Union Bank lifts profit with cut down on loan losses

Union Bank lifted after tax profit by almost 600% in 2014 to N26.82 billion, one of the biggest advances in earnings in the banking sector in the year. The high profit growth is accounted for largely by a cut down in loan loss provisions by as much as 60%. An outstanding growth of about 134% in other operating income also provided the spur for the profit growth. The high margin of growth was further increased by a restatement of the preceding year’s profit figure, which involved a significant reduction.

This marks the first significant improvement by the bank in four years. Revenue growth accelerated and the bank closed the 2014 operations with the highest gross income since 2009. Union Bank is one of the few banks that are still on the recovery journey after the financial crisis-induced losses hit banks in 2008/9. Despite the strong profit growth last year, the bank is nowhere close to its profit peak in 2010 and gross earnings remain well below the 2009 high.

Emeka Emuwa (pictured), managing director/chief executive officer of the bank, has on his hands the big task of driving the transformation agenda of a bank hungry for rapid recovery and growth. All eyes are on him to return the bank to glory in five years.

One of the major strengths of the bank in 2014 is an accelerated growth in revenue. Gross earnings grew by about 12% to almost N136 billion in the year, a significant improvement from 3.6% in the preceding year. The bank has sustained revenue growth for the third year running after a major drop in 2011.

Revenue growth in 2014 was accounted for exclusively by non-interest income – mostly other operating income. Against a decline of 5.8% in interest income to N76.19 billion, other operating income rose by 133.6% to N31.75 billion during the year.

The decline in interest income is despite a major growth of 36.3% in loans and advances to about N313 billion. The average yield of the naira of loans and advances declined during the review period. The decline in interest income against one of the most aggressive expansions of the loan portfolio in the banking industry in the year is a major operating weakness for Union Bank in 2014.

A good signal for the bank is an increase of 11.3% in total deposit base to over N589 billion, which is a major accomplishment in a year in which growth of deposits was generally flat or negative for banks. This is a mild indication that the bank is on the way to reclaiming its lost market share. The ability to sustain the move will be a key development to watch out for in the current financial year.

Lending and investing operations of the bank will need greater attention to enhance income lines and cut down on expenses. The decline in interest income and an increase in interest expenses in 2014 led to a drop of 9.5% in net interest income. Without the drop in impairment charge for loan losses, net income from lending and investing operations would have declined.

The summary of the bank’s operating story in 2014 is that the core businesses of lending and investing did not contribute meaningfully to the profit growth achieved. Net income from lending and investing improved by only 4% to N47.05 billion. Growth in other operating income accounted mostly for a 34% growth in operating income at N90.52 billion in the year.

Another significant development during the year is a firm hold on operating cost, which enabled management to convert a significantly increased proportion of its income into profit. Total operating cost was flat at N58.72 billion, showing a marked reduction in operating cost margin from 48.3% in the preceding year to 43.2% in 2014. This has aligned the bank’s expenditure structure with some of the best industry numbers.

In all, Union Bank achieved a significant reduction in the cost-income ratio in 2014 and that gave it a big leap in profit margin. Net profit margin improved from 3.2% in the prior year to 19.7% at the end of 2014. This is one of the highest net profit margins in the banking industry in the year, coming after GTB’s 35.4%, Zenith Bank’s 24.6% and Stanbic IBTC’s 24.5%.

The bank earned N1.51 per share in 2014, up from 37 kobo in 2013. No cash dividend are expected as it still carries a retained deficit of about N243 billion in the capital account.