Union Bank records resilient performance despite challenging environment in 3Q

Chairman Atul Malik

CEO Indrajit Wickramasinghe

Union Bank continued to focus on its prudent cost and portfolio management strategy to remain resilient amidst a volatile macro-economic landscape that prevailed through the third quarter of the year. 

The COVID-19 outbreak weakened the country outlook substantially and affected the overall business landscape of the country. Amidst a challenging economic landscape, the Average Prime Lending Rate (AWPLR) dropped by approximately 400bps YoY while the Treasury Bill rates continued on a downward trend during the period under review. In line with directives of the Central Bank, Union Bank implemented a downward revision of interest rates on its various lending products including credit cards. The Bank took measures to provide loans at concessionary rates for Working Capital requirements of SMEs and exporters by participating in the CBSL credit schemes including the Saubhagya COVID-19 Renaissance Facility. 

In a backdrop where the negative impacts of COVID-19 on the economy, businesses and consumers continued to weigh down on the banking industry, the Bank focused on continuing the COVID-19 related benefits schemes granted to its customers in a bid to support their financial recovery while focusing on maintaining business operations in compliance with health safety guidelines set by health officials to ensure safety of staff, customers and other stakeholders. 

Amidst mounting challenges, Union Bank increased its liquidity buffers on a prudent basis and has been able to maintain a strong excess liquidity position. During the period under review average fixed deposits remained stable whereas average CASA ended at Rs. 23,805 million, with an increase of 18% over the comparative period.  As a consequence of the Bank’s policy to support its customers during these tough times and a decline in interest rates, its Net Interest Margin (NIM) declined from 3.8% to 3.3% over the comparative period. 

Late payment fee and other fee waivers provided in line with the CBSL guidelines aimed at supporting the customers affected by the pandemic, alongside a decline in economic activity, caused a reduction of the overall fee income by 25% over the comparative period. 

The Treasury performed notably within the period under review, recording impressive trading profit/capital gains with a significant YoY increase of 108%. Other Operating Income of the Bank increased on the back of exchange rate deflation during the said period. 

Amidst the challenging environment, the Operating Income of the Bank for the quarter was Rs. 1,692 million, and reduced by 3% over the comparative quarter. The Total Operating Expenses were prudently managed through bank-wide cost management initiatives and reduced by 5% QoQ to Rs. 941 million. Consequently, pre-impairment profits of the Bank were Rs. 751 million for the quarter and was similar to that of the comparative quarter. 

While the Bank’s actual credit losses were low, the Bank recorded significant provisions through management overlays to account for the deteriorating environment, leading to a 31% QoQ increase in impairment charges. The entire day one loss on account of COVID-19 moratoriums 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). 

Against this challenging macro-economic backdrop, the Bank recorded subdued Results from Operating Activities of Rs. 470 million a decline of 12% over the comparable quarter. The operating environment for the Bank’s subsidiaries, namely UB Finance and NAMAL was also very challenging. Due to a drop-in tax rates and prudent management of reserves, the Bank including its share of ownership in its subsidiaries was able to maintain its PAT at the comparative quarter levels. 

YTD Operating Income of the Bank was Rs. 4,643 million and was similar to that of the comparative period. The Total Operating Expenses were prudently managed through bank-wide cost management initiatives and reduced by 4% YoY to Rs. 2,855 million. Consequently, Pre-impairment profits of the Bank were Rs. 1,787 million for the period and indicated a 7% growth over the same period last year. While the Bank’s actual credit losses were low, the Bank recorded significant provisions through management overlays to account for the deteriorating environment, leading to a 59% increase in impairment charges over the comparative period. The entire day one loss on account of COVID-19 moratoriums 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). 

Against a continuously challenging macro-economic backdrop, the Bank recorded subdued Results from Operating Activities of Rs. 1,226 million YTD, a decline of 7% over the comparable period. The operating environment for the Bank’s subsidiaries, has also continued to be very challenging. Due to a drop-in tax rates and prudent management of reserves, the Bank including its share of ownership in its subsidiaries was able to increase its PAT by 3% YoY. Total comprehensive income for the Bank YTD was Rs. 812 million. 

Owing to external pressures and continuous deterioration of macro-economic conditions since March this year, the gross NPL ratio of the Bank was reported as 5.48% by end of the reporting period compared to 5.03% as of last year. The Bank’s prudent approaches towards managing portfolio quality proved favourable in containing NPLs even within a weakened economic landscape. 

Total assets of the Bank stood at Rs. 122,291 million as at 30 September. The Bank’s loans and receivables stood at Rs. 71,333 million YTD while the deposits base was Rs. 81,958 million and expanded by 7% during the period. 

The Bank continued to maintain its capital adequacy ratios well above the regulatory requirements and reported a robust Capital Adequacy with a Total Capital Ratio of 16.26% as at the reporting date. 

Union Bank’s robust liquidity position and stability were further affirmed by Fitch Ratings in the latest ratings release in 2020 which confirmed the current rating of the Bank. 

The Group consisting of the Bank and its two subsidiaries, UB Finance Company Ltd. and National Asset Management Ltd. reported a Profit before all taxes of Rs. 1,306 million for the period. 

The Profit after Tax of the Group in comparison to the corresponding period last year declined by 5%. Total assets of the Group were Rs. 129,008 million of which 95% was represented by the Bank. The Group maintained a healthy Core Capital Ratio of 16.41% as at the reporting date. 

During the period commencing from April 2020 to 30 September 2020, the Bank had approved debt moratoria under the CBSL recommended debt relief scheme providing extensions for repayment of capital and interest on loans granted. Loan facilities were granted with payment extensions providing relief to customers to navigate during these challenging times. Amongst the schemes that were considered for moratoria are Loans and Leases, Overdrafts, Pawning and Trade Finance facilities. 

Union Bank’s Corporate Banking customers were proactively approached with customised financial solutions to help stabilise their strategic redirections post-lockdown. Union Bank’s SME Banking segment focused its support towards customers that were affected by the pandemic lockdown, supporting to re-ignite their businesses and livelihoods while channelling the CBSL backed funding schemes to enable SME business revival in-line with the national vision for economic recovery.

During the period under review, the Bank has granted Rs. 1.3 billion worth of working capital loans under Central Bank’s ‘Saubhagya’ concessionary credit scheme to SMEs in diverse sectors that were adversely affected by the pandemic. As part of its relief efforts for affected customers, around 58% of the SME portfolio value had been accommodated under different moratorium schemes. These measures have substantially helped affected entrepreneurs to re-strategise and recommence business activities amidst subdued economic conditions. 

Union Bank BizDirect continued to offer the Bank’s Corporate and SME customers the much-needed liquidity management efficiency while facilitating prudent and convenient cash management expertise to maximise on liquid positions of their companies during these challenging times. Due to a growing inclination for digital solutions over traditional banking methods, many new customers were on-boarded for Union Bank BizDirect in both Corporate and SME segments during the period under review. 

Retail banking business growth was led by CASA acquisition, deposit mobilisation and Credit Cards portfolio expansion. The Bank continued to offer greater value to its Cardholders through focused lifestyle offers that included discounts on hotel stays, dining and shopping along with 0% interest instalment plans. Union Bank’s digital banking channels continued to provide added convenience to customers by facilitating a contact-free and secure banking experience. 

In-line with health authority guidelines, the Bank prioritised its focus on the implementation of comprehensive measures to ensure the safety of customers and staff, resulting in stringent hygiene and safety practices across the branch network and Head Office premises. Convenient access was made available for customers to reach the Bank’s ATM network, online/mobile banking platforms and the 24-hour contact centre, thus enabling a safe and secure banking experience. 

Commenting on the performance, Union Bank Director/Chief Executive Officer Indrajit Wickramasinghe said, “We have placed a steady focus on maintaining a healthy liquidity position while engaging with our customers to provide them with the necessary impetus to navigate through these difficult times. The third quarter results display the resilience of Union Bank against a challenging landscape. As we steer with prudence and continuously adjust our sails to withstand the extreme volatilities which have become the new-norm in the current times, we hope to continue the engagement with customers and provide tailored financial solutions that would better-suit their unique financial needs and challenges while ensuring the well-being of our staff and customers at all times. Maintaining a healthy liquid position, driving profitability and prudent portfolio growth will be key focus areas of the Bank during the last lap of this year.”