Union Bank maintains steady growth despite challenges in FY21

Union Bank maintained a steady growth momentum reflecting the determined pursuit of its business strategy, primarily driven by the bank’s core banking performance in the first six months of 2021. 

Chairman Atul Malik

CEO Indrajit Wickramasinghe

Whilst cautiously managing the risks within its business operations, the bank continued its support to impacted customers with the extension of debt moratoria in line with the relief measures mandated by the Central Bank. The bank also maintained a strong liquidity and capital position throughout the year, and the latest Fitch review in September 2021 reaffirmed Union Bank’s rating at BBB(-) with a stable outlook; driven by several key factors including high liquidity, significantly higher capitalisation and potential for growth under improved operating conditions. 

The Net Interest Income (NII) of the Bank increased by Rs. 387 million to Rs. 4,257 million in 2021, reflecting a YoY growth of 10%. The interest income of the bank was impacted by lower AWPLR that prevailed during the year and the extension of CBSL’s new credit relief schemes for impacted borrowers. However, NII benefited from the reduction in liability interest expense at a faster pace of 33.1% over the corresponding year. Net Interest Margin (NIM) increased from 3.2% in 2020 to 3.5% in 2021. NIM for the current period would have been 3.7% if the return from investment in units were considered as part of interest income. 

Return from investment in units was Rs. 261 million and has been recorded under net fair value gains/losses from financial instruments at fair value through profit and loss. 

The bank’s loans and advances stood at Rs. 67,835 million by year-end, marginally higher than in the corresponding year. The portfolio growth was primarily driven by Corporate, SME and Credit Cards while focused efforts for prudent credit growth and portfolio consolidation were continued throughout the year across Retail, SME and Corporate Banking segments of the bank. 

The Credit Card business growth was propelled by numerous acquisition strategies and attractive offers that included 0% instalment plans for easy repayments, balance transfer options and special seasonal discount schemes at over 100 merchant partner outlets with the aim of acquiring new customers and gaining wallet-share of the existing customers. The SME credit portfolio too saw growth during the year, owing to focused efforts on empowering selected industries and businesses in line with the national agenda for SME revival. 

The deposits base stood at Rs. 83,416 million as at year-end. Despite the low-interest rate regime, the bank maintained a healthy Current Accounts and Savings Accounts (CASA) mix of 30%. While the bank followed a prudent deposit mobilisation strategy which was reflective of subdued loan growth, the bank continued to maintain its strong liquidity position throughout the year. 

Despite extending fee waivers in compliance with the CBSL guidelines, the Fee and Commission income of the bank for 2021 increased by 21% YoY to Rs. 1,054 million, driven by fee income generated from Credit and Debit Cards, Trade and Remittances.

Net trading and other income decreased by 41% to Rs. 778 million in 2021 mainly due to the exceptional performance by Treasury in 2020 and the Treasury performance being impacted in 2021 by the reductions in trading opportunities, shortage of foreign exchange and the exchange rate volatility that prevailed throughout the year. Income from investments in unit trusts also decreased to Rs. 261 million in 2021 from Rs. 321 million in 2020. Consequently, total capital gains, including income from unit trusts declined to Rs. 421 million in 2021 from Rs. 1,153 million in 2020. However, other operating income of the bank increased to Rs. 339 million, reporting a YoY increase of 94.7% mainly due to foreign exchange gains. 

The total operating income of the bank was Rs. 5,895 million in 2021. The Total Operating Expenses decreased by 2.4% YoY to Rs. 3,680 million, as a resultant effect of the bank-wide cost management initiatives implemented throughout the previous years.

The gross NPL ratio of the bank improved to 5.65% in December 2021 from 6.05% in December 2020, aided by continued focus on managing its portfolio quality amidst the deteriorating macro-economic conditions. 

The impairment charge for the year under review was Rs. 933 million and was a 26.8% increase YoY. The prevalent macro-economic environment brought forth further challenges to credit quality management, hence, the bank recognised additional impairment on risk elevated sectors, successive moratoria and on restructured facilities, in order to manage future challenges. Impairment charges were also recognised on Sri Lanka Development Bonds (SLDBs) resultant from the sovereign rating downgrade by the rating agencies. 

Union Bank’s Profit after tax for the year 2021 was Rs. 765 million and reported a 32.7% growth YoY. The reduction in the corporate income tax rate by 4% lead to a positive impact on the income tax charge for the year. The share of profit of equity accounted investees was Rs. 66 million. This contribution was derived mainly through the bank’s subsidiary, UB Finance Ltd.

The bank continued to maintain its capital adequacy ratios well above the minimum regulatory requirements and reported a healthy Total Capital Ratio of 16.47% as at the reporting date. The Tier 1 Capital Ratio stood comfortably above the minimum requirements at 15.51% as at year end.

The Group consisting of the bank and its two subsidiaries, UB Finance Company Ltd. and National Asset Management Ltd. reported a Profit After Tax of Rs. 850 million reporting a 37% growth over the corresponding year. Total assets of the Group were Rs. 124 billion. The bank accounts for 95% of the Balance Sheet of the Group and hence the Group performance is mainly propelled by the bank. Maintaining healthy liquidity levels and uninterrupted operations amidst challenges, while ensuring employee and customer safety remained key management priorities for Union Bank when operating in a highly volatile environment throughout the year 2021. The bank continued its close engagement with Retail, SME and Corporate customers despite limitations and restrictions, to identify their unique challenges and provide necessary banking assistance including the efficient roll-out of the CBSL relief schemes. 

In line with its strategic focus on digital banking and enhancing its digital prowess during the year, the bank introduced its enhanced mobile app under the brand name ‘UBgo’, which is enriched with capabilities of QR payments and instant top-ups from other banks enabled by JustPay, thus making banking more accessible and simplified to customers. This was a step forward in the direction of revolutionising the digital banking experience of its customers as the bank plans to continue to invest in and enhance its digital banking channels further in the future.

The bank’s award-winning, revolutionary Cash Management Solution BizDirect continued to be extended as a value addition to Corporate and SME customers, which proved to be a key digital enabler for efficient and effective liquidity management for businesses during these challenging times. In line with its envisaged digital transformation in the year 2022 and beyond, Union Bank invested in a major upgrade to its data centre in 2021, with state-of-the-art IT infrastructure equipped with the latest technologies that are expected to further enable greater customisation and innovation capabilities, along with heightened security standards, reliability of systems and better disaster recovery capabilities. 

Commenting on the bank’s financial performance of the year, Director/Chief Executive Officer Indrajit Wickramasinghe said, “When operating amidst a turbulent macro-economy, the bank prioritised its focus on undisrupted service delivery and prudent business growth. Aided by a robust Business Continuity Plan and sound risk management strategies, the bank remained committed to the pursuit of supporting its customers, staff and other stakeholders throughout the evolving phases of the pandemic in 2021. Due to agile strategic manoeuvring, Union Bank withstood a challenging year with sound liquidity, strong capitalisation and a healthy performance. 

“The year 2022 rings in more optimism and hope as the world is emerging from the worst of the COVID-19 pandemic, prompted by the successful vaccination drive. The bank is well-poised to capitalise on the emerging opportunities within the market, and the year 2022 will be a continuation of the strategic pursuit for creating and protecting value for our stakeholders while ensuring the safety and well-being of our customers and staff members.”