Union Bank remains resolute amidst challenging environment

Chairman Atul Malik

CEO Indrajit Wickramasinghe

In 2020, Union Bank crossed the significant milestone of completing 25 years of service to the nation. The year tested the grit and foundations of the bank in many ways and the bank emerged strong amidst challenges. While operational performance was impacted amidst the slowdown of economic activity, the

bank continued to focus on cost optimisations, effective resource and productivity management as well as prudent portfolio management to overcome these tough conditions. 

Despite the challenging backdrop, Union Bank increased its liquidity buffers prudently and was able to maintain a strong excess liquidity position. Fitch ratings in its 2020 ratings release affirmed the bank’s current rating, which was backed by the strong liquidity and capital. 

Union Bank stands confident with an industry-leading capital position alongside significant financial flexibility that effectively helps mitigate the pandemic induced economic impacts. The bank maintained a robust Capital Adequacy Ratio throughout the year reporting 16.95% total capital ratio as at year end, which was well above regulatory requirement levels.

Union Bank swiftly re-aligned its operations, prioritising its focus on the new market dynamics and customer inclinations that resulted from the pandemic. The bank executed an inclusive business strategy that ensured smooth continuity of its services while safeguarding the health and well-being of its customers and staff as top priorities. 

Significant investments were made in ensuring the health and safety of staff by providing alternate work solutions, work from home facilities as well as setting up additional infrastructure to facilitate a smooth work environment for critical staff that attended work despite lockdowns.

An imperative focus was placed on rolling out a cohesive plan across all customer segments to provide support to re-build their businesses and lifestyles with the implementation of the CBSL recommended relief schemes for COVID-19 impacted customers. 

In line with the CBSL directives and policy rate cuts administered to enable economic growth, Union Bank implemented a downward revision of interest rates on its lending products including credit cards. Moratoriums of capital and interest were extended to affected borrowers in-line with the CBSL’s financial relief package while a significant number of affected customers were granted debt relief outside the CBSL criteria, as per the bank’s internal credit policy guidelines. Amongst the schemes that were considered for moratoria were loans, leases, overdrafts, pawning and trade finance facilities. Non-performing borrowers eligible for relief schemes were also provided customised rescheduling, inclusive of waivers on accrued interest while withholding further recovery action. 

The bank’s loans and advances stood at Rs. 67,518 million. The deposits base of the bank stood at Rs. 82,384 million as at year-end and recorded a growth of 7.6% despite the low-interest environment. The bank’s strategic focus for low-cost deposits continued to bear results, supported by focused initiatives for CASA growth by the business units. The bank’s CASA portfolio reflected an excellent growth of 26.8% as at December 2020, increasing the CASA Mix of the bank to 30% in 2020 from 25% in 2019. 

As a result of the numerous reliefs extended to affected customers and due to the low-interest-rate environment, the bank recorded a Net Interest Margin (NIM) of 3.2 % in comparison to 3.6% in 2019. The bank’s NII was further impacted with the latest CBSL directive issued in November 2020 that mandated 60 days’ loan extension for moratoriums given in March 2020 at subsidised interest rates up to a maximum of 7%; thus leading to a reduction of interest earned on all such credit facilities repaid on Equal Monthly Instalments (EMI) basis.

The fee income was impacted by adverse market drivers and declined by 18.4% over the comparative year. This was an outcome of the cumulative effect of fee waivers extended as part of COVID-19 reliefs, a slowdown in trade income due to import restrictions and a drop in loan-related fees due to slower credit growth that prevailed during the year.

The Treasury performed exceptionally well, recording impressive capital gains that grew significantly by 84.2% YoY. Other Operating Income of the bank grew notably by Rs. 162 million led by foreign exchange income and backed by growth in customer transactions, depreciation of the currency and the reduction of swaps in 2020. 

The bank had no trading equities and has not invested in any equity fund as at the reporting date. 

The total operating income for the year was Rs. 5,890 million and recorded only a marginal drop despite the challenging market dynamics. 

The gross NPL ratio stood at 6.05% by year-end. The absolute NPL increase however was only Rs. 230 million, while an overall reduction in the loan portfolio caused the ratio to reflect an increase. The bank’s prudent approaches towards managing portfolio quality proved favourable in containing NPLs amidst market volatilities. 

The impairment charge recorded an 88.5% increase YoY. While its actual credit losses were low, the bank recorded significant provisions through management overlays to account for the deteriorating environment. 

Three sectors were identified as risk elevated industries and accordingly additional provisions were made for these by shifting stages. Further on the Economic Factor Adjustments (EFA), weightages assigned to the worst-case scenario increased with the transferring of weightages from best-case to worst-case on 31 December 2020 to account for the deteriorating environment. 

This had a significant impact on the increase in impairments, while the Treasury impairment figures also inflated due to investments denominated in foreign currencies, based on the country risk downgrade. The entire modification loss on account of COVID-19 moratorium scheme was recorded under the impairment charge as per the non-substantial modification method which is in line with the Sri Lanka Accounting Standard–9 (SLFRS 9). 

The Total Operating Expenses were prudently managed through bank-wide cost management initiatives and were reported as Rs. 3,772 million, with a YoY decrease of 1.5%. 

The operating margin was Rs. 2,118 million and recorded a decline of 3.3% YoY as an effect of a 2.2% decrease of revenue against the 1.5% drop in costs. Excluding the 60-day moratorium impact of reducing the interest earnings to 7%, the operating margin would have improved by 3.4%.

Share of loss of equity accounted investees was Rs. 29 million for the year ended 31 December 2020. In the previous year, a one-off gain was reported from UB Finance amounting to Rs. 127 million due to tax reversals. The subsidiary profits were also impacted due to the macro-economic challenges of the year under review. Total taxes for the year was Rs. 777 million and was a drop of Rs. 417 million in comparison to the previous year.

The ‘Bank-only’ profit for 2020 was Rs. 605 million and was on par with the previous year. Profit of the bank including its share of ownership in subsidiaries was Rs. 577 million in 2020 and was a decline of 18.8% over the previous year, mainly because of the one-off income recorded at UB Finance in 2019. Other comprehensive income for the year was Rs. 183 million, while the total comprehensive income of the bank was Rs. 759 million.

The group consisting of the bank and its two subsidiaries, UB Finance Company Ltd. and National Asset Management Ltd., reported Rs. 623 million in profits after taxes, a decline of 22.6% over the previous year. Total assets of the group were reported as Rs. 129.6 million. The bank accounts for 95% of the total assets of the group and hence the group’s performance is mainly propelled by the bank. 

Operations and business continuity amidst challenges

Considering the impact of the pandemic on its customer bases, the bank’s key focus for the year was shifted to extending COVID-19-related financial relief to customers across corporate, SME and retail banking segments since March 2020, so as to not compromise on its promise to serve customers with the best-suited financial solutions and tools.

Under the CBSL-recommended scheme, self-employed personnel, foreign currency earners, SMEs and corporates in identified sectors were eligible for loan repayment moratoria from Union Bank. A gamut of relief measures was channeled towards SMEs, including fee waivers on cheque returns and stop payments among others.

As part of the relief efforts, around 58% of the bank’s SME portfolio was accommodated under moratorium schemes by year-end. The bank granted around Rs 1.3 billion worth of working capital loans under Central Bank’s ‘Saubhagya’ COVID-19 renaissance credit scheme to SMEs, aiding their rebuilding efforts. 

For impacted retail borrowers, the bank announced immediate extensions of credit card dues along with a two-month extension for all personal borrowings such as loans and leases. Retail banking relief measures included debt moratoria for all loans upon eligibility and credit cards related relief including minimum payment concessions and fee waivers. Following the second outbreak in October 2020, the moratoria for affected customers across all segments were further extended to ensure resilience amidst the continuous contraction of business activity in identified sectors.

Union Bank’s digital cash management solution, BizDirect, continued to offer its corporate and SME customers much-needed liquidity management efficiency while facilitating CASA and fee-based revenue for the bank during the year. 

Due to a growing inclination for digital solutions, many new corporate and SME banking customers were on-boarded to the product during 2020. In recognition of its success in transaction banking excellence, Union Bank BizDirect was awarded the prestigious ‘Best Cash Management Bank in Sri Lanka’ title at the Asian Banker Transaction Finance Awards 2020. Retail banking business was led by CASA acquisition, deposit mobilisation and Credit Cards portfolio growth. The bank continued to offer value to its cardholders through focused lifestyle savings that included discounts on shopping, dining, and e-commerce platforms along with 0% interest instalment plans. 

Despite lockdowns, curfews and regional isolation procedures imposed from time to time to curtail the spread of the virus, the bank provided uninterrupted banking services via its strategic business continuity plan that was executed through its branches, ATMs and other touchpoints. Union Bank’s Online Banking portal and Mobile Banking app were further enhanced in 2020, to facilitate a wider range of banking conveniences to users enabling contactless banking from the safety of their homes. 

Commenting on the 2020 performance, Union Bank Director/CEO Indrajit Wickramasinghe said: “Our agility and apt business continuity execution have allowed Union Bank to weather the macroeconomic storm in good shape. The bank has safeguarded the interests of its stakeholders amidst challenges and maintained healthy liquidity levels, and stands strongly capitalised to withstand the adverse environment in which we operate in. 

“We will continue on a path of cost optimisation and enhanced operational efficiency in the year 2021 in which we have re-strategised for stronger growth and will continue to leverage on our key strengths while ensuring the health and safety of our customers and staff as a priority when navigating in the new normal.”