The first quarter of 2022 witnessed the gradual recovery of economic activity resultant from the setbacks of the COVID-19 3rd wave. However, during 1Q 2022, continued political uncertainty that prevailed, largely impacted normalcy, with public and businesses facing heightened challenges brought-forth by gas and fuel shortages, rapidly rising inflation, FX reserves depletion, depreciation of the LKR and import restrictions. With most COVID-19 related customer relief measures concluding in December 2021, the Banking sector faced continued asset quality pressure. Several monetary and other policy measures were implemented in the first quarter to aid the much-needed economic revival and stability.
In this backdrop, Union Bank’s primary focus was to remain agile and resilient by leveraging on its strong capital position, stringent risk management approach and prudent cost measures to minimise the impacts of these external shocks to its operations and customers.
Core Banking performance and profitability
The Bank recorded an improved core banking performance despite the challenges of a tough operating environment and posted an overall income of LKR 3, 148 Mn for the quarter, which is a 10% increase over the comparative period. Net Interest Income (NII) increased by 11% owing to improved yields from the re-pricing of the asset portfolio and prudent management of interest expenses which lead to an increase in the Net Interest Margin (NIM) by 33 bps. Fee and Commission Income increased by 17% as a result of the higher contribution from Credit and Debit Cards and the increased activity from the trade business. Other Operating Income decreased by 4% due to the lack of liquidity & volatility in the Government Securities market. The Operating Expenses of the Bank increased to LKR 983 Mn, an increase of 8% over the corresponding period, mainly impacted by the depreciation of the LKR and the increase in other expenses.
Considering the stresses stemming from the macro- economic environment, the Bank conservatively provided for impairments including management overlays. The impairment charge for the period was LKR 288Mn an increase of 47% compared to the corresponding period 1Q 2021.
Consequently, the Bank’s Profit Before Tax (PBT) including its equity accounted share of subsidiaries for the period under review remained flat at LKR 316Mn compared to last year due to the deteriorated operating environment and increase in VAT on Financial Services from 15% to 18% in 2022. In comparison to 1Q 2021, the Bank’s Profit After Tax (PAT) was adversely impacted as the corresponding year’s charge was after the one-off reversal of the overprovision made in the previous year. Total Assets of the Bank increased by 10% to LKR 129,878 Mn by 31 March 2022. Loans and Advances grew by 11% to LKR 75,479Mn, whilst customer deposits increased by 9% to LKR 91,226Mn due to the heightened focus on CASA balances across all segments. The CASA ratio remained at a healthy 30.4% as of 31 March 2022. The Bank’s stage 3 loan ratio was controlled at 4.8% aided by strong recovery capabilities and customised re-payment plans
The Bank continued to maintain a healthy capital adequacy position, well above the regulatory requirements and the Bank’s Total Capital Ratio was 14.45% as of 31 March 2022.
The Union Bank Group, consisting of UB Finance Company Ltd., and National Asset Management Ltd., recorded a PBT of LKR 398Mn for the period, a decrease of 5% compared to the corresponding period. Total Assets of the Group was LKR 136,132Mn an increase of 10% with the Bank’s share amounting to over 95%.
Operational Performance
In sync with the private sector credit growth and leveraging its relationship capabilities to seize timely opportunities, the Corporate Banking division posted a noteworthy improvement in its performance during the period and recorded 27% growth in Loans & Advances, 29% growth in Deposits and 13% increase in Commission & Fee Income. The increase in the loan and deposit bases were resultant of the revaluation of the foreign currency book due to the currency depreciation.
Focused efforts to grow foreign currency deposits and strategically managed margins resulted in the Retail Banking sector recording a 6% growth in deposits and a 28%
CASA ratio. The credit card portfolio continued its strong growth momentum during the period under review.
The SME Banking sector was successful in securing the Asian Development Bank (ADB) funding line that will further support the Bank to propel growth amongst entrepreneurs with the primary focus of the credit-line being placed on women entrepreneurs and tea smallholders. The period under review recorded an increase in
Deposits and CASA from the SME banking sector. The Bank’s award-winning cash management solution Union Bank Biz-Direct was the key driver for CASA and facilitated the securing of a significant number of new clients in both corporate and SME sectors.
The Union Bank brand continued to maintain its status within the top 100 brands in Sri Lanka in the latest rankings issued by Brand Finance for 2022. The Bank’s Annual
General Meeting for the year 2021 was concluded on 31 March 2021 and the 2021 Annual Report of the Bank was published under the theme “Persist, Persevere”.
