The second quarter of 2022 witnessed a challenging macroeconomic outlook that resulted in the banking sector facing multiple headwinds with the impact of the sharp rupee depreciation, rising interest rates, an upward revision of taxes, higher impairments, supply constraints and demand side policies undertaken to dissuade imports, which lead to impeding credit growth for Banks.
Against this backdrop, Union Bank remained agile in prudently managing and controlling its existing portfolios and customer bases and implementing stringent recovery measures whilst ensuring uninterrupted banking services to 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 7,426 Mn for the first half, an increase of 31% over the comparative period.
Net Interest Income (NII) increased by 19 % as a result of 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 57 bps.
Net Fee and Commission Income increased by 24% 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 141 % aided by foreign exchange income and gains.
Operating income before impairments was LKR 3,575 Mn, an increase of 18% as at 30 June 2022. Due to the delays in loan settlements brought forth by the impacts of the adverse macro-economic conditions, the Bank continued to provide for increased impairments and management overlays as a prudent measure. The impairment charge for the period was LKR 961 Mn, an increase of 120% compared to the corresponding period.
Despite prudent cost management initiatives, the total operating expenses of the Bank increased to LKR 2,059 Mn, an increase of 14 % over the corresponding period, mainly impacted by the depreciation of the Sri Lankan Rupee and consequent increase in fuel expenses etc.
Consequently, the Bank’s Profit Before Tax (PBT) including its equity accounted share of subsidiaries as at 30 June 2022 was LKR 304 Mn and the Bank’s Profit After Tax (PAT) was LKR 152 Mn. .
Total Assets of the Bank increased by 11% to LKR 131,744 Mn by 30 June 2022. Loans and Advances grew by 10% to LKR 74,796 Mn, whilst customer deposits increased by 16% to LKR 96,779 Mn due to the focus on sourcing CASA and term
deposits across all segments. The CASA ratio was 27.5% as of 30 June 2022. The Bank’s stage 3 loan ratio stood at 6.89%.
The Bank continued to maintain a healthy capital adequacy position, well above the regulatory requirements and the Bank’s Total Capital Ratio was 16.34% as of 30 June 2022.
The Union Bank Group, consisting of UB Finance Company Ltd., and National Asset Management Ltd., recorded a PBT amounting to LKR 395 Mn for the period up to 30 June 2022. Total Assets of the Group was LKR 139,428 Mn an increase of 12% with the Bank’s share amounting to over 94%.
Amidst the challenges, the Corporate Banking division prudently managed its loan portfolio whilst maintaining the credit quality and recorded a 29% growth in Loans & Advances and 39% growth in Deposits.
The Treasury was able to re-align the impacted Government Securities portfolio at a much faster pace, through focused investment strategies and timely execution of auction pricing on short term T-Bills. Further, it was instrumental in providing the much-needed support to importers by way of foreign exchange with focus on USD and prioritizing of trade payments for essential items such as food, pharmaceuticals, fertilizer, fuel and student payments.
In sync with the interest rate revisions, the Retail banking sector focused on new customer relationships by expanding its deposit base through time deposits and recorded a 14% growth in deposits and a CASA ratio of 27.5% during the second quarter. In addition, customer convenience was further enhanced through the Bank’s mobile banking app UBGO as well as its Agent Banking platform by facilitating deposits, loan payments and credit card payments at selected SLT Mobitel and Cargills Foodcity outlets.
The SME Banking sector was successful in securing the Asian Development Bank (ADB) funding line in 1Q 2022 and through this credit line continued its focus on new lending to support growth amongst women entrepreneurs and tea smallholders. In addition, a schematic plan was implemented to support the highly impacted SMEs with re-scheduled facilities and payment schemes. Further, the continued focus was placed on sourcing CASA through the Bank’s cash management solution Union Bank Biz- Direct to new clients in both corporate and SME sectors.