Union Bank closed last year’s operations with a profit figure that is significantly down from the third quarter level. While the bank reported an after tax profit of N7.58 billion in the third quarter, it closed the year with a net profit of N5.46 billion. The last quarter disappointment was a repetition of the preceding year’s earnings records.
An unpredictable earnings performance has been the feature of Union Bank’s operations for the third year running. The promises held by third quarter profit numbers have been rubbished each year by final quarter developments since 2011. Such wide swings in the bank’s earnings performance has raised the risk level of its equities.
Profit from total operations came to N5.46 billion for Union Bank at the end of 2013. Based on the revised figures for the preceding year, net profit improved by 32% in the year. Profit growth was much stronger from continuing operations at 53.7% to N6.07 billion from a revised figure for 2012.
Actual profit figure from continuing operations is significantly off our full year projection of N10.4 billion for Union bank in 2013. The bank lost track with its third quarter growth rate upon which full year projection is based.
The ability to convert revenue into profit collapsed in the final quarter. Net profit margin fell from 9.5% at the end of the third quarter to 5.0% at full year, one of the lowest profit margins in the banking sector in the year. Its revised profit figure for 2012 indicates an improvement in net profit margin from 3.4% in the prior year.
The loss of profit capacity in the third quarter happened against an improvement in revenue growth during the period. Revenue growth accelerated in the final quarter from N79.85 billion at the end of the third quarter in September to N121.40 at the end of the financial year. This means that well over one-third of the bank’s gross income in 2013 was earned in the final quarter.
Gross earnings improved by 3.6% in 2013, showing a major slowdown from the growth of 37.7% in 2012. The bank managed to sustain its recovery in revenue for the second year in 2013. Its gross income had fallen by almost 35% in 2011 from the peak figure of N130.4 billion in 2010. Actual revenue figure for the bank in 2013 was 12% above our full year projection of N108.4 billion for Union Bank in 2013.
The modest growth in revenue at full year was exclusively accounted for by other operating income, which rose more than one and half times in the year at 152% to N15.60 billion. Interest income declined by 5.1% to N81 billion and net fee and commission income also went down by 2.2% to N9.19 billion. Net trading income was a loss of N303 million in 2013, a drop from N697 million in the preceding year.
The poor profit performance of the bank reflects adverse movements in the key income and expenditure lines. The decline in interest income happened against a major expansion in loans and advances at 43% to N229.54 billion. Asset yield therefore declined considerably during the year.
Interest expenses increase by 4.3% to N23.58 billion against a decline in interest income. Net interest income therefore declined by 8.6% to N57.42 billion during the year. The increase in interest expenses was against a decline in deposit liabilities of the bank during the year. At N529.50 billion, total deposits declined by 6.7% during the year. While the average yield per naira of assets of the bank declined, the average cost of the naira of deposits increased.
By far the biggest adverse impact on the bank’s profit capacity in the year came from loan loss expenses. Provision for credit losses soared by 679% to N12.07 billion in 2013. This led to a drop of 25.9% in net income from lending operations of the bank to N45.36 billion. Provisions for other financial assets also surged up from only N218 million in 2012 to N4.74 billion in 2013.
Two favourable developments on the side of cost helped the bank to counter some of the adverse developments on the income statement during the year. The first is a drop of 17.9% in total operating expenses, which amounted to N59.96 billion at the end of the year. The development saved much revenue for the bank in the year and brought down operating cost margin from the excessive level of 62.3% in 2012 to 49.4% in 2013.
The other favourable cost behaviour was tax expense, which recorded a credit of N933 million in the year against a charge of N391 million in the preceding year. This made the difference between the increase of 18.4% in pre-tax profit and a growth of 53.7% in after tax profit from continuing operations during the year.
Inability to grow profit is holding the bank back from healing its deficient reserve account. Its equity base remains punctured by a retained deficit of N274.87 billion. Rather the decline expected, the figure increased slightly from N274.30 billion in the preceding year. With a flat growth in asset base, equity resources are considered quite adequate at 19.9% of total liabilities. This is one of the highest equity ratios in the banking industry.
The bank earned 36 kobo per share from continuing operations in 2013 against 23 kobo in the preceding year. Dividend holiday has run for five years now since the bank paid the last dividend of N1.0 per share in 2008. Cash dividend is not anticipated until the bank is able to wipe off its huge retained deficit. Progress in this direction requires a strong and sustained growth in profit, which in turn depends on achieving strong revenue growth and a major gain in profit margin.