CALIFORNIA: Union Bank faces the challenges of inability to grow revenue and that could lead to a drop in gross earnings for the bank at full year. Rising interest cost is hurting profit capacity and the bank isn’t likely to achieve up to one-half of its preceding year’s profit based on the third quarter growth rate. Revenue is constrained by non-interest income, which declined by 13% year-on-year at the end of the third quarter while interest income has slowed down due to a continuing drop in the investment portfolio.
Interest cost is growing rapidly against the slowdown in interest income. Rising interest expenses have depressed net interest margin and claimed an increasing proportion of revenue at the end of the third quarter. Interest expenses rose by over 50% at the end of the third quarter compared to an increase of 19.3% in interest income.
The good news however is that the bank has successfully contained the problem of rising credit losses, which enabled it to improve the bottom line at the end of the third quarter. Net loan loss expenses dropped by 20.4% at the end of the third quarter and that moderated the impact of rising interest expenses on the income statement.
There was a slip in customer deposits during the period and the bank had to depend more on expensive liabilities to maintain earning assets. Rising cost of funds is a general trend in the banking sector as well as the larger economy. The bank closed third quarter operations with an interest income of N66.64 billion year-on-year at the end of the third quarter, which was accounted for exclusively by earnings from loans and advances.
Its net credit portfolio grew by 15.6% over the opening figure for the year, which was moderated by a decline of 9.9% in investment securities. The bank’s investment assets have been declining since 2013, which is affecting interest income from that source. Inability to grow the principal liabilities has constrained growth is earning assets generally.
The bank generated gross earnings of N84.72 billion at the end of the third quarter, which is an increase of 6.4% year-on-year. Based on the third quarter growth rate, gross income is projected at N114.2 billion for Union Bank at the end of 2015. This will be a drop of 16% from the gross earnings of N135.80 billion the bank posted at the end of 2014.
Another major area of favourable cost behaviour is in respect of operating expenses, which increased slightly at 1.1% at the end of the third quarter. Compared with an increase of 6.4% in gross earnings, the bank reduced its operating cost margin from 55.5% in the third quarter of last year to 51.6% at the end of September this year. This is still well above the average banking industry operating cost margin of 44.6%.
The bank closed third quarter trading with an after tax profit of N9.34 billion, which is an increase of 15.5% year-on-year. The improvement came from moderation of operating cost and the drop in loan loss expenses over the review period. This improved net profit margin from 10.2% to 11% over the review period.
The full year profit outlook isn’t that promising to maintain the growth seen at the end of the third quarter. On full year basis, the bank has lost profit margin and that has undermined profit capacity for this year. Net profit margin is down from about 20% at the end of last year to 11%. Based on the third quarter performance, after tax profit is projected at N12.8 billion for Union Bank at the end of 2015. This is a likely drop of 52.2% from the after tax profit of N26.82 billion it reported at the end of 2014.
The bank improved earnings per share from 44 kobo to 55 kobo over the review period. The full year expectation is 76 kobo per share at full year, which would be a sharp drop from earnings per share of N1.52 at the end of 2014.
The bank carries a large retained deficit of nearly N250 billion, which is a big mountain on the way to resuming dividend payment. The retained deficit black hole will have to swallow up profits of many years to come to level up.
