Union Bank moves to ease funding cost, says it’s on track to meet 2019 guidance

• Added N43 billion loans in first half • Strengthen Capital Adequacy Ratio to 19.4%, LDR 63% • Diversified exposure from oil & gas, power and energy sector • Share price increase 25% year to date

Beyond M&A Frenzy, Union Bank CEO says Balance Sheet in Much Stronger Position Now
Union Bank

Union Bank of Nigeria Plc has said that the bank would bring down its funding cost by re-pricing expensive deposits in the coming months. The management said this at its conference call with analysts recently.

Speaking at the result presentation, Joseph Mbulu, the Chief Finance Officer said that the bank is on track to meeting its 2019 guidance.

At the market capitalisation of N203.845 billion, Union Bank share closed at N7.00 on Friday as year to date return hit 25%. The bank share opened the year at N5.60 having peaked at N7.50.

According to Mbulu, he said deposits reprice will help to reduce the bank’s cost of funds having noted that right issue is not in its purview right now. Union Bank however said there is a N100 billion bond program which is working currently.

The management stated that at half year, the bank is on track to meet the guidance for the areas indicated. These include loan growth, NPL ratio, return on equity, return on assets and the cost to income ratio.

Mbulu who led the result presentation said; “there are a few areas where we have to work harder, and we will work harder to meet the guidance”.

“One is deposit growth, and we will continue to drive the value chain. And with increased liquidity in the system, repricing of deposits, we should work harder to get close to meeting target, closing this gap.

The net interest margin is a timing issue; we were repricing our liabilities, but basically replacing expensive deposits return with lower price deposits. And that should help us close this gap, while we look at loans with better margins within our ecosystems”, Mbulu said.

Meanwhile, analysis of the Union Bank’s number shows that its capital adequacy ratio pitched at 19.4% compare with 16.4% brought forward into the year. The feat which the bank said was achieved on the back of its successful Tier 2 issue.

Then, non-performing loan (NPL) ratio declined to 7.3% for the bank as against 8.1%.

The management said that it has reduced the bank’s share of oil and gas and power sector in its loan portfolio, while expanding the retail, SME and portion of other critical segments in the economy.

The management stated that, “It’s a focus of ours in 2019, and we’re working hard towards that”.

In dissecting the performance scorecard, Mbulu said, “Our total equity of N239 billion, assets NGN 1.7 trillion, ATM were 1,000, debit cards about 4 million, POS 6,700, our customer base is 4.9 million.

He stated that customer growth achieved by the bank over the last 4-5 years is 28%. And this is driven by the digital platforms.

Tracking the growth trajectory, mobile banking grew 111%, online banking has grew by 95% on average over the last 1.5 years and our debit cards have grown by 37% on the average over the same period.

At the presentation, the management stated that 96% of the bank’s transactions are driven by these platforms, leaving the branch to get over 4%.

“On the mobile banking platform, we see huge growth both in the user base, the volume and the value of transactions…we are not deploying ATMs for the fun of it”, Mbulu reckoned.

“Customer acquisition drive continues with an increase of 400,000 customers over the last 6 months. We’re keen on gaining market share, higher market share of our customer base with our innovative products”, the management stated.

To achieve operational efficiency, UBN said it has launched Long-term Efficiency Acceleration Program (LEAP) to reduce our cost base in a sustainable way and then influence our future spend in Nigeria going forward.

As a result of this, the bank said it has seen a 4% year-on-year drop in total expenses, driven by a 31% decline in major overheads and a 5% drop in staff expenses.

“We will continue to optimize branches for better efficiency, providing new formats that are appropriate to our customer base, and there are basically different needs across the country”, the management stated.

On its N100 billion program, the management said that the bank has continued to tap the market as part of the bond program.

“We did a NGN 30 billion bond, which was fully subscribed, testament to the confidence the investor public has for the bank”, the management said.

Mbulu said, “On the commercial front, we have solid platforms. I spoke to the reliability and the trust that we’re seeing from our customer base. Our transactions grew from NGN 33.9 billion in the first half of 2018 to NGN 41.8 billion in 2019 first half.

“Gross earnings declined by 9%, and this is driven by lower loan portfolio. If you remember, last year, we did a significant write-off from our loan portfolio, and we’re just rebuilding that loan book.

“So the impact is still here, and we will see a complete reversal by the end of the year. Net revenues after impairment are down by 2% and pretax profit up 4%.

“Cost to income ratio is down from 77% in the first half of 2018 to 76.3%, and we will see that trajectory continue. Deposits growth of 4% while loans have grown by 8% and we’ll continue to do that to replace the loans we wrote off 2018”.

Speaking on decline NPL, Mbulu said that interest income definitely led that reduction because the loan book is less than it was in 2018.

“We basically booked N43 billion new loans in first half 2019, and we’ll continue to do that. Our interest income was down 11% on the back of a lower interest environment. And we also, of course, have a lower trading income.

“We recently reduced rates of treasuries and other treasury deposits. However, we see recoveries grew by a whopping 169% on the back of aggressive recovery, which we embarked upon in 2018 when we wrote off the significant amount of loans”, he reckoned.

On operating expenses, the bank saw reduction in staff costs, which came down 5% but stated that management has no control on NDIC, AMCON charge but further reduction in other overheads was achieved.

The detail of its overheads bucket are general expenses includes things like cleaning, entertainment, stationery, postage, telephone. And that came down close to 46%.

The management said the bank achieved reduction of 12 -19% in repairs and maintenance, fleet and vehicle expenses of 17%, accommodation and travel 42% on the back of aggressive cost management program.

On net interest margin which came down 100 basis points, management stated that funding cost went up 20 basis points on the back of some repricing and the timing issue.

“This will reverse in the next very few months, as we begin to reprice expensive deposits”.

The bank said that loan margins are thinning. We will leverage our value chain to make sure we can book loans with higher margins in a more secured structure.

On its total loans to customer deposits, management said the bank is at 63% at the end of June. It further stated that liquidity ratio settled at 38% and is way above the regulatory guidelines.

The bank recorded decline in the oil and gas proportion of our loan portfolio, from 38.2% at the end of 2018 to 34.6% first half 2019. In the power and energy sector, it recorded a decline from 7.7% to 7.2%.

“These declines are on the back of our focus in growing the retail portfolio and other segments that are growth segments in Nigeria today. We will keep this focus and chose an improved distribution of loan”, the bank stated.

Reacting to analysts questions about significant increase in placement with other banks as well as CBN restriction on banks’ participation in government’s bond would affect the bank, Ikechukwuka Emerole, Head of Treasury said for the placements, which will typically follow the general trend in the market, depend on where there’s surplus liquidity or deficit of liquidity will typically put money in the market.

“But most of these funds are secured. And I think if you look at the trajectory of the market from last year to this year, there have been quite some bits of movements in the rate volatility over this period.

“And so we just take advantage of where we think there’s an opportunity to [off lay] liquidity in the market. I think that’s what every other treasurer or treasury will do”, Emerole added.

He said that in terms of restriction in auction, there’s no official restriction for now.

“I think at the end of the day, in line with the strategy of the bank, if you look at what we’ve done, we’ve actually [led this] finer asset book into different parts of the market in terms of whether its SME loans or other retail part of the market.

“That’s where we’re going to see a lot of activity. So even if that restriction comes, I think we’re well covered for that. If you look at the trajectory of the asset book, we’ve grown from date, and there’s a still plan to grow that part of the book.

“It also speaks to increasing the margins that we have on our balance sheet. So I think for that, we’re pretty fine with that, wherever the market or whatever regulation comes out. I think we have the balance sheet to actually manage whatever changes coming into the market on the regulatory side”, Emerole stated.

On recoveries and non-performing loan, Kandolo Kasongo, the Chief Risk Officer & Executive Director said the oil and gas portfolio has been reduced. And some of it is linked effectively to the payment of the subsidies.
“We received payment of the first tranche for the end of last year, early this year. There’s a second tranche that is on its way.

“And this was the sticky part of the portfolio. Therefore, we would expect to continue to see some repayment of the sticky part, but we are not out of that market.

“We will continue to take the opportunities and to finance the oil and gas portfolio, but within our portfolio limit”, Kasongo added.

cc:Julius Alagbe