Union Bank: Feeling The Pain Of Rising Credit Losses
Rising loan loss expenses is the price that the Union Bank of Nigeria Plc is paying for the mandatory expansion of customer lending in compliance with the increase in loan deposit ratio last year. Loan impairment expenses consumed more than all the increase in interest expenses in the first quarter of the current year. This is sustaining a roundabout turn from net write back in loan impairment expenses over the first three quarters of last year to net charges since the fourth quarter of 2019.
A cut down of 8.4 percent in customer lending volume in 2018 led to a net write back of nearly N4 billion in loan loss expenses. The cost saving permitted a 44 percent leap in net profit in the year. In compliance with ‘the-lend or be sanctioned’ policy introduced by the Central Bank of Nigeria in mid-2019, the bank’s management expanded the loan portfolio by 16 percent to over N550 billion at the end of the year.
The effect of that was that a net write back of N3.8 billion in loan impairment expenses at the end of the third quarter dried up and a marginal net charge of N184 million appeared at full year. The net impairment charge figure has multiplied to N3.6 billion in the first quarter of 2020.
During the first quarter, the bank’s management raised the customer credit volume further to over N563 billion. With strong increases in investment securities and rash reserve, Union Bank closed the first quarter with a balance sheet size in excess of N2 trillion.
The increase in customer lending is adding far more to loan loss expenses than to interest income. Interest income grew by 17.7 percent year-on-year to N29.8 billion at the end of the first quarter while a net write back of N776 million in loan impairment expenses in the first quarter of last year plunged to a net charge of N3.6 billion at the end of March 2020.
There is a change of direction in interest expenses from growing nearly twice as fast as interest income last year to growing significantly below it this year. At N14.8 billion, interest expenses increased only 3 percent year-on-year compared to close to 18 percent increase in interest earnings.
The cost saving from interest expenses enabled a robust growth of close to 37 percent in net interest income to almost N15 billion at the end of the first quarter. The upsurge in credit losses however claimed more than all the increase in net interest income, leaving net interest income after loan impairment charge slightly down at N11.4 billion at the end of the first quarter.
This means the bank’s core business of lending and investing did not contribute to profit improvement in the first quarter. The strength for profit improvement during the period came from non-interest earnings, which grew by 22 percent year-on-year to about N13 billion. This was equally the position last year when net interest income after loan impairment expenses dropped by about 6 percent while non-interest income grew by 25 percent.
The strong growth in non-interest income was reinforced by cost saving from operating expenses. Total operating cost edged up 2.7 percent and claimed a reduced share of gross earnings over the review period. This is equally in line with the pattern last year when operating expenses declined while gross earnings grew.
Union Bank ended the first quarter operations with gross earnings of N43.9 billion, an increase of 16.5 percent year-on-year. This is a reasonable growth in revenue for the second year after an increase of 15 percent at the end of 2019. Non-interest income is again leading revenue growth as was the case in 2019.
Cost-saving from operating expenses reduced the cost margin further in the first quarter after a big slash in 2019. Operating cost margin had dropped from almost 52 percent in 2018 to 42.6 percent in 2019 and has declined further to 41 percent at the end of the first quarter of 2020. This is one of the lowest cost margins the bank has seen in many years.
The reduction in cost margin improved net profit margin slightly from 13 percent in the same period last year to 13.8 percent at the end of the first quarter. This is the highest net profit margin the bank has recorded in several years.
Union Bank closed the first quarter operations with an after tax profit of N6 billion, an improvement of close to 23 percent year-on-year. This is twice the 11 percent growth rate the bank recorded at the end of 2019.
The earnings outlook for the bank in 2020 is a mix of forces helping as well as hurting the bottom line. The gain in profit margin is a function of improving revenue and cost saving from interest and operating expenses. Loan loss expenses are rising rapidly and consuming a good part of the cost savings. The bank’s earnings position for the year will be the outcome of how these forces play out.
The bank ended the first quarter operations with earnings per share of 21 kobo against 17 kobo per share in the same period last year. Retained earnings have improved from the post write off of retained deficits figure of N21.4 billion at the end of 2019 to about N30 billion at the end of the first quarter.
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