Union Bank: A big mountain still ahead

Union Bank suffered major drops in revenue and profit in 2015, events which garnered no muscle to scratch the big mountain of accumulated losses ahead of the bank. The bank needs to be consistently profitable for many years and those profits have to be both big and increasing for management to level up huge retained deficit, reinforce the capital stock and resume dividend payments to shareholders.  

Mr. Emeka Emuwa, managing director/chief executive officer of the bank, is the man driving the transformation agenda of a bank quite hungry for rapid recovery and growth. Despite the drop in earnings last year, his roadmap to return the bank to glory has sustained profitable operations so far. He still has a big mountain ahead of him however, which is to fill up the deep hole of N245 billion accumulated losses that have significantly impaired the capital account.

The high speed growth the bank needs on the earnings field failed to happen in 2015 when gross earnings dropped to the lowest figure in three years. The weakness in the earnings front came from non-interest income, as other income dropped in the year. Operating costs could not be contained in two major expenditure lines – interest expenses and loan loss charges. That led to a sharp drop in profit after the bank posted the most impressive profit record in four years in the preceding year.

Gross income amounted to N117.21 billion for Union Bank at the end of 2015, a drop of 13.8% from the peak earnings figure of N135.90 billion the bank reported in the preceding year. Non-interest income accounted exclusively for the drop in revenue in the year, as other operating income, which provided the spur in 2014, dropped to almost a third of the previous year’s figure in 2015. Gain from disposal of subsidiaries contributed close to N16 billion to revenue in 2014. The figure dropped into a marginal loss in 2015.

There was however a strong growth of 19% in interest income to N90.90 billion in the year, which partly compensated for the weakness in non-interest income. The strength to grow interest income came from an expansion of 17.2% in loans and advances to customers as well as a 9% growth in investment securities. The bank ended the year with a net credit portfolio of N366.72 billion. Interest yield per naira of loans and investments improved in the year.

A major challenge for the bank and for the banking industry as well as the rest of the economy last year is a rapid growth in cost of funds. Interest cost rose by as much as 45% for Union Bank in 2015 to over N35 billion against the 19% increase in interest income and about the 14% drop in gross earnings.

The effect of that on the accounts is the devotion of increased proportions of revenue to meet interest expense. Interest cost claimed almost 39% of interest income in 2015 compared to 32% in 2014. This means that a good part of the increase recorded in interest income in the year was applied to pay interest expenses.

The other area of challenge on the bank’s cost structure is impairment charge for credit losses, which more than doubled at 106% to N9.95 billion. Consequently, net income after impairment charge declined by 3.2%, indicating that the net increase in interest income was insufficient to meet interest expenses and loan loss charges. The decline in net income from lending and investing operations was reinforced by a fall of 40.7% in non-interest income to N26.17 billion at the end of 2015. With that, operating income dropped by 21.3% to N71.90 billion.

There was a significant cost saving success in the area of operating expenses in the year where management was able to achieve a reduction in total expenses. Total operating cost declined slightly by 2.1% to N58.16 billion. This is a major feat accomplished in the light of increased costs of labour and materials employed in operations in the year.

Relative to revenue however, the bank paid more operating cost per naira of revenue during the year. Operating cost margin increased from 43.7% in the preceding year to 49.6% in 2015. This is well above the banking industry average figure of 45%. The problem lies in the revenue weakness rather than in cost management.

On the revenue-cost scale in 2015, costs weighed heavier than earnings, which led to a drop of about 48% in after tax profit in 2015. The bank’s after tax profit amounted to about N13.99 billion at the end of the year, dropping sharply from the four-year profit high of N26.83 billion the bank reported in 2014.

The bank suffered both a drop in revenue as well as the ability to convert it into profit. Net profit margin declined from a top industry record of 19.7% in 2014 to 11.9% in 2015. Loss of profit margin has been a general trend in the banking industry for the third year running.

Union Bank earned 83 kobo per share in 2015, dropping from N1.51 recorded in 2014. No dividend has been paid since the bank’s post consolidated operations and no dividend is expected until the huge mountain of retained deficits is successfully mowed down and completely leveled up.