Core banking growth and Profitability

Union Bank continued to focus on portfolio alignment and prudent cost management to sustain against a hard-hitting macro economic environment that continued to weigh down the banking sector during the third quarter of 2019.

As a result of focused efforts for enhancing operational efficiency, the Operating Expenses of the Bank increased only by 5% YoY to Rs. 2,960 Mn within the period under review.

The results of the macro economic shocks that prevailed throughout, continued to affect the banking sector performance in the 3rd quarter of 2019.  Despite policy rate revisions the demand for private credit remained flat, affecting balance sheet growth through the 3rd quarter of the year. Amidst such a challenging business environment, Union Bank strived for revenue optimisation through portfolio re-alignment and enhanced emphasis on fee and commission income generation.

Total Operating Income of the Bank continued to rise reporting Rs.4,637 Mn which was a YoY increase of 19%.

Net Interest Income (NII) for the period ended 30^th September was reported as Rs.3,466 Mn. The Bank’s well executed strategic initiatives for Fee Income growth continued throughout the reporting period, resulting in a 12% YoY growth in Fee and Commission Income which grew to Rs. 784 Mn. The growth is mainly attributed to the increased influx of Credit Cards processing fees due to focused acquisition efforts along with the fee income generated through transaction banking services provided to corporate and SME banking cients.

The Bank’s Treasury performance remained notable and recorded Rs. 380 Mn in capital gains YoY, which was a significant increase of 83%.  Other Operating Income of the Bank declined on the back of exchange rate deflation and due to a significant increase in the number of funding swaps entered in to during the review period . A decline in trade volumes stemming from adverse macro economic conditions was also contributory to the above.

Pre-impairment profits of the Bank were Rs.1,677 Mn for the period, which was an increase of 54% YoY. The impairment charge of the Bank during the period under review was Rs.354 Mn. Collective impairment charge for the period ended 30^th September 2019  has been  prepared  in  accordance  with  Sri  Lanka  Accounting  Standard – SLFRS  9  (Financial Instruments), whilst prior period charge was prepared in accordance with LKAS 39 (Financial Instruments). Reflecting the stress of the macro economic challenges, the Gross NPL ratio of the Bank stood at 5.2% while the Net NPL ratio was reported as 3.9%.

Despite the challenges of the operating environment, Union Bank presented a resilient performance recording a profit before all taxes of Rs. 1,422 Mn, which was a 54% growth YoY for the period ended 30^th September, signalling the Bank’s continued progress towards achieving its strategic growth objectives for the year.

Profit share from subsidiaries was reported as Rs.98 Mn which was a Rs.51 Mn increase YoY. UB Finance Limited was the major contributor to the above increase.

Taxes including Income, VAT,NBT and DRL on Financial Services amounted to Rs.889 Mn which was an increase of 67% YoY. Profit after Tax (PAT) of the Bank was Rs.533 Mn, which was a 37% growth YoY.

The total comprehensive income of the Bank was reported as Rs. 867 Mn with an increase of 469% YoY and was supported by the positive impact from the valuation on debt instruments at fair value through other comprehensive income.

Total assets of the Bank stood at Rs.115,574 Mn as at 30^th September.The Bank’s loans and receivables stood at Rs. 74,998 Mn and the  deposits  base  was  Rs.74,707 Mn as at end of the quarter.  Total average CASA grew to Rs.18,923 Mn which reflected a 22% YoY growth.  Efforts of sustaining a healthy CASA inflow was supported through focused acquisition strategies driven by retail, corporate and SME banking segments.

Maintaining strong capital ratios continues to be a management priority. Union Bank’s Total Capital Adequacy Ratio as at 30^th September 2019 was 16.5% and is well above the regulatory requirements.

The Group comprising the Bank and its two subsidiaries, National Asset Management Limited and UB Finance Company Limited, reported a Profit after Tax of Rs.606 Mn for the period which was a growth of 36% YoY. Total assets of the  Group were  Rs. 124,061 Mn of which 93% was represented by the Bank. The Group maintained a healthy Core Capital Ratio of 16.3% as at balance sheet date.

Operational Performance

Union Bank recorded subdued business growth amidst challenging market conditions during the 3rd quarter.

The Corporate Banking business of the Bank continued to make progress within a competitive market space, with the Bank meeting its core objectives of revenue and assets growth for the period under review.

Small and Medium Enterprises (SMEs) were the most affected by the trying economic backdrop that continously tests the adaptability of the smaller players in the market.  Despite the challenges facing SMEs, Union Bank continued to identify strategically important segments and support the growth and endurance of these enterprises with customised solutions and advisory services.

The Bank’s flagship Transaction Banking solution, Union Bank Biz Direct continued to add value to corporate and SME clients as a cost-effective cash management automation tool.  The Bank is currently steering a modification of this Transaction Banking solution, with a view to enhance its functions and features to facilitate up-to-the-minute business solutions that will deliver even greater banking conveniences to its users.

Retail Loans and advances showed moderate growth during the review period with special focus being placed on meeting the home equity needs of the retail clientele. The Bank’s Credit Cards portfolio further expanded on the back of focused sales and acquisition campaigns supported by a gamut of attractive lifestyle offers in diverse segments such as leisure, dining, shopping etc.

In line with its focus on building Current and Savings (CASA) balances, Union Bank continued the momentum of portfolio build-up of key products such as Children’s Savings, Investment Plans and Institutional CASA, with intense sales drives through branches, Relationship Managers and dedicated sales teams to pursue new acquisitions.  As a result, the CASA base of the Bank grew to 26.4% YTD as at end September 2019.

Continued efforts for operational efficiency and enhanced productivity through streamlining of processes resulted in improved cost management during the period under review.

The Bank continued to offer enhanced banking conveniences to its clients via online and mobile banking facilities with a project being underway to enable credit cards self care services along with enhanced safety of transactions through these platforms.

In August 2019 , Union Bank’s corporate website www.unionb.com was awarded the Gold winner under the Finance Category at the dotCoMM Awards 2019 based in the USA. This was an affirmation of the Bank’s successful efforts in enhancing its digital impression which incorporates some of the latest technologies and features to increase digital presence and security while providing greater convenience to users.

Commenting on the 3^rd quarter performance of the Bank, Director/CEO Indrajit Wickramasinghe said,  “I am pleased to share this resilient 9 months’ performance of Union Bank amidst a challenging economic backdrop and high tax regime, which is a clear assertion of the Bank’s successful strategic direction that has helped withstand such tough conditions. I believe that the Bank’s continued focus on operational efficiency, digital banking lead and inclusive portfolio expansion will augur well for the 4^th and final lap of the year, in which we will continue to build on these growth dynamics and strive for more insistent business growth with a view to successfully meet our strategic objectives for 2019.”

Union Bank concluded a strong first half, recording significant growth in core banking revenue with resultant profits before all taxes of Rs. 849 Mn, amidst challenging market conditions that tested the resilience of businesses across all sectors.

Core banking growth and financial performance

The second quarter of 2019 carried unforeseen challenges for the banking sector, which was under demanding economic conditions caused by the unfortunate events that unfolded in April 2019.

Despite a very challenging macro environment, Union Bank reported healthy core banking growth with Net Interest Income (NII) significantly increasing by 19% YoY, to report Rs.2,131 Mn. Net Interest Margin of the Bank improved to 3.4% from 3.1% in the comparative quarter. This is mainly due to the increase in average CASA balances during the reporting period. The NII growth is also attributable to the Bank’s focused efforts towards portfolio realignment during the recent times.

The fee and commission income of the Bank improved continously, and grew by 17% YoY to Rs.524 Mn during the period under review. The growth stemmed mainly from processing fees on an expanding loan book, new Credit Card issuances, commission on guarantees and Current and Savings accounts (CASA) related fees.

Income from capital gains for the period was Rs. 253 Mn which was a noteworthy increase YoY. Income from investments in units for the period was Rs.123 Mn and was a reduction of 20% YoY. This is due to the decrease in investments in unit trusts during the period.

The decline in other operating income  was mainly due to the reduction in foreign exchange business income which was approximately 50% of the income reported during the corresponding period last year. This was mainly due to a significant reduction in trade business stemming from the macro economic challenges of the quarter.

During the quarter under review, the Total Operating Income of the Bank rose to Rs. 2,899 Mn, and represented a growth of 13% YoY. Total Operating Expenses were prudently managed and grew marginally by 4% YoY to Rs.1,973 Mn during the period. As a result, Pre-impairment profits of the Bank was Rs.926 Mn which was a 37% increase YoY.

The impairment charge of the Bank was Rs.139 Mn. Collective impairment charge for the period ended 30^th June 2019 has been prepared in accordance with Sri Lanka Accounting Standard – SLFRS 9 (Financial Instruments), whilst prior period charge was prepared in accordance with LKAS 39 (Financial Instruments).

Profit share from subsidiaries was reported at Rs.62 Mn which was a Rs.22 Mn increase YoY.

Profit after Tax (PAT) for the period was  Rs.297 Mn and was an 18% increase YoY. PAT of the Bank was significantly affected by the increase in tax rates. Effective tax rate (all taxes) for the period increased to 70% in comparison to 59% in the comparative period.

The total comprehensive income of the Bank was Rs.685 Mn and was an increase of 490% YoY. This was mainly due to the positive impact from the valuation on debt instruments at fair value through other comprehensive income.

Total assets of the Bank stood at Rs.121,747 Mn as at 30^th June. The Bank’s loans and receivables stood at Rs. 74,222 Mn YTD. The deposits base was Rs.74,609 Mn as at the balance sheet date. The Bank continued to focus on asset quality with prudent risk management practices and the net NPL ratio stood at 3.9% at the end of the reporting period.

Within the period under review, total average CASA grew to Rs.3,545 Mn which reflected a growth of 23% YoY.  Efforts of maintaining a healthy CASA inflow was supported through focused acquisition strategies driven by retail, corporate and SME banking segments.

The Bank continued to maintain its robust Capital Adequacy, reporting a Total Capital Ratio of 17.23% as at the balance sheet date.

The Group consisting of the Bank and its two subsidiaries, UB Finance Company Limited and National Asset Management Limited reported a Profit before all taxes of Rs.799 Mn for the period which was a growth of 19% YoY. Total assets of the Group was Rs. 130,369 Mn of which 93.4% was represented by the Bank. The Group maintained a healthy Core Capital Ratio of 15.48% as at the balance sheet date.

Business Performance and Strategic Enablers

The Bank’s corporate banking business continued to focus on consolidating the portfolio while managing the yields and Non Performing Loans (NPLs). With the challenges  in the economy, the corporate banking business realigned its focus and initiated market development activities for portfolio growth. The Bank’s state-of-the-art transaction banking solution Union Bank Biz Direct was offered as a value added auxilliary solution to corporates as well as SMEs which also contributed to Current and Savings (CASA) growth of the Bank.

The SME banking business continued to support the emerging enterprises in the country with a special focus on selected strategic industries. Prudent risk management and stringent credit policies helped the Bank to keep the NPLs at manageable levels at a time when the SMEs were greatly affected by the challenging economic conditions.  A 10-year loan product  (BML) for the sector was introduced during the period. Strategic staff competitions were continued in the three main zones of the Bank to support CASA acquisitions, whilst the on-boarding of SME clients for Cash Management services was also intensified to support the CASA growth.

The retail banking business continued to grow with focus on credit cards, mortgage backed loans as well as savings and investment solutions. Several new retail banking features and value additions were introduced during the period under review. A discount scheme for mortgage loans and the Loan-on-Card were key new initiatives. The segment approach for profitable acqusitions was implemented through the branches and sales teams during the period under review.

The Treasury continued its excellent performance in this 2^nd quarter as well, with strong revenue contribution. The Foreign Exchange Income continued to be under stress due to lower volumes on trade finance business and the impact from adverse economic conditions.

In May 2019, Union Bank was awarded ‘Best Cash Management Bank – Sri Lanka’ title at the Global Business Outlook Awards in recognition of its state-of-the-art cash management solution Union Bank Biz Direct.  The award affirmed the continued success of Union Bank Biz Direct which has made great strides in providing transaction banking excellence to the corporate and SME clients of the Bank.

Also in May 2019, Fitch Sri Lanka upgraded the National Long-Term  Ratings  of  Union Bank to ‘BBB-(lka)’  from  ‘BB+(lka)’  with a Stable Outlook. The upgrade of Union Bank’s rating reflected its better risk profile through a more diversified loan book, increased  profitability  and  higher-than-average capitalisation amongst other rating drivers. The upgrade is also an affirmation of Union Bank’s growing commercial banking franchise and continuously improving profitability.

In June 2019, Union Bank announced a share repurchase, to which its major shareholder TPG responded with non-acceptance, thus further affirming TPGs long term commitment towards Union Bank’s progress and growth in the years ahead. The Bank made an offer to the shareholders to repurchase a maximum of 7,851,844 ordinary shares at the price of Rs. 15/- per share on the basis of one share for every 139 shares held by them in the Bank. The approval of the shareholders for the repurchase and the consequent distribution of a sum of Rs.117,777,660/-  was obtained at the extraordinary general meeting held on 11th June 2019. The offer period commenced on 27th June and closed on 11th July 2019.Applications for an aggregate of 585,485 shares (7.46% of the offer) have been submitted by the shareholders for repurchase by way of entitlements whilst applications for an aggregate of 48,004,755 shares have been submitted for repurchase as additional shares.

Commenting on the first half performance of the Bank in the year 2019, Director/CEO of Union Bank Mr. Indrajit Wickramasinghe said, “We have had a very positive 2019 so far, despite the many challenges of the macro environment. The results are significantly impressive and indicate our resilience and further endorses the business strategy. We will continue to grow at this pace and look forward to an even better core banking the performance in the latter part of 2019, in tandem with the recovery of the economic landscape.”

-End –

Core Banking Growth and Profitability

Continuing its growth momentum powered by a three – year growth strategy set forth in January last year, Union Bank posted significant growth in its core banking operations reflecting a 62% Year on Year (YoY) growth in profits from operating activities to report Rs.362 Mn during the 1^st quarter of 2019. This was despite the continuously challenging macroeconomic backdrop which had been affecting the industry over the past few quarters.

Union Bank recorded an impressive profit before all taxes of Rs. 366 Mn, a 49% growth YoY for the period ended March 2019, highlighting the Bank’s continued performance and progress towards achieving its strategic growth objectives for the year.

Continuous focus on revenue optimisation through portfolio re-alignment within and across business units resulted in a 19% YoY growth in Net Interest Income (NII) which was Rs.1,013 Mn during the period ended 31^st March despite the increase in cost of deposits.

Fee and commission income grew by 19% YoY to Rs.266 Mn during the period under review. The growth in fee income has been from across a number of products including fees collected on Credit Cards – the newest addition to the product portfolio which made its debut in late 2018. Trade and remittances related fees indicated a slight decline YoY, owing to the unconducive market dynamics for these products.

Capital gains from government securities for the period were Rs. 71 Mn which was a 23% increase YoY. Income from investment in units for the period was Rs. 70 Mn and was a reduction of 33% YoY. This negative growth stemmed from reduced investments in units as a result of the changes to tax regulations which came into effect mid last year. Meanwhile, foreign exchange income for the period showed a 71% decline YoY, as a result of revaluation due to the appreciation of the value of the Sri Lankan Rupee.

During the quarter under review, the Total Operating Income of the Bank rose to Rs. 1,368 Mn, and represented a growth of 8% YoY. Total Operating Expenses were prudently managed and grew only by 2% YoY to Rs.955 Mn during the period. As a result, the operating margin improved by 24% YoY to Rs. 413 Mn.

Impairment charge for the period reduced by 53% YoY and was reported at Rs. 51 Mn, as a result of a reduction of the individual impairment.

Profit share from subsidiaries was reported at Rs.4 Mn which was Rs.19 Mn reduction YoY as both subsidiaries of the Bank were affected by adverse market conditions that prevailed during the period.

Profit after Tax (PAT) for the period was affected by the significant increase in the effective tax rate. The Effective tax rate for the quarter was 72% compared to 52% in the comparative period. The Increase in the effective tax rate was due to the withdrawal of tax exemptions on profits earned on investments in Sri Lanka Development bonds, investments in units, investments in debentures and also due to introduction of Debt Repayment Levy. In addition, the withdrawal of notional tax credit further impacted the effective tax rate. As a result, PAT for the period was reported at Rs.105 Mn, which was a 19% decline YoY.

The total comprehensive income of the Bank was Rs.295 Mn and was an increase of Rs.246 Mn YoY. This was mainly due to the positive impact from the valuation on Debt instruments at fair value through the other comprehensive income.

Total assets of the Bank stood at Rs.124,624 Mn as at 31^st March. The Bank’s loans and receivables stood at Rs. 76,279 Mn and was a 3% growth YTD. The deposits base was Rs.77,897 Mn as at the balance sheet date. Loan to Deposit ratio improved to 99% from 105% reported in the comparative period last year. The Bank continued to focus on asset quality with prudent risk management practices and the net NPL ratio of the Bank stood at 3.1% at the end of the reporting period.

Also within the period under review, total CASA grew to Rs.20,077 Mn which translated to a growth of 22% YoY.  Maintaining a healthy CASA inflow was supported through focused acquisition strategies driven by Retail, Corporate and SME banking segments.

The Bank continued to maintain its robust Capital Adequacy, reporting a Total Capital Ratio of 16.9% as at the balance sheet date.

The Group consisting of the Bank and its two subsidiaries, UB Finance Company Limited and National Asset Management Limited reported a Profit before all taxes of Rs.401 Mn for the period which was a growth of 31% YoY. Total assets of the Group was Rs. 134,065Mn of which 93% was represented by the Bank. The Group maintained a healthy Core Capital Ratio of 16% as at the balance sheet date.

Core Banking Growth and Profitability

Pursuing growth in its 2^nd year of the 3-year growth strategy, Union Bank’s Corporate Banking portfolio recorded a notable performance in the quarter under review.  Steered by impressive growth in assets and liabilities, the corporate loans portfolio expanded by 18% YoY and the deposits base of the corporate banking segment increased by 45% YoY, while the Cash Management proposition Union Bank Biz Direct continued to make significant contributions to the overall CASA growth of the Bank.

The SME Banking portfolio set off on a continued growth phase in the 1^st quarter of 2019 on the back of a strategic lending approach that places focus on large disbursements to selected industries. The SME business of the Bank reflected a positive start to the year creating a strong pipeline for asset growth while increasing geographical focus at branch level for the growth of SME business including the SME CASA base.

The Retail Banking segment of the Bank continued to make significant strides recording a YoY deposits growth of 4% with a CASA portfolio expansion of 16% YoY. Launch of Union Bank Gold Circle was a key highlight of the quarter under review. Union Bank Gold Circle is a specially designed financial proposition aimed at empowering the dreams of dynamic and ambitious individuals. The banking proposition is bundled with benefits on saving and borrowing options, allowing more flexible, convenient terms of banking to suit the evolving needs of young professionals and business owners. Designed to provide a personalised service through dedicated relationship managers, Union Bank Gold Circle is an affirmation of the Bank’s commitment to continuously enhance its retail banking propositions to suit the evolving banking needs in the market.

Retail assets portfolio continued to expand aided by the Bank’s focused efforts during the review period, growing its mortgage backed loans by 196% YoY.  Having launched its Credit Cards proposition in October last year, the Bank’s retail banking operation continued to place significant emphasis and efforts on the expansion of the Credit Cards base with the introduction of unmatched offers including Cash Back offers for fuel and supermarket purchases, special avurudu discount offers, 0% interest instalment schemes, Loan on Card facility as well as other targeted campaigns conducted with the aim of acquiring new customers and gaining the wallet-share of existing customers.

The Treasury which consists of Interbank, Fixed Income and Corporate Sales desks performed well above expectations in the first quarter of the year, making significant contributions to the Bank’s bottom line, especially in terms of capital and exchange gains.

Human Resources and operations functions of the Bank continued to support the business growth with the reorganization of resources and processes to match market dynamics while ensuring prime performance amidst optimal cost management that contributed towards the sound management of the cost to income ratio.

The outstanding achievers of the Retail and SME business segments of Union Bank were felicitated at the Union Bank Retail and SME Banking Awards ceremony held at the Marino Beach Hotel on 30th March under the theme ‘Race to Win’. The Bank’s top performing branch and sales staff were felicitated and awarded at the event, for their outstanding contributions and commitment towards the noteworthy core banking growth of the Bank in the year 2018.

Union Bank’s Annual Report 2018 was presented in February 2019, under the theme ‘Building Strong Bonds’- which signifies the Bank’s commitment to forge ahead as one of Sri Lanka’s fastest growing commercial banks, while building on the profound stakeholder relationships fostered over the years and leveraging on its strengths of a solid capital base, comprehensive product portfolio, an empowered team, technological finesse and operational efficiency to create sustainable growth opportunities for all stakeholders.

Further, on March, 27 2019, the Bank announced that the Board had resolved to repurchase up to a maximum of 7,875,798 ordinary shares of the Bank at a price of Rs.15/- per share from the shareholders of the Bank, subject to all necessary approvals and consents under applicable laws, including the approval of the shareholders.

Commenting on the 1^st quarter performance of the Bank, Union Bank’s Director/CEO Mr. Indrajit Wickramasinghe said, “We have got a very positive start to the year 2019 with significant growth in the core banking operations. However the macro environmental conditions are very challenging which will have an impact going forward.  We will continue to build on this solid foundation, with focused efforts in expanding our business growth in the identified key strategic business pillars. We also plan to add scale to the Bank through inorganic growth strategies, including portfolio acquisitions with the objective of optimising capital utilisation and thereby enhancing shareholder returns.”

-End –

In the year 2018 Union Bank showcased an impressive performance aided by its robust strategic plan, particularly excelling in core banking operations despite a challenging macroeconomic framework.

The Bank concluded 2018 recording an impressive profit before all taxes of Rs. 1,248 Mn. More importantly, the core-income of the Bank, excluding the capital gains and the negative impact due to the investments on the newly launched credit cards, reflected a 124% growth year on year (YoY). This was despite the withdrawal of notional tax credit on the interest on government securities.

However, Profit after Tax (PAT) was affected by the significant changes of tax regulations subsequent to enforcement of the new Inland Revenue Act. The Bank was a holding significant amount of investments in Sri Lanka Development Bonds, Debentures and Unit Trusts and hence, the removal of the tax exemption on profits derived out of these instruments bore a significant impact on the effective tax rate.

Introduction of the Debt Repayment Levy (DRL) during the last quarter of the year under assessment further amplified the negative impact on the effective tax rate.

The PAT of the Bank was Rs.473 Mn and was only a 2.6% growth YoY. Total Assets of the Bank grew by 5.8% to Rs. 125,920 Mn.

The Bank continued to maintain its robust Capital Adequacy ratio which was well above the limits even after adoption of SLFRS 9.

Financial Performance Analysis

The Net Interest Income of the Bank reached Rs.3,652 Mn in 2018. This is a significant improvement of Rs. 606 Mn which translated to an increase of 19.9%. Net Interest Margins (NIM) increased to 3.0% compared to 2.9% recorded in 2017. NIM for the current period would have been 3.2% if the return on investment in units were considered. Cost of funding of investments in units was accounted under interest expense of the Bank. The Returns from investment in units was Rs. 246Mn and was recorded under capital gains under Net fair value gains/ (losses) from financial instruments at fair value through profit or loss. Withdrawal of notional tax credit of the government securities portfolio had a significant negative impact on the NII of the current year.

The Bank continued to make significant efforts to improve its fees and commission income using the key enablers articulated in the strategy. Fee and commission income which mainly comprise of deposit related fees, trade and remittances, loans, cards and other fees stood at Rs. 968 Mn recording an impressive growth of Rs. 185 Mn which translated to a 23.6% growth YoY.

The Bank reported net trading and other income of Rs. 800 Mn, which was a 21.9% growth over the previous year. This comprised of capital gains from Government Securities and investment in Units as well as exchange gains.

Despite the weakening of currency towards the end of the year, the Bank’s exchange income showed a noteworthy growth of 73.6% YoY. Income from Investments in Units were 23.5% lower YoY, as a result of lower investments made in Units during the year.

Reflecting the overall improvement in core-banking operations of the Bank, capital gains on government securities as a percentage of profit before all taxes declined to 18.9% from prior period’s 29.6%. This is a significant reduction of dependency on income of one-off nature on profitability. The total capital gains of Rs. 236 Mn was marginally lower by 4.9% YoY.

The Bank had no trading equities and has not invested in any equity funds as at Balance Sheet Date. The overall growth in core banking activities and consistent performance across all areas resulted in a 20.8% growth YoY in total operating income which was reported at Rs. 5,285 Mn.

The Bank adopted SLFRS 9 with effect from 1st January 2018. The comparative impairment numbers have been calculated based on the previous standard LKAS 39. Impairment charge for the year was Rs. 342 Mn, an increase of 37.5%. In addition to impairment for loans and receivables, the total impairment of the year under review, comprised of the impairment on treasury instruments as well.

Operating Expenses of the Bank were prudently managed to see an increase of only 11.5% to Rs. 3,729. Current period expenses were mainly driven by increased investment in human resources to support the Bank’s growing business requirements and included the expenses incurred on Credit Cards, which was a new initiative launched during the second half of 2018. The sound cost management adopted throughout the year was well reflected in the Cost to Income Ratio which improved to 71% from 76% in 2017.

The Bank has accounted Rs. 776 Mn as Financial Services VAT, NBT, DRL on financial services and Corporate Taxes during the year under review. This was a formidable 105.7% increase YoY. Effective tax rate (all taxes and DRL as a percentage of operating income) in 2018 increased to 62% compared to 45% in 2017. As changes to taxes occurred over the year, full year impact of tax changes are yet to be reflected in the P&L. The Increase in effective tax rate was mainly due to withdrawal of tax exemptions on profits made out of investment in units, SLDB and corporate debt instruments invested prior to the tax changes together with newly introduced Debt Repayment Levy (DRL).

Profit after tax for the year was Rs. 473 Mn compared to Rs. 461 Mn recorded in 2017.

The Group, consisting of the Bank and its two subsidiaries, UB Finance Company Limited and National Asset Management Limited reported a PAT of Rs. 535 Mn in 2018, supported by a growth of 38.0% in results from operating activities. Total assets of the Group stood at Rs. 135,032 Mn.

The Bank’s loans and receivables stood at Rs. 73,749 Mn. The increase of Rs. 3,171 Mn was a 4.5% growth in comparison to the previous year. During the year under review, key focus was placed mainly on portfolio realignment rather than the growth. The new growth in the portfolio was subdued as a result of a conscious decisions made with regard to exiting from selected segments. Proactive steps taken towards realignment further assisted the prudent management of the overall portfolio quality of the Bank. Loans to deposits ratio improved to 93% from 100% in 2017.

The Deposit Base stood at Rs. 79,251 Mn by the year end. This increase of Rs. 8,925 Mn was a 12.7% growth in comparison to 2017. The growth was primarily supported by the Retail Banking segment which pursued a focused strategy with enhanced relationship management driven through identified key segments during the year under review. CASA recorded Rs. 2,410 Mn growth which translated to an increase of 14.8% over the previous year.

The Bank’s gross NPL ratio was 3.7% and the Net NPL ratio was 2.5%. Gross and Net NPL ratios of the comparative period were 2.7% and 1.8% respectively. The Bank’s prudent risk management in credit assessment, proactive and focused monitoring of the portfolios and regionally driven remedial strategies have been instrumental in preserving the asset quality and preventing potential loan losses.

A year of resilience and growth

Union Bank remained resilient against the macroeconomic effects of the year 2018 to record indomitable growth in all areas of business.
The Corporate Banking business of the Bank grew on the back of strengthened corporate relationships and enhanced focus on Union Bank Biz Direct – the cutting-edge transaction banking technology offered by the Bank to its corporate and SME segments. The Bank continued to support the SME Banking segment with customised banking facilities and advisory services delivered across a regional strategy that placed focus on this nationally important segment.

The Treasury of the Bank continued to perform at its optimum making significant contributions towards the Bank’s revenue through its prudent operations.
Retail banking business of the Bank saw significant growth with the focused efforts in expansion of retail deposits and CASA coming to fruition within the year. Union Bank shifted its focus to the Home Equity market in the year under review, thus driving the growth of Home Loans and Loans against Property portfolios of the Bank. The launch of Credit Cards was a key highlight of the year, which opened up a new avenue of revenue growth while complementing the personal banking offering of the Bank with the addition of this versatile solution to its gamut of banking solutions.

The Bank continued to deliver enhanced value and convenience through its diverse delivery channels including digital banking solutions that saw significant take-up and usage during the year under review. Union Bank’s comprehensive delivery strategy geared to deliver improved levels of service was recognised and awarded with the title of ‘Best Bank for Seamless Backend Operations’ at the Lanka Pay Technovation Awards 2018.

Commenting on the performance of the Bank, Director/Chief Executive Officer of Union Bank Mr. Indrajit Wickramasinghe stated “2018 was a year that placed heavy demands on the banking industry which faced multiple headwinds in the economic and political spheres. With cohesive strategic realignment, Union Bank remained resilient and showcased impressive progress and financial performance with outstanding growth in its core banking operations. Our aim is to further strengthen our position as one of Sri Lanka’s fastest growing Banks and become the preferred Retail/ SME and transactional Bank by 2021, a virtue that will be built on trust and partnerships. We will build on this growth and carry the momentum during the year 2019, with focused commitment on meeting the strategic growth objectives of the 2nd year of our three-year strategic growth plan.”

Union Bank recorded an impressive Profit Before Tax and VAT of Rs.558 Mn, led by core banking growth that reported a 42% growth YoY for the period ending 30th June; further consolidating its growth prospects for the year.

Core Banking Growth and Profitability

Continuous growth in core banking operations contributed to the healthy performance during the period under review. Focused revenue management using portfolio realignment within and across the business units resulted in a 14% YoY growth in Net Interest Income (NII) which recorded Rs.1,785Mn during the period ended 30th June. Both Net Interest Margins (NIM) and spreads depicted an improvement during the reporting period in comparison to FY 2017. This was despite the withdrawal of the notional tax credit which bears a direct impact on the interest income earned on the Government securities portfolio carried prior to the change in the tax regulations.

The fee and commission income of the Bank continued to improve through the key enablers articulated in the business strategy. Fee and commission income grew by 21% YoY to Rs.447 Mn during the period under review. Growth was mainly attributable to processing fees on an expanding loan book, commission on guarantees and CASA related fees.

Net trading and other income grew to Rs.405 Mn during the period under review. A strong performance by the Treasury function resulted in capital gains of Rs.142 Mn in comparison to Rs.99Mn reported in the corresponding period last year, which translated to a 44% growth YoY. Income from units was Rs.154 Mn. The Bank has no exposure to trading equities and has not invested in equity funds as at the reporting date.

Total Operating Income of the Bank rose to Rs.2,575 Mn, and represented a growth of 22% YoY. Total Operating Expenses, on the other hand, were well managed and grew only by 17% YoY to Rs.1,899 Mn during the period.

Pre-impairment profits of the Bank was Rs.677 Mn which was a 37% increase YoY. The impairment charge of the Bank was Rs.158 Mn which was only a 20% increase YoY. This contributed to a strong 42% growth in Results from Operating Activities to Rs.518 Mn. Reflecting consistent performance across the group, share of profits from subsidiaries too grew by 36%.

Profit after Tax (PAT) for the period was Rs.253 Mn and represented a 22% growth YoY. PAT was adversely impacted due to the changes in the tax regulations subsequent to the New Inland Revenue Act enforcement. Effective tax rate for the quarter increased significantly in comparison to 1st quarter. This is mainly due to the withdrawal of tax exemptions on profits made out of SLDB and Corporate Debt Instruments invested prior to the tax changes and withdrawal in the notional tax credits.

The Bank’s loans and receivables stood at Rs.72,241 Mn while the deposits base was Rs.69,824 Mn as at June 2018. The Bank’s focus on asset quality continued through a robust risk management frame work and the implementation of rigorous risk management practices. The net NPL ratio of the Bank was 2.07% at the end of the reporting period.

Total CASA (Current and Savings Accounts) grew to Rs.15,798 Mn which translated to an increase of Rs.1,282 Mn over the 1st Half of 2017. The impressive CASA growth that outperformed the market growth rate, was enabled by focused CASA acquisition strategies driven by the Retail, SME and Corporate Banking segments.

The Bank continued to maintain its robust Capital Adequacy, reporting a Total Capital Ratio of 19.36% as at the balance sheet date.

Despite the challenging macro environment, the Group consisting of the Bank and its two subsidiaries, UB Finance Company Limited and National Asset Management Limited reported a Profit before all taxes of Rs.670 Mn for the period which was a growth of 35% YoY. Total assets of the Group was Rs.123,162 Mn of which 93% was represented by the Bank. The Group maintained a healthy Core Capital Ratio of 18.93% as at the balance sheet date.

Business Performance and Strategic Enablers

The Corporate Banking portfolio of the Bank continued to expand during the period under review with an YTD corporate loans portfolio growth of 7%. The premier cash management solution of the Bank, Union Bank Biz Direct continued to strengthen the corporate banking proposition of the Bank by garnering the trust and confidence of some of the top corporates in the country through customised cash management solutions while supporting the portfolio expansion through CASA and fee income growth.

The SME Banking portfolio of the bank continued to grow, aided by greater portfolio rationalisation and better customer segmentation. In line with its commitment to empower and deliver enhanced value to this vital sector, the Bank introduced a range of value added products and services under the proposition themed ‘Union Bank Biz Partner’. The proposition is linked to the business savings/current account relationship of a client and is offered in three distinctive tiers based on the balance maintained in the respective savings or current account. The three tiers namely, Gold, Platinum and Signature offer unique, customised benefits that include preferential tariffs, special interest rates on fixed/savings deposits, tailor-made banking solutions to meet specific business requirements, special fee waivers on business banking services such as telegraphic transfers, letters of credit, import collection bills and foreign exchange transactions as well as dedicated Account Relationship Manager (ARM) services along with affordable access to Union Bank’s exclusive transaction banking technology. While creating value and giving due recognition to the SME clients of the Bank, this enhanced range of services is expected to enable better relationship management with this nationally significant client segment. Union Bank Biz Partner has been well accepted by SMEs and have shown positive returns during the first six months of its launch, enabling the Bank to on-board a sizable number of mid- tier of SMEs.

The retail banking portfolio continued to be strengthened during the period under review with the retail deposits base growing to Rs.45,388 Mn. A focused strategy with enhanced relationship management on identified segments along with aggressive sales efforts refocusing on segment based products enabled the deposits growth. Continuing to instill the habit of savings and encouraging customers to grow their savings for greater stability the Bank once again conducted the ‘Kalin Avurudu Ganu-Denu’ promotion in April 2018. With enhanced emphasis been placed on mortgage backed lending, the retail loans portfolio of the Bank which consists of Personal Loans, Home Loans and Loans against Property recorded a steady growth during the period under review.

The Treasury which consists of Interbank, Fixed Income and Corporate Sales desks continued to perform well above expectations, making significant contributions to the Bank’s bottom line.

Commenting on the 1st half performance of the Bank, Union Bank’s Director/CEO Mr. Indrajit Wickramasinghe said, “The Bank has continued on its steady growth trajectory within the 1st half 2018, recording noteworthy performance in all its key business and profitability growth areas. We will continue to build on this enhanced momentum to reach the envisioned growth objectives of the year, in line with the three-year strategic growth plan set in motion by the Bank at the beginning of this year.”

Union Bank conducted an Investor Forum on the Bank’s transformational journey and financial performance for the first half of 2018 at the Hilton Colombo recently with the participation and representation of the investment community of Sri Lanka. Leading stockbrokers, financial analysts, venture capitalists and investment advisors were among the distinguished addressees at the well-attended event.

The event was preceded by Union Bank Chairman Atul Malik, Union Bank Director Trehan Gaurav, Union Bank Director/Chief Executive Officer, Indrajit Wickramasinghe, Union Bank Chief Financial Officer Malinda Samaratunga and members of the Bank’s leadership team.

CEO Mr. Indrajit Wickramasinghe sharing his views on the performance of the Bank mentioned that the Bank has embarked on a transformational journey since the landmark investment by TPG Capital in 2014. Mr. Wickramasinghe presented the Bank’s successful journey of growth during the past four years, drawing attention to the post-acquisition achievements that include successful transformation to a fully-fledged commercial bank, sound growth from a well-diversified core banking base, technological value additions, centralised and streamlined operations as well as a honed human capital base.

Addressing the forum, he cited that strong capitalisation, robust risk management, superior asset quality, and sound corporate governance as the key strengths of the Bank. Mr. Wickramasinghe went on to elaborate on the future growth strategy of the Bank, affirming its commitment to continue along the sustainable growth mode that the Bank has now entered into, with a new three year strategic plan set in motion at the beginning of 2018. He mentioned that focus on consumer and SME banking, profitable growth, channel optimisation, economies of scale, portfolio acquisition and the growth of ROE and ROA will be the key pillars of focus of the Bank’s strategy for the next three years.

Presenting the financial results of the Bank for the first half of 2018, Mr. Wickramasinghe expressed confidence in the Bank being driven towards enhanced performance during the year 2018, reaching key milestones in business volumes and enhancing returns.

About Union Bank

With a solid foundation etched with financial stability and international know-how, Union Bank is amongst the highest capitalised private commercial banks in Sri Lanka, offering a full range of products and services to personal and commercial financial sectors.

Union Bank recorded an impressive Profit Before Tax and VAT of Rs 246 Mn, reporting a 47% growth YoY, thus setting the pace for its next growth phase powered by a new three – year growth strategy which includes its subsidiaries.

Core Banking Growth and Profitability

A significant growth in core banking operations contributed to the robust performance of the Bank during the period under review, while prudent cost and revenue management drove growth in profits over the corresponding period in 2017. In a clear reflection of a strong core banking performance over the last 12 months, the Bank’s loan portfolio grew by 16% YoY while the total deposits grew by 21% YoY.

A focused management of yields saw Net Interest Income (NII) of the Bank record Rs 853 Mn during the quarter ended 31st March, which translated to an 11% increase YoY. Both Net Interest Margins (NIM) and spreads showed a marked improvement during the reporting period in 2018 compared to the last quarter of 2017. NIM for the quarter under review would have seen a higher growth if not for the interest expense on investments in units, the income in respect of which has been recognized as a capital gain under trading income.

The Bank continued to make significant efforts to improve its fee and commission income using the key enablers articulated in its strategy. Fee and commission income which mainly comprises of deposit related fees, trade and remittances, loans, cards and other fees increased by 18% to Rs 224 Mn, as against Rs 191 Mn recorded during the corresponding period in 2017. Overall, the growth in fees was mainly a result of processing fees on an expanding loan book and CASA related fees.

Net trading and other income was reported at Rs 221 Mn for the quarter under review. A strong performance by the Treasury function resulted in capital gains of Rs 69 Mn in comparison to Rs 11 Mn reported in the corresponding period last year. Income from investments in units recorded a noteworthy growth of Rs 62 Mn following increased investments in units. The Bank has no exposure to trading equities and has not invested in equity funds as at the reporting date.

Stemming from the overall growth in core banking activities and fuelled by the new three-year growth strategy, Total Operating Income of the Bank rose to Rs 271 Mn, and represented a sharp increase of 26% YoY. Total Operating Expenses on the other hand were well managed and increased by 22% YoY to Rs 938 Mn during the quarter, as against Rs 771 Mn reported in the corresponding period in 2017. Pre-impairment profits of the Bank was Rs 333 Mn and reported a 39% increase YoY. The impairment charge of the Bank was Rs 109 Mn which was a 17% increase YoY.

Profit after Tax (PAT) for the 1st quarter of 2018 was Rs 130 Mn and represented a 37% increase YoY.

The Bank’s loans and receivables stood at Rs 70,736 Mn while the deposits base was Rs 69,038 Mn at the end of the quarter. With the repositioning in 2014, the Bank has continuously improved its asset quality through a robust risk management frame work and the implementation of rigorous risk management practices that include stringent appraisal processes, strong collections efforts and risk based pricing. The gross NPL Ratio of the Bank was 3% at the end of the quarter.

Total CASA grew to Rs 16,523 Mn which translated to an increase of Rs 3,441 Mn over the 1st quarter of 2017. The impressive CASA growth that outperformed the market growth rate, was enabled by focused CASA acquisition strategies driven by the Retail, SME and Corporate Banking segments.

The Bank continued to maintain its robust Capital Adequacy, reporting a Total Capital Ratio of 19.9% as at the balance sheet date.

The Group, consisting of the Bank and its two subsidiaries, UB Finance Company Limited and National Asset Management Limited reported a PAT of Rs 154 Mn for the quarter which was a growth of 28% YoY, supported by a total operating income growth of 22% YoY. Total assets of the Group was Rs 123,883 Mn, of which 93% was represented by the Bank. The Group maintained a healthy Core Capital Ratio of 19.3% as at the balance sheet date.

Business Performance and Strategic Enablers

Propelled by the 3 year growth strategy, the Corporate Banking portfolio recorded a notable performance in the quarter under review. The corporate loans portfolio expanded by 15% YoY, while the deposits base of the corporate banking segment increased by a significant 22% YoY. Corporate Banking continued to deliver enhanced customer value by offering a comprehensive product package supplemented by Union Bank Biz Direct – the state of the art transaction banking solutions platform which is now extended with customized cash management possibilities for leading corporates in the country.

The SME Banking portfolio set off on a continued growth phase in the 1st quarter of 2018 recording a SME loan book growth of 6% YoY, on the back of a new strategic lending approach that focused on strategically important industries and geographic regions. Within the period under review, the Bank introduced Union Bank Biz Partner, a status banking proposition designed to empower the Bank’s SME clientele with exclusive benefits and convenience whilst differentiating itself from the rest.
The retail deposit base too grew notably in 1Q2018 supported by a focused strategy driven through identified key segments. An impressive YoY deposits growth of 32% was recorded under the retail segment.

Amidst intense competition, retail banking accounted for 18% of the overall CASA growth of the Bank. The retail loan portfolio which consists of Personal Loans, Home Loans and Loans against Property recorded a remarkable growth of 90% YoY during the quarter under review.

The Treasury which consists of Interbank, Fixed Income and Corporate Sales desks performed well above expectations making significant contributions to the Bank’s bottom line.

The Bank was once again the first in the industry to release its Annual Report for the year 2017. Union Bank’s Annual Report 2017 was presented in February 2018, under the theme ‘Connect and Grow with us’- which signifies the Bank’s commitment to forge ahead as one of Sri Lanka’s fastest growing commercial banks, while building on the profound stakeholder relationships fostered over the years and leveraging on its strengths of a solid capital base, comprehensive product portfolio, an empowered team, technological finesse and operational efficiency to create sustainable growth opportunities for all stakeholders.
Commenting on the 1st quarter performance of the Bank, Union Bank’s Director/CEO Mr. Indrajit Wickramasinghe said, “The Bank has set the pace for an excellent year of growth with an impressive first quarter performance in 2018 and we will continue to build on this strong balance sheet and profitability to accomplish our envisioned growth objectives for the year. Strengthened by its three-year growth strategy, Union Bank is now ready to take on the next phase of its expansion and growth.”