Published On: Sun, May 20th, 2018

Special Report: Union Bank struggles to fill yawning NPL holes

By OKEY ONYENWEAKU

Snail-paced recovery has dragged Union Bank of Nigeria’s profit and loss account back into competitive reckoning. First quarter (Q1) 2018 results saw the bank post a 15 percent rise in its gross earnings, while profit before tax climbed 16 percent. Financial analysts have seen this as a sign of strong operational growth with the exception of worrisome issues concerning non-performing loans (NPLs).

Mr. Emeka Emuwa was appointed to the board of Union Bank as the Chief Executive Officer (CEO) and Group Managing Director in November 2012.

Gross earnings shuffled up by 15.2 percent from N34.3 billion in Q1 2017to N39.5 billion inQ1of 2018, while the money lenders profit before tax rose from N4.7 billion in Q1 2017 to N5.4 billion in Q1 2018, a rise of 14.9 percent. Equally impressive was that profit after tax soared to N5.3 billion in first Q1 2018 compared to N4.5 billion posted in a comparable period of 2017. But the snag is that non-performing loans still towers high at lunging 15.4 percent.

Financial analysts consider nonperforming loan (NPL) to be the sum of borrowed money upon which debtors have not made scheduled payments for at least 90 days.

In the opinion of a number of data crunchers, huge nonperforming loans portfolio erodes the ability of banks to make profits. ‘’In the 1990s and beyond many Nigerian banks became weak and highly unprofitable due to excessive nonperforming loans portfolio accumulated by bank promoters and management that led to their demise. Insider dealing was the major cause of large nonperforming loan portfolio in Nigeria, involving over-extension of loans to promoters, directors and significant others that became bad and irrecoverable’’.

As a result, shareholders are becoming edgy that total non-per forming loans in Union Bank in 2017 stood at 19.78 percent for the Group and 20.81 percent for the bank. There is a consensus that this is very high for any financial institution given that the regulatory threshold is 5 percent. There is also the concern that the banks’ non-per forming loans are also higher than the industry average at 12-13 percent. This disposition of the bank, however, raises questions on the claim of Union Bank as the Big, Strong and Reliable financial institution.

This notwithstanding, Chief Executive Officer of Union Bank, Mr. Emeka Emuwa, said the first quarter results reflected the bank’s renewed focus on driving efficiency and productivity with a view to fully leveraging resources including human, technology and new capital to maximize the bottom line.

“While we are just in the early stages of this drive, we are already starting to see positive results,” Emuwa said.

The top-line performance was driven by improvement in net interest margins from 7.1 percent to 8.7 percent and 18 percent increase in non-interest income due to enhanced trading income and increased volumes on alternate banking channels.

February 14, 2017 marked the beginning of a dynamic era in the Nigerian banking industry as Union Bank PLC officially kicked off celebrations for its 100th year of doing business in Nigeria.

Interest income had grown by 14 percent to N31.7 billion in first quarter 2018 as against N27.7 billion in first quarter 2017. Net interest income before impairment increased by 22 percent to N17.8 billion in 2018 compared to N14.6 billion in 2017, driven by 14 percent increase in interest income and a lower six percent increase in interest expense. Non-interest income also rose by 18 percent from N6.6 billion to N7.8 billion.

The audited report for the year ended December 31, 2017, showed that gross earnings rose by 26 percent from N126.6 billion in 2016 to N163.8 billion in 2017. Profit before tax was largely flat at N15.5 billion in 2017 as against N15.7 billion in 2016.

The CEO explained that the group’s non-performing loan ratio had improved to 14.9 percent by March 2018 from 19.8 percent at the beginning of this year, noting that the bank has continued to maintain aggressive focus on its impaired loans and is expected to resolve some large exposures in the course of the year, which will further drive down the ratio.

He added that the bank has been pushing strongly on debt recovery efforts across the board including initiating or continuing legal action where necessary.

“For the first half of the year, we will continue to hone initiatives around our productivity drive, focusing our people on targeted opportunities across regions and optimising our technology and digital platforms to deliver operational efficiency and improved customer service,” Emuwa said.

Operational highlights indicated continuing success of the bank’s simple, tech-savvy growth strategy with 68 percent increase in new-to-bank accounts, underlining customer acceptance of new products and increasing brand penetration.

The bank also saw 90 percent increase in the volume of funds transfer transactions on its alternate channels, highlighting efficiencies gained from technology investments which are driving increased customer adoption. This led to 58 times increase in net alternate channel fee income, underlining efficiencies gained from investments in alternate channels.

Chief Financial Officer of Union Bank, Oyinkan Adewale said while the first quarter results reflected the adoption of International Financial Reporting Standards (IFRS) 9, which came into effect at the start of 2018, the bank’s regulatory risk reserve was adequate to absorb the impact of the new accounting rules.

“Our capital adequacy ratio (CAR) remains robust at 17.9 percent in spite of the impact of IFRS 9 on impairments. Liquidity ratio is at 39.4 percent, well above the minimum requirement, while net interest margin improved to 8.73 percent in first quarter 2018 from 7.14 percent in first quarter 2017,” Adewale said.

She noted that despite 19 percent and 27 percent increase in the bank’s Asset Management Corporation of Nigeria (AMCON) levy and Nigeria Deposit Insurance Corporation (NDIC) premium respectively, the bank’s operating expenses increased by only 10 percent, reflecting management’s continuing focus on optimising operating costs.

“We will continue to be proactive in managing the risks in our business as we pursue targeted opportunities identified for growth,” Adewale assured.

UBN successfully raised about N50 billion in 2017 through a rights issue that was oversubscribed. This strengthened the bank’s capital base to support business growth and maintain regulatory capital requirements.

Despite the industry challenges, UBN has bucked common boardroom trends by showing a capacity to take on the rigours of turning in strong quarterly performances.

Nevertheless, despite the weak economy, the bank has been able to gallop through the tide with a modest fourth-quarter showing in profit.

The bank which vision is to be Nigeria’s most reliable and trusted banking partner parades total assets of N1.45 trillion and a total 860 ATM’s.  With a total customer of over 3.2million and a workforce of 2,700 employers, Union Bank is still struggling to get back her numerous customers that migrated to other banks during the banking system crisis in 2009/2010 that nearly engulfed it.

This, however, resulted in growing its customer base on its mobile and online banking platforms by nearly 350% and about 50 percent respectively and brought in 73 percent more new-to-bank customers during the year.

The bank’s momentum is strongly upbeat again after the setback it experienced when it almost went distressed a few years back.

Since 2013, Union Bank has placed its head above water as it strategizes to retain its prior position as the ‘Big Strong and Reliable’ financial institution. When the challenging macroeconomic drove some banks and companies into posting losses, Union Bank has survived.

For instance: the bank posted a profit after tax of N3,951billion in 2012, it rose by 58 percent to N6,262billion in 2013 and leapt again by 326 percent to N26,685billion in 2014. Union Bank’s profit after tax plunged by 47 percent to N14.204 billion in 2015 and dropped by 8.3 percent in 2016.

Though not as fantastic as shareholders would have expected but they have been assured that the future looks brighter with the expected N50billion capital via Rights Issue.

However, Union Bank has not paid a dividend since 2009 ( Seven years) when the CBN sacked its chief executive officer and that of 4 other banks for financial mismanagement. The strain of that exercise has weighed down heavily on the second oldest bank in Nigeria which appears determined to make record successes in the future. In fact, many stakeholders have praised Emeka Emuwa, Union Bank’s Chief Executive officer for effort turning the bank around and for attraction huge attention from both internal and foreign investors.

In 2011, customers left the bank in droves after the bank was adjudged terminally ill by the apex bank, thus deposit went down by 33% while loan and advances bolted by 16%. This probably led to increased cost to income ratio which berthed at 183% while equity holders lost more than 420% of their investment.

Then the bank’s assets returned negatives, which invariably meant that it was better to have realized its non-current assets in the market safe for some un-priced goodwill.

Profit before tax had slipped into the negative zone, with about N103 billion loss in the hole.

But after a restructuring program, its financials have become better and its business focus redefined. The bank is now having visibility and the brand confidence is stronger compared to past years.

The bank, in addition, appears to appeal more to the youthful population now, than its traditional old generation character of rendering banking services. Its rebranding is also reflected in the banking halls and can favourably compare with new generation banks standards.

“I initially thought the gleeful look was randomized, aiming at giving false brand appeal. But, everywhere I go, Union Bank Plc is actually wearing a new look. The bank rebranding program is in no doubt a feat worth celebrating”, Mr. JideFamodun associate at LSIntelligence team had told Business Hallmark.

After 2009 CBN intervention, the bank emerged from the burden of toxic assets, poor governance as well as weak leadership etc. and began to chart a new and straight path to profitability devoid of the funfair. The bank’s new brand exudes energy which reflects the ability of some of the individuals’ skills sets working with Mr. Emuwa.

In every respect, the bank strategic direction has been refined, and the brand revitalized but it has to contend with the harsh economic environment and the tough rivalry in the industry.

“Union Bank’s restructuring, rebranding and reconnecting to the market has started yielding a result. Good result for that matter! The bank’s leadership effort to re-focus was done professionally, no noise but the statement is clear to stakeholders”; analysts told Business Hallmark. The stallion has become lighter, and it could fly as well as run.

 

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