Higher impairments, taxes drag down Union Bank March profits
Union Bank of Colombo PLC, a licensed commercial bank with an asset base of little above Rs.100 billion, reported an earning of Rs.107.5 million or 10 cents a share for the January–march quarter, a decline of 8 percent from a year ago, as the higher loan impairments and tax liability dented the performance, the interim results released to the Colombo Stock Exchange showed.
The bank managed to guard itself against the fast rising cost of funds during the quarter as its net interest margin slightly rose to 3.16 percent from 3.06 percent in December 2016 because the bank still largely rolls on its equity base.
As a result, the net interest income grew by 61 percent year-onyear (YOY) to Rs.922.3 million.
However, the other banks more or less have to depend on deposits or any other funding source, which generally comes at a higher cost than equity.
In 2014, Culture Financial Holdings Limited (CFHL), an affiliate of TPG, a Usa-based leading private investment firm, invested US $ 117 million or Rs.15.44 billion in return for a 70 percent stake in the bank.
As a result, both Tier I and Tier II capital adequacy ratios of the bank stand around 22 percent, well above the regulatory minimums of 5 percent and 10 percent under each.
Meanwhile, the bank grew its gross loans and advances by little above 10 percent or Rs.5.8 billion to Rs.61.93 billion.
The deposits also grew by a similar percentage or Rs.5.4 billion to Rs.57.2 billion, largely matching the deposits growth with the growth in the loans.
However, the low-cost deposits measured by the current and savings account (CASA) ratio declined to 22.7 percent from 23.9 percent three months ago.
The provisions made for the possible bad loans rose quite substantially, of which the specific provisions rose by 252 percent YOY to Rs.101.8 million.
The asset quality also took some hit as the gross non-performing loan ratio slightly rose to 2.73 percent from 2.40 percent in December 2016.
It is not unusual for the asset quality to get hit when the interest rates rise substantially because fixed income borrowers find it challenging to service their loans.
This gets exacerbated when the disposable incomes also get impacted from the higher taxes and inflation, which is running at multiyear highs.