Union Bank of Colombo PLC posted strong financial performance for the three months ending December 31, 2021, with improvements in asset quality and margins, but the extremely anemic growth in the company’s loans and advances raised serious concerns. questions about his overly conservative business strategy.
The bank reported profit of 16 cents per share or 170.9 million rupees for the October-December quarter, up from 5 cents per share or 48.8 million rupees in the same period in 2020. by 250%.
The robust profit was driven by a 44% growth in net interest income in the quarter to Rs 1.49 billion as the bank benefited from the faster decline in interest charges compared to the fall in income of interests.
In line with the industry, the bank increased its net interest margin to 3.53% from 3.16% as the bank saw its low-cost deposits reach 30% of total deposits, while taking advantage of the time lag between the revaluation of assets and liabilities.
The bank also generated fee income worth Rs 270.7 million, up just 4%. What has raised eyebrows among analysts in the banking sector is the too weak growth recorded by the bank in its loan portfolio.
The bank’s lending increased by 570 million rupees for the year as a whole and in the December quarter the company recorded a massive decline of 2.16 billion rupees in its loans.
Sri Lanka had the lowest interest rates in history in 2020 and 2021 and the banking sector in 2021 triggered a record Rs 811 billion in credit to the private sector alone.
Union Bank has been overly conservative on growth, despite sitting on a bank’s largest cushion of capital relative to its risky assets.
For example, at the end of December 2021, the bank’s Tier I and Tier II capital ratios stood at 15.51% and 16.47% respectively, while the regulatory minimums were 8% and 12% respectively.
The company’s return on equity was 4.25% at the end of 2021, compared to 3.24% a year ago.
Meanwhile, for the year ended Dec. 31, 2021, the bank reported earnings of 77 cents per share or Rs 836.8 million, up 32% from 58 cents per share or Rs 632.7 million. rupees in 2020. The bank set aside Rs. 1.14 billion for the year as provisions for possible bad debts and other financial asset losses, up 20%.
However, the bank reported a gross non-performing loan ratio below 5.65%, down from 6.05% at the start of the year.
Culture Financial Holdings Limited, part of US private equity firm TPG, has a 70.84% stake in Union Bank.