Union Bank of Nigeria Plc stepped out into a new lending venture in 2020 but that led to more credit loss expenses than it built income — yet, it has now recorded its best profit margin at any time since 2015.

The bank added some N46 billion in new lending in the third quarter to close the nine months of the year with a net credit portfolio of N627 billion.

The increased lending activity resulted in a net loan impairment charge of N1.9 billion in the quarter while interest earnings dropped by 9 percent quarter-on-quarter. This is a bad turn from a net loan impairment write back of N243 million to the charge over the same period.

The bank’s management grew the loan portfolio for the second year in 2020 from a drop it recorded in 2018. Its net credit portfolio had expanded by 14 percent over the closing figure in 2019 at the end of September 2020. It grew by 16 percent in 2019 — the highest loan growth rate for the bank in three years.

Net credit loss expense for the three quarters of the 2020 financial year summed up to N6 billion. This is against a net write back of N4.7 billion in the third quarter of 2019. The effect of this development on the income statement is considerable.

Net loan impairment expenses claimed 14.5 percent of net interest income at the end of the third quarter. In the same period in 2019, net write back represented 13 percent of net interest income. Lending in the bad operating climate that ruled last year seems to offer an explanation for the upsurge in loan losses and the loss of interest income.

The bank recorded a sustained drift from net write back position in 2019 to rising net credit loss charges through the first three quarters of the 2020 financial year. This development constrained the bank’s ability to grow profit at the end of the third quarter.

It closed the nine months of last year with a slight decline in after tax profit. That was a step up from a profit drop of 9 percent at half year. A quarter-on-quarter profit growth of 29 percent to N4.3 billion in the third quarter narrowed down the margin of decline.

The year-on-year position for the bank shows interest income flat at N85.6 billion at the end of the third quarter. Some improvement in non-interest earnings in the third quarter however countered the weakness in interest income and enabled a slight improvement in operating income to N49.5 billion over the review period.

Union Bank closed the third quarter operations with gross earnings of over N121 billion. The figure is an increase of below 4 percent year-on-year, which is a continued slowdown from 16.5 percent growth in the first quarter and 7.7 percent improvement at half year.

Non-interest income was the revenue growth driver for the bank for the year with a year-on-year growth of 26 percent to N33.5 billion at the end of September 2020.

Another favourable event in the year is the realisation of significant cost saving by the bank from interest expenses. Cost of funds increased its pace of decline from 4.5 percent at the end of June to almost 10 percent drop to N43.5 billion at the end of September.

The cost saving achieved from the drop in interest expenses enabled the bank to turn its flat interest income into a 14 percent increase in net interest earnings to over N42 billion at the end of the third quarter operations.

The increase in net credit loss expenses claimed more than all the increase in net interest income, leading net interest income after loan impairment charges to a drop by close to 14 percent to N36 billion.

The bank’s management kept operating expenses in check in the year, which enabled the bank to defend the bottom line at the end of the third quarter. Operating cost margin edged up to 44 percent in reflection of the weakening of revenue in the third quarter.

The increase in cost margin encroached on net profit margin, which declined all the way from 14 percent in the first quarter to 13 percent at half year and further to 12.4 percent at the end of the third quarter. In spite of the downward movement, it stands as the best profit margin the bank has recorded any time since 2015.

A loss of N775 million from discontinued operations against a profit of N102 million over the review period also contributed to the profit weakness the bank suffered in the year. Union Bank closed the third quarter operations with an after tax profit of N15 billion.

The bank ended the third quarter operations with earnings per share of 54 kobo. It resumed dividend payment with 25 kobo per share at the end of 2019, which is expected to be sustained for the 2020 financial year.