Union Bank of Nigeria Plc cut costs all round in the second quarter from interest expenses, and loan impairment charges to operating costs – which improved margins and powered a 12.6 per cent profit growth to N11 billion at the half year.
The bank’s half-year interim financial report at the end of June 2022 shows a drop of 13 per cent in the cost of funds in the second quarter to N17.6 billion in line with its management’s promise to make cutting interest expenses a major goal this financial year.
Rapid growth in the cost of funds posed a big challenge for the bank in the first quarter when interest expenses grew in excess of interest earnings by 62 per cent to over N18 billion. The bank’s management promised to pay down expensive time deposits as a measure to tame the behaviour of interest expenses.
The measure has paid off with the drop in interest expenses in the second quarter against a marginal decline of 1.5 per cent quarter-on-quarter in interest income.
Our outlook for the bank for the second quarter had envisaged increased cost efficiencies reinforcing accelerating earnings and stretching out margins. This has been realised with a decline in the cost of funds against an increase of 7 per cent in customer deposits to N1.45 trillion at the half year.
Cost efficiency is an addition to the bank’s key operating advantage of minimised credit losses – which is being maintained for the fifth year running.
The bank’s relatively insignificant net loan loss charge of N375 million in the first quarter changed to a net write-back of N176 million in the second, cutting the net charge to N199 million at the half year.
The sustaining decline in credit loss expenses is powered by loan recoveries, which amounted to N1.56 billion in the second quarter and totalled over N3 billion at half year. The bank has recovered bad loans in the region of N40 billion since 2018.
Adding the cost of funds reduction to net write-back on credit loss expenses saved huge revenues for Union Bank and defended the bottom line against a drop in earnings in the second quarter. Driven by a major drop of 45.6 per cent in non-interest income, gross earnings went down by 17 per cent quarter-on-quarter in the second quarter to N43.8 billion.
With cost savings from interest and loan impairment expenses, however, the bank was able to improve margins and grow net income by 12 per cent quarter-on-quarter to N15.5 billion. It also cut total operating expenses by over 25 per cent to N19 billion for the quarter, which lowered the operating cost margin from 49.2 per cent to 44.2 per cent over the period.
The all-round cost saving improved the ability of the bank to convert revenue into profit. Net profit margin rose from 9.1 per cent in the same quarter last year to 12.6 per cent in the second quarter of the current financial year. The bank was therefore able to grow profit by 14.3 per cent quarter-on-quarter in the second quarter from the 17 per cent drop in gross income for the quarter.
The year-on-year reading shows gross earnings of N87.7 billion for Union Bank at the half year, which is an increase of 12.7 per cent. This is a slowdown from 18 per cent growth in the first quarter, reflecting the drop in gross earnings in the second quarter.
The marginal decline in interest income in the second quarter lowered the year-on-year growth from 42 per cent in the first quarter to 13.5 per cent at half year to close at N64.5 billion. This was compensated by a drop in interest expenses in the second quarter, which also lowered the year-on-year growth from 62 per cent in the first quarter to 13 per cent at half year to N35.6 billion.
A drop in net loan impairment charges from the first quarter figure added to the slowdown in cost of funds to jerk up net income a clear 41 per cent to N28.7 billion at the half year. The gain was largely countered by a drop of 23.8 per cent in non-interest income to N21 billion at the half year.
Net operating income improved only moderately at 2.9 per cent to N49.9 billion. Cost savings from operating expenses, which closed flat at N37.4 billion, helped to strengthen the bottom line. A profit of N11.9 billion from continued operations was reduced by net expenses/losses from discontinued operations, leaving an after-tax profit of N11 billion for the bank at the half year.
Union Bank closed the half-year operations with earnings per share of 40 kobo, improving from 38 kobo per share in the same period last year.
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