The third quarter of 2022 witnessed continued challenges to the Banking sector amidst mixed sentiments and subdued economic activity despite a staff level agreement with the IMF. The economy continued to depend on the banking sector for immediate respite for the import of essentials including fuel. Progress and credit growth of Banks continued to be impacted due to the weakened rupee, forex scarcity, interest rate increases and the contraction in imports due to temporary suspensions.
Against this backdrop, the Bank continued to sustain a stable core banking performance and selectively pursued business opportunities within a robust risk approach and prudently managed the portfolio and collections whilst supporting customers and businesses to revive from the setbacks of a challenging period.
Core Banking performance and profitability
Despite the challenges of a hard-hit operating environment, the Bank stood resilient and recorded an enhanced core banking performance with an overall income of LKR 5,343 Mn for the third quarter which is an increase of 109% over the comparative period. For the 9 months ended 30 September 2022, the Bank’s overall income increased by 55% to LKR 12,769 Mn.
Net Interest Income (NII) increased by 58% as a result of improved yields from the repricing of the loan portfolio and treasury assets. Prudent management of interest expenses lead to an increase in the Net Interest Margin (NIM) by 83 bps.
Net Fee and Commission Income increased by 53% aided by domestic and international fund transfers, ATM transactions, credit and debit cards, remittances, and the increased activity from the trade business. Other Operating Income also increased by 23 % aided by foreign exchange income and gains.
Operating income before impairments was LKR 1,977 Mn in the 3rd quarter, an increase of 45%.
The Bank continued to provide for increased impairments and management overlays as a result of further challenges to the settlement of loans and recovery due to continued pressures faced by impacted borrowers. The impairment charge for the 3rd quarter was LKR 591 Mn, an increase of 324% compared to the corresponding period.
Despite prudent cost management initiatives, the total operating expenses of the Bank increased to LKR 1,088 Mn, an increase of 18% over the corresponding period, impacted by the Rupee depreciation and the increase in utility tariffs etc.
Consequently, the results from operating activities for the quarter stood at LKR 298 Mn and the Bank’s Profit Before Tax (PBT) including its equity accounted share of subsidiaries for the third quarter was LKR 93 Mn and the Bank’s Profit After Tax (PAT) was LKR 74 Mn. For the 9 months ended 30 September 2022, the results from operating activities were LKR 852 Mn and the PBT was LKR 397 Mn., while the PAT was LKR 227 Mn.
The total Assets of the Bank increased by 15% to LKR 136,715 Mn by 30 September 2022. Loans and Advances grew by 11% to LKR 75,148 Mn, whilst customer deposits increased by 13% to LKR 93,876 Mn due to the focus on sourcing CASA and term deposits across all segments. The CASA ratio was 23.7% as of 30 September 2022. The Bank’s stage 3 loan ratio stood at 7.29%.
The Bank continued to maintain a strong capital adequacy position, well above the regulatory requirements and the Bank’s Total Capital Ratio was 17.02% as of 30 September 2022. The rating of the bank was reaffirmed at BBB-(lka) with a Negative Rating Watch by Fitch in September 2022 due to the stresses in the operating environment.
The Union Bank Group, consisting of UB Finance Company Ltd., and National Asset Management Ltd., recorded a PBT amounting to LKR 130 Mn for the quarter and LKR 525 Mn for the 9 months ended 30 September 2022. The Total Assets of the Group was LKR 143,910 Mn an increase of 16% with the Bank’s share amounting to over 95%.
Operational Performance
The Corporate Banking division focused on providing customised financial solutions to take advantage of new business opportunities in selected segments despite the prevalent economic backdrop and strengthened existing client relationships whilst prudently managing the loan portfolio and credit quality. Corporate Banking Loans & Advances grew by 32% and deposits by 29% year to date.
With the markets signaling a positive momentum, the Treasury prudently managed the critical liquidity requirements of the Bank, both in LKR and FCY/USD whilst managing the Government Debt Security Portfolios to support the continued stability of the overall banking operations. The Bank Notes Operation of the Bank recorded the highest ever currency repatriation during the quarter with a record shipment in the month of September. Timely repricing of the Government Debt Security Portfolios aided the Bank to strengthen its Net Interest Income (NII) position. With USD liquidity issues faced by local banks marginally easing off, the Bank effectively managed its foreign currency cashflows. In line with the Bank’s risk appetite in the current economic landscape, the Bank does not hold any International Sovereign Bonds (ISBs), and the Sri Lanka Development Bonds (SLDB’s) held by the Bank also have short term maturities with LKR flexibility for liquidity.
The Retail Banking division aggressively canvassed for new client relationships with focus on time deposits and CASA taking advantage of the rise in interest rates and recorded 8% growth in deposits and a CASA ratio of 26%. Union Bank credit cards focused on providing cardholders relief and respite through balance transfers, zero interest instalments and loan on card plans and offers on e-commerce platforms to provide convenience. Discounts and savings were offered on essentials and utility bill payments amongst others, whilst prudently managing payments and collections. The Bank’s digital platforms continued to provide greater banking convenience to customers.
As a result of the contraction in private sector credit growth and lending opportunities, during the quarter the SME Banking division focused primarily on cautiously managing the loan portfolio and collections whilst expanding lending to existing customers and assisting them to sustain and reinvigorate businesses. The Asian Development Bank (ADB) funding line secured in early 2022 continued to support the Bank’s lending initiatives. SME Banking deposit base increased by 10%. The Bank’s award-winning cash management solution Union Bank BizDirect continued to be a key driver in sourcing CASA and facilitated the securing of a significant number of new clients.
Reaffirming its corporate ethos and values, Union Bank was ranked amongst the ‘Most Respected Entities in Sri Lanka 2022’ the annual ranking publication conceptualised by LMD and conducted by Nielsen IQ. The Bank continued to maintain a positive sentiment amongst employees and in its continued efforts to create employee well-being and engagement, successfully concluded several initiatives including a digitally driven walk and win fitness challenge that received overwhelming participation from employees across the Bank network.
Ends.
