Union Bank of Nigeria Plc overturned a 28 percent drop in profit in the second quarter into a 29 percent rise quarter-on-quarter in the third quarter ended September 2020. Management balanced costs against revenue weakness during the quarter and succeeded in changing its earnings story from declining profit at half year to flat position at the end of the third quarter.
The bank realised an after tax profit of N4.3 billion for the third quarter compared to N3.3 billion in the same quarter last year. This provided the driving force to remedy the profit drop in the second quarter and defend the bottom line on year-on-year basis.
The bank stepped out from its cautious mood to new lending during the quarter and that pushed up credit loss expenses after a slowdown in the second quarter. Net loan impairment charge of N1.9 billion was incurred in the third quarter, rising from N680 million in the second and a marginal net write back in the corresponding quarter last year.
Union Bank added N46 billion to its net credit portfolio in the third quarter to close at N627 billion at the end of September 2020. That is an increase of 14 percent over the closing figure in 2019, rising from less than 6 percent increase at half year.
Management is building the loan portfolio for the second year after a drop in 2018. The portfolio had expanded by 16 percent in 2019 – the highest loan growth in three years.
The increased lending activity is building loan impairment expenses rather than interest earnings. Interest income went down by 9 percent quarter-on-quarter in the third quarter against a shift from a net loan impairment write back of N243 million to a net charge of N1.9 billion over the same period.
On year-on-year reading, the decline in interest income within the third quarter reversed an increase of 6 percent at half year to flat at the end of the third quarter. Against the flat interest earnings at N85.6 billion at the end of September, a net credit loss expense of N6 billion was recorded. This stood against a net write back of N4.7 billion in the third quarter of last year.
Net loan impairment expenses consumed 14.5 percent of net interest income at the end of the third quarter compared to a contribution of 13 percent by net write back to net interest income in the same period in 2019. Increasing lending to build credit losses rather than earnings seems to be the dilemma of banks generally this year under the Central Bank’s new lending rule.
A sustained shift from net write back position last year to rising net credit loss charges in the current financial year constrained Union Bank’s ability to grow profit at the end of the third quarter. However management was able to jerk up after tax profit from a 9 percent drop at half year to less than 1 percent slip at the end of the third quarter.
A loss of N775 million from discontinued operations against a profit of N102 million over the review period also contributed to the profit weakness in the third quarter.
Union Bank ended the third quarter operations with gross earnings of N121.4 billion, an increase of 3.6 percent year-on-year, a sustaining slowdown from 16.5 percent growth in the first quarter and 7.7 percent at half year. Non-interest income remains the revenue growth driver for the year so far with a year-on-year growth of 26 percent to N33.5 billion at the end of September 2020.
The favourable behaviour of interest expenses as a major cost saving centre improved further from a 4.5 percent decline at half year to almost 10 percent drop to N43.5 billion at the end of the third quarter. The cost saving from interest expenses enabled the bank to turn the flat interest income into a 14 percent increase in net interest earnings to over N42 billion at the end of the third quarter operations.
The increase in net credit loss expenses claimed more than all the increase in net interest income, leading net interest income after loan impairment charges to a drop by close to 14 percent to N36 billion.
A step up in non-interest earnings in the third quarter diluted the drop in interest income net of loan loss expenses and permitted a slight improvement in operating income to N49.5 billion over the review period.
The bank’s management continued to keep operating expenses in check, which enabled it to defend the bottom line at the end of the third quarter. Operating cost margin edged up to 44 percent in reflection of further weakening of revenue in the third quarter.
The increase in cost margin encroached further on net profit margin, which continued slipping from nearly 14 percent in the first quarter to 13 percent at half year and further to 12.4 percent at the end of the third quarter. This remains the best record the bank has seen any time since 2015.
Union Bank closed the third quarter operations with an after tax profit of N15 billion, a slip of less than 1 percent year-on-year but an upturn from a drop of 9 percent at half year. The turnaround in the third quarter provided the strength for the bank’s improved year-on-year profit show at the end of September.
The bank ended the third quarter operations with earnings per share of 54 kobo. It closed last year’s operations with earnings per share of 67 kobo and gave out 25 kobo per share in cash dividend.
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