Union Bank of Nigeria Plc has successfully reined in credit losses since 2018 and the bank’s income statement is free of the burden of net loan impairment expenses for the fifth year running to 2022.
The bank’s first-quarter interim report for the period ended March 2022 shows a relatively insignificant net loan loss charge of N375 million – one of the lowest credit loss expense records in the banking industry in the quarter.
The charge for the quarter is a sharp drop from N802 million in the same period in 2021. Last year ended for Union Bank with a minor net loan impairment write back after a major net writes back of N2.35 billion in 2020.
According to InsideBusiness, the good records on credit loss expenses have been on for the bank since 2018 when it slashed the net charge by 115 percent to achieve a net write-back of almost N4 billion. This was followed by a marginal net loan impairment charge of N184 million at the end of 2019.
Getting the burden of credit loss expenses off its earnings path has saved huge revenues for the bank and improved/defended the bottom line against possible major drops in profit. In 2021, when interest expenses grew rapidly by about 43 percent against flat interest income, management applied savings from credit loss expenses to defend the bottom line.
The sustained cut down in loan losses reflects substantial gains by the bank in its loan portfolio quality mark. This is evidenced by sustained massive loan recoveries since 2018.
The bank recovered a total of N3.94 billion in 2018, which surged up a clear 122 percent to N8.72 billion in 2019. Another loan recovery of N7.24 was raked in in 2020 despite the impact of the economic lockdown in the year. The momentum was reinforced in 2021 when loan recoveries soared to nearly N16 billion.
The strong credit portfolio quality is going for the bank again in 2022. The bank’s statement at the end of the first-quarter earnings report at the end of April 2022 reported the non-performing loan ratio flat at 4.3 per cent.
The gains from the improved risk asset quality are also coming by way of enhanced earnings performance in the current financial year. The bank’s statement said improving earnings is driven by strong earning assets from on-lending to key sectors of the economy.
Gross earnings rose by 18 percent year-on-year to N42.9 billion in the first quarter. Emeka Okonkwo, Union Bank’s CEO said this was bolstered by improved asset yields, treasury trading income and revenues from alternate channels.
Interest income made an upswing in the first quarter at an increase of almost 42 per cent year-on-year to N31.6 billion for Union Bank. This is a rebound from a flat position of N114 billion at the end of the last financial year. Okonkwo said the bank has taken advantage of a more viable loan portfolio to expand its earning asset base.
There is however a challenge facing management and this is coming from the cost of funds that is rising well more than interest earnings. Interest expenses grew by nearly 62 percent year-on-year to over N18 billion, which claimed a good part of the increase in interest income during the period.
The encroachment of interest expenses on earnings resulted in a subdued increase of 21.4 percent in net interest income to close at N13.3 billion for the quarter. Then the benefit of the drop as well as the modest loan impairment charge upturned the position to achieve over 27 percent growth in net interest income after net impairment charges – which amounted to almost N13 billion for the first quarter.
The bank’s management has identified measures to tame the behaviour of interest expenses as a major goal this financial year. The steps being taken include the paydown of expensive time deposits, which led to a 3.5 per cent drop in customer deposits to ₦1.31 trillion at the end of the first quarter.
The bank’s outlook for the second quarter envisages increased cost efficiencies added to reinforce accelerating earnings and stretching out margins. The bank’s management hopes to achieve increased balance sheet efficiency by continuing to pay down expensive deposits and pricing its risk assets better than previously.
Union Bank closed the first quarter of operations with an after-tax profit of N5.55 billion, which is a drop of 10.6 per cent from the N6.2 billion it posted in the same period in 2021. Its earnings per share went down from 23 kobo to 21 kobo over the review period.