Union Bank of Nigeria Plc achieved reasonable stability in earnings performance at the end of Q3 operations with recovery of approximately N13 billion of impaired loans and significant increase in non-interest income.
Management’s aggressive push on loan collections paid off with a record 163% increase in loan collections year-over-year at the end of September 2021. Powered by Loan Collections , non-interest income increased by 46% to N42 billion at the end of the period.
The strong growth in non-interest income offset a drop of around 7% in interest income over the same period and enabled a slight increase of 1.4% in the group’s gross income at the end of the operations of the third trimester.
Loan collections proved to be the largest non-interest revenue line for the bank at the end of the third quarter as well as the second largest revenue line after interest revenue. By offsetting weak interest income, the bank’s management created stability in earnings performance despite volatility, increasing the ability to absorb rising costs.
Emeka Okonkwo, the bank’s group chief executive, said his bank’s performance reflected its resilience in a difficult business environment. He said the bank aims to grow its core business by strategically focusing on meeting customer needs.
This move is clearly paying off through revenue diversification, with interest income increasing and non-interest revenue growth being sustained quarter after quarter. Interest income increased in the last two quarters of the year, rising 14% quarter-on-quarter to over N32 billion in the third quarter.
Third-quarter interest income is 40% of the nine-month figure of around N80 billion at the end of September. This indicates reasonable progress for the bank in overcoming the margin challenge on low-risk assets.
However, a 25% drop in interest income in the first quarter led to a 6.7% year-on-year decline at the end of the third quarter.
Further improvement in interest income with improved margin on risky assets is expected for Union Bank in the last quarter, which could see a moderate overall improvement over the full year.
Management plans to continue its revenue diversification campaign as well as the loan recovery initiative in the future. The effort is aimed at mitigating the impact of relatively low risk asset margins on the bottom line.
The revenue stabilization effort is supported by cost control measures which are also bearing fruit. The bank achieved substantial savings in two main cost areas: loan impairment charges and operating expenses.
The bank’s loan impairment charges fell nearly 56 percent year-on-year to N2.7 billion at the end of the third quarter. This is a direct result of aggressive loan collections, which have improved the overall quality of risky assets and reduced loan loss charges.
Operating expenses are generally under control with a reduction in personnel expenses and a moderate increase in other expense items. Total operating cost only increased by 3% to N55 billion during the review period.
The bank’s management, however, is unable to contain interest charges, which have been on the rise this year due to a general trend in the banking industry. The cost of funds rose 45% quarter-on-quarter in the third quarter to N21 billion. This figure represents 43.5% of the closing interest charges of N48 billion at the end of the third quarter.
Year-over-year, however, interest expense increased by a significantly smaller margin at less than 11%. The rise in the third quarter is mitigated by the declines recorded in previous quarters.
With lower interest income, net interest income fell 24.5% to stand below N32 billion at the end of the third quarter.
Union Bank ended third-quarter trading with the group after tax on profit of N13.4 billion, down about 11% year-on-year. The net profit margin fell from 12.4% during the same period in 2020 to almost 11% at the end of the third quarter in September 2021.
The loss of profit margin and lower earnings over the period reflect the revenue constraint and the upward pressure on interest charges. The rise in the cost of funds should continue throughout the year, but a further improvement in interest income in the last quarter should also dilute the increase in interest charges at the end of the year.
Further loan recoveries and lower loan loss expenses – which are also expected to continue in the final quarter – could improve profit margin and bolster Union Bank’s full-year bottom line.