Union Bank’s profit weakness in the first quarter has intensified in the second quarter. The bank closed the first quarter with a drop in profit and has ended the second quarter with a further drop and a rapid slowdown in the overall growth rate. Nevertheless, the full year profit outlook remains promising with after tax profit already ahead of the full year figure for last year.
While second quarter profit figure is down by almost one-third year-on-year, the full year profit last year was 22% below the first quarter figure for the same year. That provides an opportunity for growth for the bank this year but as well leaves a big chance that the interim figures for the current year may also drop at full year. Over the past three years, the bank has not been able to maintain the interim profit growth rates to full year.
Will the current growth rate in profit be lost in the second half of the year, as happened in the preceding years or will it be maintained to full year is the big question mark on Union Bank in the current financial year. If the current growth rate is maintained to full year, the bank looks good to double profit in the current financial year. If the current growth momentum is lost, the bank will be showing an unpredictable earnings pattern for the fourth year running.
The bank closed the second quarter with an after tax profit of N6.34 billion. This represents a major slow down in the growth rate compared with the first quarter net profit of N4.95 billion. It is also a drop of 32.5% from the corresponding figure in the preceding year. Net profit margin has declined from 16.7% in June last year to 12.8% at the end of the second quarter. It is also down from 19% recorded in the first quarter.
If the second quarter growth rate is maintained to full year, the bank is expected to close the year with a net profit of N12.9 billion. That will be more than double the net profit figure of N6.07 billion the bank posted in 2013. After tax profit had grown by 53.7% in 2013, being a recovery for the second year from a huge loss of N82.55 billion in 2011. With a bigger loss of N281.2 billion in 2009, the bank carries a large retained deficit in the capital account.
The drop in profit in the second quarter follows weak revenue performance and increase in operating cost. The revenue weakness is likely to follow the bank to full year.
Gross income amounted to N49.59 billion at the end of the second quarter, which is a decline of 11.7% year-on-year. Based on the second quarter growth rate, gross income is projected at N100.2 billion for Union Bank at the end of 2014. That will be a drop of 17.5% over the revenue figure of N121.40 billion it earned in 2013. It had improved gross income by 3.6% in 2013.
The revenue outlook for the bank indicates that the recovery momentum seen in the last two years might be lost this year. The bank has seen two years of recovery in gross earnings after a major drop in 2011. Inability to grow revenue amid increasing operating cost will pose a major difficulty for Union Bank in the current financial year.
Revenue weakness is led by fee and commissions income, which dropped by 21% to N4.62 billion in the second quarter. Interest income also went down by 11.1% to N36.63 billion during the same period. An increase of 18.5% in other operating income to N5.28 billion moderated the drops in the main income lines.
Another favourable development is in respect of provisions for credit losses, which changed from a net provision of N240 million last year to a net write back of N503 million this year. There was also a major drop in impairment charge for other assets during the review period.
Operating expenses however grew by 6.8% to N29.42 billion against the decline in gross income. With that, operating cost claimed an increased share of revenue during the period. Operating cost margin rose from 49% in the corresponding period last year to 59.3% at the end of the second quarter. This is one of the highest operating cost margins in the banking sector.
Interest income declined by 11.1% to N36.63 billion during the period while interest cost was flat at N11.55 billion. This is despite an increase of 13.7% in the loans and advances portfolio to N261.08 billion from the closing figure in 2013.
Other major developments in the balance sheet within the first six months of the year include a drop of 50.5% in assets held for sale to N25.59 billion and a decline of 2.3% in asset base from the over one trillion naira mark at the end of last year to N979.73 billion at the end of June. The bank’s customer deposit base closed flat at N480.76 billion during the same period.
The bank’s equity base is slightly improved at N203.50 billion. The profit realised in the second quarter has reduced the huge retained deficit to N269.26 billion.
Earnings per share came to 39 kobo at the end of the second quarter, down from 64 kobo in the corresponding period last year. Earnings per share is expected to be in the region of 76 kobo for Union Bank at the end of 2014. This will be more than double the 36 kobo per share the bank recorded last year.
Full year profit prospects for the bank will be determined by some unpredictable developments in the second half of the year. These include provision for credit losses, which could swing from the net write back position in the second quarter to significant net provisioning at full year. Also, revenue shortfall could intensify and depress profit margin further. Operating cost margin could rise further to weaken profit capacity. Any of these likely events could undermine profit performance in the second half of the year.
