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Published On: Sun, Aug 26th, 2018

H1 2018: Union Bank shines with fixed income securities


Union Bank has shown indications of  a pleasant period for shareholders as improved revenues from e-banking and fixed income securities raised its bottom line in half year (H1) 2018. 

Nigeria’s second oldest commercial lender saw its gross revenue rise 16 per cent to N83.3 billion on the back of non-interest income, which went up 37 per cent driven by higher fixed income trading, non-performing loans recoveries and a thumping 311 per cent increase in earnings from e-banking channels in the second quarter. This was further helped by a 10 per cent rise in interest income as net interest margins climbed from 7.9 per cent to 8.2 percent, despite a -9 per cent drop in loans and advances.

Consequently, the pre-tax profit of Union Bank moved up 23 per cent to ₦11.7billion against ₦9.5billion in the same period last. And its post-tax profit also shore up 24.54 per cent to N11.46 billion in H1 2018 despite its impairment charges against loan losses rising 23.10 per cent to N4.63 billion.

However, the bank made significant progress in recovering its delinquent loans as Union Bank cut non-performing loan (NPL) ratio to 10.8 per cent in June this year from 19.8 per cent at the end of 2017. Although its NPL ratio is still well above the regulatory threshold of 5 per cent set by the Central Bank of Nigeria (CBN). But high NPL is not peculiar to Union Bank as the banking industry’s bad loan to total loans ratio is currently above 10 per cent.

The profit Union Bank declared showed that it is getting out of the woods, said David Adonrin, Managing Director, HighCap Securities. “The fact that it made profit is heartwarming,” he noted.

The CBN intervened in the bank in 2009 when its key ratio fell below regulatory threshold and it had to change its management and board after inject fresh funds into the bank. And in 2012 it recapitalized with a new investor Altas Mara injecting $275 into it. It also raised fresh N50 billion capitals through right issues in 2017.

In the light of this, commercial lenders in the country have decided to lower their appetite for risk assets and most of them have chosen to extend credits to selective sectors of the economy and invest more in fixed income securities. Union Bank tolled this line in the first six months of 2018 as its gross loans and advances decline -9 per cent to N1.47 trillion instead of N1.46 trillion in December 2017. It, however, grew total deposit marginally by 2 per cent to N918.17 billion in H1 2018.

Bulk of the bank’s exposure is to the oil and gas sector, which constitute 45 per cent of its loan book. Even though there has been 41.35 per cent upturn in crude oil prices in the last one year, Union Bank delinquent loans in the sector did not reflect this as its NPL in the oil and gas industry unpicked from 21 per cent in December 2017 to 39 per cent in H1 2018. Brent crude oil was sold for $72.13 per barrel on Friday. Also, the bank’s toxic assets in the power and energy sector worsened to 44 per cent in the first six months of the year from 18 per cent in December 2017. However, the lender successfully cleared its 32 per cent bad loans in the real estate sector in the first half of 2018.

Expectedly, Union Bank total assets improved just marginally 1 per cent to N1.47 trillion, augmented by 15.78 per cent rise in cash reserve requirement and N13.66 billion loans and advances to banks made during the period under review. On the other hand, its total liabilities upped 6.4 per cent to N1.18 trillion underpinned on due to foreign correspondent banks, which rose 205.55 per cent and it open buy back undertakings in H1 2018.

The bank spent more to raise its interest income in the first six months of 2018 as interest cost increased 5 per cent to N27.86 billion due to expenses from customers’ deposit, which expanded 11.37 per cent. Meanwhile, total expenses ascended 21 per cent to N39.21 billion, propelled by personnel cost and other operating expenses, which rose 15.05 per cent and 28.95 per cent respectively.

Apart from the 9 per cent the bank shoveled up from its NPLs, the lender made insignificant improvement in other key ratios. Its liquidity ratio rose slightly 1.1 per cent to 38.5 per cent, while capital adequacy ratio moved up just 0.4 per cent to 18.2 per cent. The regulatory benchmarks for liquidity ratio and capital adequacy ratio are 30 per cent and 10/15 per cent respectively. Despite the marginally increase in Union Bank key ratios, Adonrin believed there was no cause for alarm since most of them were still above regulatory requirement, except the NPL ratio. It aims to keep its NPL ratio under 10 at the end of 2018, which it is on course to achieve.

Union Bank has to device means to cut down its operating costs though its growth was slowed in the first six months of the year. Its cost to income is still on the upper side as it moved marginally up 0.8 per cent to 72 per cent, while cost of risk also scaled up 0.3 per cent to 1.7 per cent.

 Union Bank stock has appreciated 6.56 per cent in the last one year. It lost -2.63 per cent to close at N5.55 on Friday.

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