net profit of Rs.182.2 million or 17 cents a share for the July-September quarter, down 24 percent from Rs.239.1 million or 22 cents a share in the same period last year. 

For the nine months to September, the bank posted net profit of Rs.665.9 million or 61 cents a share, up 14 percent from Rs.583.9 million or 54 cents a share a year ago. 

“The third wave of the pandemic impacted banking activities owing to limitations caused by the travel restrictions imposed during August and September, while the resultant economic challenges of trade and foreign reserves limitations continued to weigh on the overall business landscape,” Union Bank said in an earnings release last week.

As the September quarter earnings are in full swing, investors and the other interested parties are watching how banks and other entities fared amid partial economic restrictions prevailed during the three months and how they have contended with the fresh challenges that stemmed from the foreign exchange shortages and the increase in yields and interest rates set about from around August with the reset in the monetary policy. 

The bank reported a net interest income of Rs.1.19 billion in the period, down 2 percent from the same period a year ago amid decrease in both interest incomes and expenses. The net interest margin however rose to 3.40 percent, from 3.16 percent, at the end of last year. 

“The net interest income for the third quarter was impacted by the adverse macro environment along with the bank extending debt moratoria to support its customers during these tough times and intensified further by the significant drop in AWPLR by 280 basis points compared to the rates in 2020,” the bank said.

The bank saw its loan portfolio slipping for the second quarter in a row to end the September quarter with Rs.72.72 billion loans and advances, down from Rs.73.5 billion in June. The bank got off to a robust start in the three months to March, with Rs.4.4 billion growth, before turning into de-growths in the following three quarters when the economy lost steam from April onward, with the resurgence in the virus. 

As the bank had to contend with the foreign exchange challenges and the rising yields in the government securities, its treasury and trading market incomes depressed. For instance, the bank posted Rs.36.2 million and Rs.42.7 million in net fair value gains and net trading gains on financial investments during the quarter, substantially narrowed from Rs.100.9 million and Rs.369.5 million, respectively in the year earlier period. 
However, the fee incomes rose by 16 percent to Rs.233.5 million from a year ago period. 

The bank provided Rs.189.7 million for possible loans and other losses in the September quarter, compared to 341.5 million a year ago, applying the assumptions and the impairment models similar to that of applied in December 2020.  

However, as per the application guidance of the relevant accounting standards, the bank deviated from the earlier practice of recognising the entire individually significant loan portfolio as impairments to stage classification based on the arrears status of such facilities in the September quarter this year. 

The bank continued to bring down the gross non-performing loans ratio to 5.79 percent, from 6.05 percent from the end of last year. 

“As we steer with prudence amidst prevailing challenges, we hope to maximise on the opportunities available with the gradual reopening of the country, to meet the readjusted strategic objectives of the bank,” said Union Bank Chief Executive Officer Indrajit Wickramasinghe.