Union Bank stabilises earnings with N13bn loan recoveries in Q3

Union Bank of Nigeria Plc achieved reasonable stability in earnings performance at the end of the third quarter operations with a recovery of roughly N13 billion bad loans and a major boost in non-interest earnings.

Management’s aggressive loan recovery push paid off with a record increase of 163 percent in loan recoveries year-on-year at the end of September 2021. Powered by the loan recoveries, non-interest income grew by as much as 46 percent to N42 billion at the end of the period.

The strong growth in non-interest income countered a drop of about 7 percent in interest earnings over the same period and enabled a slight increase of 1.4 percent in gross income for the group at the end of the third quarter operations.

Loan recovery turned out to be the biggest non-interest income line for the bank at the end of the third quarter as well as the second-biggest revenue line after interest income. By making up for the weakness in interest revenue, the bank’s management created stability in earnings performance amidst volatility, thereby raising the capacity to absorb rising costs.

Emeka Okonkwo, the bank’s group chief executive officer, said his bank’s performance reflects its resilience in the challenging business environment. He said the bank is targeting growth of the core business through a strategic focus on meeting customer needs.

The move is evidently paying off by way of revenue diversification with interest earnings picking up and growth in non-interest income sustained across quarters. Interest earnings have been looking up over the last two quarters of the year — growing by 14 percent quarter-on-quarter to over N32 billion in the third quarter.

The third-quarter interest income represents 40 percent of the nine months’ figure of about N80 billion at the end of September. This indicates reasonable progress for the bank in overcoming the challenge of low risk asset margins.

However, a drop of 25 percent in interest income in the first quarter caused a year-on-year drop of 6.7 percent at the end of the third quarter.

A further improvement in interest earnings with improving risk asset margin is expected for Union Bank in the final quarter, which could see a moderate overall improvement at full year.

Management plans to sustain its revenue diversification drive as well as the loan recovery initiative going forward. The effort is intended to mitigating the impact of relatively low-risk asset margins on the bottom line.

The effort to stabilises revenue is supported by cost control measures that are also yielding fruits. The bank has achieved substantial cost savings in two major cost areas – loan impairment charges and operating expenses.

Loan impairment expenses of the bank went down by as much as almost 56 percent year-on-year to N2.7 billion at the end of the third quarter. This is a direct result of the aggressive loan recoveries, which have improved overall risk asset quality and reduced fresh loan loss charges.

Operating expenses are generally under control with a reduction in personnel expenses and moderate increases in the other expense lines. Total operating cost increased by only 3 percent to N55 billion over the review period.

The bank’s management is however unable to hold back interest expenses, which have been on the upward run this year in reflection of a general trend in the banking industry. Cost of funds grew by 45 percent quarter-on-quarter in the third quarter to N21 billion. The figure accounts for 43.5 percent of the closing interest expenses figure of N48 billion at the end of the third quarter.

On year-on-year, however, interest expenses grew by a significantly lower margin of less than 11 percent. The increase in the third quarter is moderated by drops recorded in the previous quarters.

With a drop in interest income, net interest earnings went down by 24.5 percent to stand below N32 billion at the end of the third quarter.

Union Bank ended the third quarter operations with the group after tax profit of N13.4 billion, which is a decline of about 11 percent year-on-year. Net profit margin went down from 12.4 percent in the same period in 2020 to close to 11 percent at the end of the third quarter in September 2021.

The loss of profit margin and the profit decline over the period reflect the revenue constraint and the upward pressure of interest expenses. Rising cost of funds is expected to sustain to full year but further improvement in interest income in the final quarter can also be expected to dilute increasing interest expenses at the end of the year.

Further loan recoveries and declining loan loss expenses – which are also expected to be maintained in the final quarter, could improve profit margin and strengthen bottom line performance for Union Bank at full year.