EARNINGS REVIEW: UNION BANK PLC, ONCE BIG, ONCE STRONG, ONCE UNRELIABLE..?

Union Bank Released its half year earnings last week about 3months after the end of the period or just at the close of business for the third quarter of 2012 financial year. Nevertheless, the bank released its half year results showing a return to profitability after a period of unsustainable losses. According to the Group Managing Director, Funke Osibodu, “The performance is attributed to full re-capitalisation, injection of new capital; support from AMCON with the clean- up of bad loans; faster service delivery to customers and other growth spurring polices of the Osibodu led management”. But could this be the reason why?

Revenue

The Bank posted Gross Earnings of N58billion for the first half of this year as against N67.8billion when compared to the same period last year. Net Interest income however rose marginally by 2.2% to N34.7b when compared to the same period last year despite a drop in gross interest income. This was achieved through an impressive 42% drop in interest expense during the period. This delivered an interest margin of 78% for the period better, a margin that is probably only bettered by their old foe, First Bank. Loan Impairment also dropped to N1.2billion as against N45billion in the same period last year, bringing their’s below industry trends. First Bank, GTB, Access Bank and Stanbic had impaired loans of N9b, N2.4b, N1.8b, N1.2b, respectively in the same period.

Operating Profit

The Bank posted an operating profit of N12.4billion for the first half of this year signifying a return into profitability after posting a loss of N61.5b in the same period last year. Much of the bank’s profits is as a result of a near 75% cut in operating expenses (excluding personnel and depreciation cost) dropping from N47b in H1 2011 to N12b H1 2012.

Bottom Line

In as much as it is important to hail the bank’s return to profitability, its also important to note that the bank’s return to profitability was driven by cut back in bad loans (as a result of AMCON cleaning up) rather than any form of increase in revenue. In fact, without the huge losses precipitated by written down loans in 2011, this H1 result may well have been a disappointing result when compared to last year’s result. Interest Income for example dropped 12% this period when compared to last. Operating income (without providing for loss on loans) dropped 5% from N51billion in H1 2011 to N48billion H1 2012. All of this in a period where the bank’s balance sheet has seen improved stability and its peers in the industry revel in the windfall that is high interest rate on government securities. Much of this though, may point to the seeming inactivity in the banks core operations. For example, loans and advances to customers remained flat with just a modest growth of 0.7%. Customer deposits also only just increased 10% to N555b in an industry with the big five posting well over one trillion naira in deposits (first bank had over N2tr) at the end of June 2012. Still a lot of catching up to do if they are to remain competitive going forward.

Apart from the satisfaction of finally attaining profitability another consolation may well be the fact that when it comes to returns on asset, the bank is well within industry trends. Despite not growing its loan portfolio it is still able to generate returns in line with its assets just as many in the industry does. There is significant room for improvement in Union Bank and a potential to beat expectations by a wider margin. As for shareholders who have been comatose by losses in recent times a respite seems near and may now begin to believe in a bank that was once reputed to be big strong, strong and more recently unreliable. Share price closed at N7.51 representing a weekly drop of 17.74%.

UPDATED – 1/10/2012 (Share price has declined rather than increased)