Union Bank 3Q net up 74% to Rs.133mn; but margins decline

Union Bank of Colombo PLC saw its net profits for the quarter ended September 30, 2016 (3Q16) rising as much as 74 percent to Rs.133.2 million from a year ago, on the back of modest growth seen in the bank’s loan book but the margins came under further pressure as interest rates rose, the interim financial accounts released to the Colombo Stock Exchange showed.
The earnings per share rose to 12 cents from 7 cents. The bank’s share closed 10 cents or 0.62 percent lower at Rs.16.10 during yesterday’s trading. 

The bank on a standalone basis saw its gross loans and advances rising 30 percent or Rs.12.3 billion during the nine months to Rs.53 billion—little under Rs.1.4 billion disbursements a month. But the bank’s net interest margin came further under pressure as it fell under 3.0 percent to 2.79 percent from 3.37 percent at the beginning of the financial year. 

The deposits grew by 32 percent or Rs.11.9 billion while the low-cost, current and savings accounts (CASA) ratio stood little under 24 percent. The industry average hovers around 37 percent, which is also down from around 42 percent at the beginning of the year, as people shifted from low interest earning savings accounts to high yielding fixed deposits when the market interest rates rose. 
But this put pressure on the margins of the banking sector as the sector margins also came down to around 3.5 percent by the end of the first eight months, hence the banks were fighting to maintain the bottom line by repricing its assets and liabilities.  Union Bank’s net interest income however grew 34 percent year-on-year (YoY) to Rs.806.2 million. But the net fee and commission income, which generally cushions the narrowing margins, dropped 4 percent you to Rs.106.1 million.  The bank had gains from the trading from the investments and foreign exchange better than what it enjoyed during the same quarter last year. The bank has zero exposure to equity investments. 

For the nine months ended September 30, the bank posted a net profit of Rs.367.8 million, up 154 percent YoY. The earnings per share rose to 34 cents from 13 cents. 

Meanwhile, the bank’s provisions made against the possible bad loans in respect of individual customers saw an increase of 54 percent YoY to Rs.45.8 million but the asset quality improved as the gross non-performing loans ratio dropped to 2.73 percent from 3.55 percent at the end of 2015. The bank, which has the backing of US-based Culture Financial Holdings Limited, had its Tier I and Tier II capital adequacy ratios at 23.03 percent and 22.38 percent, respectively, by the end of September, well above the minimum requirements of 5 percent and 10 percent each. 
Culture Financial holds a 70 percent stake in the bank. 

The Central Bank along with the Finance Ministry are said to be contemplating to further increase the minimum core capital of licensed commercial banks to Rs.20 billion from the current Rs.10 billion; such a move will nothing but force some of the small and mid-sized banks to merge with other well capitalized banks.