1 March 2022 03:52 am
Union Bank of Colombo PLC reported strong financial performance for the three months to December 31, 2021, with improvements in asset quality and margins but the company’s extremely anaemic growth in loans and advances raised serious questions about its overly conservative business strategy.
The robust earnings came on the back of 44 percent growth in net interest income during the quarter to Rs.1.49 billion, as the bank benefitted from the faster decline in the interest costs compared to the decline in interest income.
In line with the industry, the bank expanded its net interest margin to 3.53 percent, from 3.16 percent, as the bank saw its low-cost deposits rising to 30 percent of total deposits, while it took advantage of the timing difference between repricing assets and liabilities.
The bank also generated a fee income worth of Rs.270.7 million, up by just 4 percent. What raised the eyebrows of the banking sector analysts was the too little growth recorded by the bank in its loan book.
The bank’s loans grew by Rs.570 million in the entire year and in the December quarter, the company recorded a massive degrowth of Rs.2.16 billion in its loans
and advances.
Sri Lanka had the lowest interest rates in history during 2020 and 2021 and the banking sector in 2021 unleashed a record Rs.811 billion in private sector credit alone.
Union Bank has been too conservative when it comes to growth, despite sitting on the largest capital buffer by a bank relative to its risk assets.
For instance, by the end of December 2021, the bank’s Tier I and Tier II capital ratios stood at 15.51 percent and 16.47 percent, respectively, when the regulatory minimums were at 8 percent and 12 percent, respectively.
The company’s return on equity was at 4.25 percent by the end of 2021, compared to 3.24 percent a year ago.
Meanwhile, for the financial year ended on December 31, 2021, the bank reported earnings of 77 cents a share or Rs.836.8 million, up 32 percent, from 58 cents a share or Rs.632.7 million in 2020. The bank set aside Rs.1.14 billion for the year as provisions for possible bad loans and other financial asset losses, up 20 percent.
However, the bank reported a lower gross non-performing loans ratio of 5.65 percent, compared to 6.05 percent at the beginning of the year.
Culture Financial Holdings Limited, part of the United States-based private equity firm TPG, has a 70.84 percent stake in Union Bank.