Union Bank reports subdued growth in 1Q20 amidst a turbulent environment

Core banking growth and profitability 

Despite its strong-footed entry into the first quarter of 2020, Union Bank’s core banking growth compressed since mid-March up until the end of the first quarter, owing to unprecedented economic impacts of the ongoing global pandemic. 

The bank focused on continued cost optimisation and portfolio preservation to manage the bottom-line in a challenging environment, which saw the Banking industry capitulating in the face of weak economic performance. 

Union Bank Director/CEO  Indrajit Wickramasinghe

Net Interest Income (NII) of the bank was affected by low credit growth and the pressure on lending rate caps introduced by the Central Bank of Sri Lanka (CBSL). As a result, the bank’s NII increased only by 2% YoY to Rs. 1,031 million. The effective fund management strategies coupled with timely repricing of assets and liabilities contributed towards sustaining NII amidst challenges. 

The bank’s fee and commission income declined by 8% YoY to Rs. 201 million due to the drop in demand for fee-based activities across credit related product lines and mainly due to the reduction in the import and export business lines along with some COVID-19 relief measures that came into effect during the latter part of the quarter. However, the fee income from credit cards increased due to focused acquisition of this product which helped recompense for the drop in other fee based income. 

The bank’s Treasury recorded a notable performance with a significant YoY increase of Rs. 119 million in capital gains mainly due to the favourable movements of interest rates. Other Operating Income of the bank increased significantly on the back of exchange rate deflation by 5% YTD. Operating Income of the bank for the period was Rs. 1,498 million.  

As a result of focused efforts on enhancing operational efficiency, the Operating Expenses of the bank increased only by 5% YoY to Rs. 1,001 million during the period under review. 

Pre-impairment profits of the bank were Rs. 498 million for the period and indicated a growth of 20% YoY. 

Stressed economic conditions that prevailed within the reporting period which intensified by mid-March, affected business cash flows across the country. Accordingly, the impairment increased by 81% YoY to Rs. 93 million. In line with the industry, the Gross NPL ratio of the bank stood at 5.11% while the Net NPL ratio was reported as 3.37%.

Weighed down by the challenges of the operating environment, Union Bank recorded a subdued profit before all taxes of Rs. 405 million. Profit after Tax (PAT) of the bank was Rs. 180 million. The total comprehensive income of the bank was Rs. 240 million.

Total assets of the bank stood at Rs. 131,195 million as at 31 March. The bank’s loans and receivables stood at Rs. 78,266 million and the deposits base was Rs. 83,924 million by quarter-end. Total average CASA grew to Rs. 20,010 million. Efforts of sustaining a healthy CASA inflow was supported through focused acquisition strategies driven by retail, corporate and SME banking segments.

Maintaining strong capital ratios continues to be a management priority. Union Bank’s Total Capital Adequacy Ratio as at 31 March was 15.81% and is well above the regulatory requirements. 

The Group comprising the bank and its two subsidiaries, National Asset Management Limited and UB Finance Company Ltd., reported a Profit after Tax of Rs. 195 million for the period. Total assets of the Group were Rs. 139,206 million of which 94% was represented by the bank. The Group maintained a healthy Core Capital Ratio of 15.50% as at quarter-end.  

Operational performance 

The bank’s operational performance was impacted by the changes to the operating environment that came into effect from mid-March due to the COVID-19 pandemic. 

Having identified the challenges faced by customers, Union Bank took immediate measures to roll out the financial relief scheme recommended by CBSL, in a bid to help customers to recover from the financial impacts of the medium term. The financial relief package places focus on the bank’s Corporate, SME and Retail banking customers.  

Despite challenges, the Corporate Banking business continued to sustain its portfolio but interest income compressed by end-March. Small and Medium Enterprises (SMEs) were the most affected by the trying economic backdrop. 

Union Bank continued to support its Corporate and SME customers with customised solutions and advisory services while rolling out the financial relief measures outlined by CBSL. The bank immediately engaged with customers in relation to the relief measures including the offers for debt moratoriums and extensions of repayment periods. 

Corporates in tourism, direct and indirect export related businesses including apparel, plantations, IT and related logistic services industries and others are eligible for loan repayment moratoriums of capital and interest from Union Bank up to six months; while SMEs in agriculture, manufacturing, services, construction and trading sectors are offered the relief package through continuous engagement via branch and relationship managers. 

With the intent of providing immediate relief to SMEs and small-scale traders etc., charges on cheque returns and stop payments have been waived until 30 September while the validity period for issued cheques below Rs. 500,000 of value has been extended until 15 May.  

Retail Loans and advances showed moderate growth during the review period. The bank’s Credit Cards portfolio expanded albeit at a slower pace, through focused sales efforts supported by time-appropriate offers that continued to add value to customers. 

In consideration of the challenges faced by customers due to the pandemic situation, the bank extended a number of relief measures in-line with the CBSL package including a three-month debt moratorium for all personal loans of values less than Rs. 1 million. The maximum interest rate applicable for local credit card transactions up to Rs. 50,000 was reduced to 15% p.a. and the minimum payment was reduced to 2% from 4%. Late payment fees have been waived for all credit cards and loans until 30 September.

In line with its focus on building Current and Savings (CASA) balances, Union Bank continued efforts on portfolio build-up of key products such as Children’s Savings, Investment Plans and Institutional CASA, through branches and dedicated relationship managers.  The CASA ratio of the bank improved to 29% as at 31 March. 

The bank heightened its focus on digital delivery channels amidst restrictions caused by the health crisis, making online and mobile banking facilities more accessible to clients with simplified registration processes. The bank’s recently revamped transaction banking system, Union Bank BizDirect continued to add value to Corporate and SME customers as a cost-effective cash management automation tool that enables remote management of business transactions.  

Commenting on the first quarter performance of the bank, Director/CEO Indrajit Wickramasinghe said: “We are currently operating in unprecedented conditions and are making every effort to provide our customers optimum solutions and financial support during these difficult times. The safety of our customers and staff is a top priority and we have made necessary arrangements at our work premises to ensure that stringent levels of hygiene and safety are practiced. 

“We are also doing our utmost to engage with customers and support their financial revival through the relief package in-line with CBSL guidelines. The bank has withstood a challenging first quarter, and the results have been impacted by the economic trials of the health crisis which began its effects from mid-March and is expected to bear a ripple effect on the banking sector as well as the business community in the coming months. 

“We will continue to support customers across Retail, SME and Corporate segments to roll out the special financial relief scheme during the next few months while ensuring sound liquidity management within the bank.”