Union Bank records lower 1Q profits amid higher provisions; records surprise growth in loans

Union Bank of Colombo PLC reported disappointing results for the three months ended March 31, 2022 (1Q22) on the back of higher provision made on account of loans and other financial assets, but recorded a surprise growth in new loans amid tough conditions.  
The bank reported earnings of 22 cents a share on total profits of Rs.236.8 million in the three months, down 20 percent from the same period in 2021. 
The bank missed an opportunity during the last two years to expand its loans when the conditions were mostly conducive and failed to make the most of the record low interest rates during the period.
In 2021, the bank’s loans grew by Rs.570 million in the entire year and in the December quarter it recorded a massive de-growth of Rs.2.16 billion in its loans and advances. 
The bank’s loans and advances grew Rs.7.8 billion in the three months under review but the growth in loans leaving out the foreign currency loans was Rs.3.1 billion or 5.2 percent, still satisfactory given the dourer conditions in the economy. 
Although the cumulative deposits grew by Rs.7.8 billion in the three months, the rupee deposits didn’t grow at all. 
A more meaningful comparison in portfolios is only possible between rupee denominated financial assets and liabilities as the foreign currency denominated financial instruments were revalued at the weaker rupee stood as at the end of March 31, 2022 resulted from the botched rupee float by the previous Governor of Central Bank. 
Meanwhile, the bank reported net interest income of Rs.1.41 billion, up 15 percent from the same period in 2021 and the net fee and commission incomes grew by 11 percent to Rs.271.0 million, mostly came from credit and debit cards and increased activity in trade business.  
 “The first quarter of 2022 witnessed the gradual recovery of economic activity resulting from the setbacks of the COVID-19 3rd wave,” Union Bank said in an earnings release. 
“However, during 1Q 2022, continued political uncertainty that prevailed, largely impacted normalcy, with public and businesses facing heightened challenges brought-forth by gas and fuel shortages, rapidly rising inflation, FX reserves depletion, depreciation of the LKR and import restrictions,” the bank said giving an account of the difficulties faced by them and the rest of the economy.
Meanwhile, reflecting these tougher conditions, the bank provided Rs.316.7 million for possible bad loans and other losses from financial assets. This is a 33 percent increase from the same period in 2021. 
The bank showed signs of weakening asset quality as its gross non-performing loans ratio rose to 4.82 percent from 4.46 percent in December 2021. 
The bank also saw its operating costs rising by 10 percent to Rs.1.13 billion in the quarter. 
“With most COVID-19 related customer relief measures concluding in December 2021, the Banking sector faced continued asset quality pressure,” the bank said.
 “In this backdrop, Union Bank’s primary focus was to remain agile and resilient by leveraging on its strong capital position, stringent risk management approach and prudent cost measures to minimise the impacts of these external shocks to its operations and customers,” it added. 
Despite the operational weaknesses, the bank remains well capitalised with its capital ratios above the regulatory levels while the liquidity is also at modest levels. 
The bank has also secured a funding line from the Asian Development Bank during the period for on-lend to women entrepreneurs and tea smallholders.