Union Bank’s Share Premium Drops 29% On Resumption Of Dividend Payment
MICHAEL MOSES.
The share premium of Union Bank of Nigeria is set to plunge 29 percent owing to the shareholders’ approval to write off a final portion of accumulated permanent losses that have stood in the way of cash dividend payment to shareholders for 10 years. The bank closed the 2018 financial year with a retained deficit of over N44 billion from legacy transactions after an initial write off of N248 billion.
The write off will bring the share premium to N132.63 billion as it will involve movements in the capital account that aren’t going to affect the equity stock. The bank’s robust share premium account has already thinned down after dropping by more than one-half in 2017 to N187 billion following the initial write off of accumulated losses.
The accounting entries are targeted at paving the way for dividend payment to shareholders, who were disappointed by non-payment of dividend at the end of 2018 operations. They had hoped for dividend after a rights issue of five for seven that injected N49.75 billion into the capital account in 2017. The capital injection enabled the bank to write off a large chunk of the retained deficit.
Union Bank has remained consistently profitable since 2012 but full profit retentions all the way have not been significant enough to scratch the huge accumulated losses in the books. With the write off of the final portion of the losses, a return to dividend payment is expected at the end of 2019.
First quarter operations in 2019 show that gross income is declining for the second year but a 39% leap in non-interest income is moderating the weakness arising from interest earnings. Interest expenses are increasing as interest income is declining, which resulted in a 33% drop in net interest income in the first quarter.
Revenue growth is expected to step up moderately in the course of the year just good enough to turn the first quarter decline into a moderate improvement at full year. Gross income declined by 4.6% to under N38 billion at the end of the first quarter. The full year outlook indicates gross earnings in the region of N150 billion for Union Bank in 2019. This will be just 3% up on the N145.5 billion the bank grossed in 2018.
A moderate net write back position in loan loss expenses was recorded in the first quarter but unlike last year, it was insufficient to drive profit growth. In 2018, the bank overturned a huge net loan loss expenses in the prior year into a net write back and that enabled management to strengthen the bank’s recovery and growth momentum in the year.
With the drop in loan impairment expenses to a net write back position last year, the bank saved about N29 billion that powered profit growth by 44% to N17.6 billion – one of the strongest profit advances in the banking industry in 2018.
The strength for profit advancement is missing so far this year and the bank ended the first quarter with profit flat at N5.3 billion, which empties into retained deficit. Profit growth is however expected to pick up in subsequent quarters with a full year projection of N20 billion for Union Bank at full year. This means a full year anticipated profit growth of 14%.
The strength of the bank in the current year is coming from strengthening revenue and the sustaining net write back position on loan impairment expenses. A shift from a drop of 11% in gross earnings last year to a moderate improvement as projected will be a key factor in defending profit. Maintaining a net write back of loan losses will permit cost savings and revenue gains to flow down into the bottom line.
The improved revenue performance hope is driven by a favourable shift in non-interest income from a 10.5% drop in 2018 to a big leap of 39% year-on-year at the end of the first quarter.
Interest expenses remains a challenge for the bank as it was in the preceding year. It declined last year but not as fast as interest income, resulting in a drop of 17% in net interest income at N55.4 billion.
This year, interest expenses grew in the first quarter even as interest income declined during the period. This resulted in an accelerating drop of over 32% in net interest income at the end of the quarter. The implication of this is that profit improvement hopes lie outside the core business and income line of the bank. This keeps the profit outlook subject to significant deviation from forecast in the absence of robust shock absorbers.
Union Bank’s asset base stood at N1.52 trillion at the end of March 2019, represented by loans and advances to customers of N495 billion, cash and bank balances of N545 billion and investment securities of N161 billion. The assets are built on customer deposits of N867 billion and an equity cushion of N233 billion.
With decline in revenue and profit flat, net profit margin improved from 12.1% at the end of 2018 to 14% in the first quarter. Union Bank remains on the path of recovery after losing close to half of its 2014 net profit of about N27 billion in 2015.
The bank closed the first quarter with earnings per share of 18 kobo with a full year expectation of 68 kobo. Having cleared the way for dividend payment, shareholders can hope for an end of a long dividend holiday at the end of 2019.
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