Union Bank: Cautious Lending Curbs Credit Losses In Q2
Union Bank of Nigeria Plc applied speed breakers on new lending in the second quarter that also broke the speeding growth in credit loss expenses during the quarter. The bank incurred only N680 million loan loss expenses in the second quarter – which is a sharp slowdown from N3.6 billion figure in the first quarter.
New lending is staying on the path of caution this year with a year-on-year increase of 5.6 percent to over N581 billion at half-year. This is a sharp slowdown from an increase of 16 percent last year – the highest loan growth in three years.
Yet the lending activity keeps adding more to loan impairment expenses than to interest earnings. Net loan impairment expenses still consumed more than all the increase in interest income at the end of half-year ended in June 2020.
A sustaining shift from net write back position last year to net credit loss charges in the current financial year constrained profit performance in the second quarter. Profit performance backslid from 23 percent growth in the first quarter to a 28 percent drop quarter-on-quarter in the second quarter.
The development resulted in a year-on-year decline of 9 percent in after-tax profit to N10.76 billion at the end of June 2020. A loss of N256 million from discontinued operations against a profit of N958 million over the review period also contributed to the profit weakness in the second quarter.
Interest expenses reinforced the favorable behavior observed in the first quarter – from moderate growth to a decline in the second quarter. At N29 billion, interest expenses went down by 4.5 percent at half-year from a 3 percent increase in the first quarter. This is against an increase of 6 percent in interest income and over 12 percent increase in customer deposits.
The bank, therefore, maintained cost savings from interest expenses at the end of half-year, which enabled an increase of 20 percent in net interest income to over N28 billion at the end of the half-year operations.
The change of position on credit losses from a net write-back of N4.5 billion to a net charge of N4.2 billion made a big difference in the income statement of the bank at half-year. The expense claimed more than all the increase in net interest income, leading net interest income after loan impairment charge to a drop of 14 percent to N24 billion.
The strength for profit improvement in the first quarter had come from an increase of 22 percent in non-interest earnings. Non-interest income even stepped up to a 24 percent growth at half-year but this was only sufficient to level up the impact of credit loss expenses. Operating income, therefore, closed flat at N46.7 billion at the end of the review period.
The bank’s management kept operating expenses in check, compressing total operating costs from moderated growth in the first quarter to a flat position at half-year. With the slowdown in revenue, however, operating cost claimed an increased share of gross income from the position in the first quarter.
Union Bank ended the half-year operations with gross earnings of N81.86 billion, an increase of 7.7 percent year-on-year but a slowdown from 16.5 percent growth in the first quarter. Non-interest income remains the revenue growth driver for the year so far with a year-on-year growth of 24 percent to N22.7 billion at the end of June 2020.
Operating cost margin ended a declining trend and increased from 41 percent at the end of the first quarter to 43 percent at half-year. The increase reflects relative revenue weakness in the second quarter while costs came under firmer control during the period.
The increase in cost margin encroached on net profit margin, which slipped from nearly 14 percent in the first quarter to 13 percent at the end of half-year trading. This remains the best record the bank has recorded in any year since 2016.
Union Bank closed half year operations with an after-tax profit of N10.76 billion, a decline of 9 percent year-on-year. This is a backslid from a 23 percent growth in the first quarter – which was punctured by the changes from net write back in credit loss expenses to net a net charge and from profit from discontinued operations to a loss over the review period.
The earnings outlook for the bank for the second half remains a mix of forces helping as well as hitting the bottom line. The decline in profit margin in the second quarter is a function of slackening revenue performance and an increased operating cost margin. Loan loss expenses can be expected to keep consuming a good part of any cost savings.
The bank ended half year operations with earnings per share of 37 kobo. It closed last year’s operations with earnings per share of 67 kobo and gave out 25 kobo per share in cash dividend.