Union Bank faces the challenges of inability to grow revenue and that could lead to a drop in gross earnings for the bank at full year. Rising interest cost is hurting profit capacity and the bank isn’t likely to achieve up to one-half of its preceding year’s profit based on the third quarter growth rate. Revenue is constrained by non-interest income, which declined by 13% year-on-year at the end of the third quarter while interest income has slowed down due to a continuing drop in the investment portfolio.

Interest cost is growing rapidly against the slowdown in interest income. Rising interest expenses have depressed net interest margin and claimed an increasing proportion of revenue at the end of the third quarter. Interest expenses rose by over 50% at the end of the third quarter compared to an increase of 19.3% in interest income.

The good news however is that the bank has successfully contained the problem of rising credit losses, which enabled it to improve the bottom line at the end of the third quarter. Net loan loss expenses dropped by 20.4% at the end of the third quarter and that moderated the impact of rising interest expenses on the income statement.

There was a slip in customer deposits during the period and the bank had to depend more on expensive liabilities to maintain earning assets. Rising cost of funds is a general trend in the banking sector as well as the larger economy. The bank closed third quarter operations with an interest income of N66.64 billion year-on-year at the end of the third quarter, which was accounted for exclusively by earnings from loans and advances.

Its net credit portfolio grew by 15.6% over the opening figure for the year, which was moderated by a decline of 9.9% in investment securities. The bank’s investment assets have been declining since 2013, which is affecting interest income from that source. Inability to grow the principal liabilities has constrained growth is earning assets generally.

The bank generated gross earnings of N84.72 billion at the end of the third quarter, which is an increase of 6.4% year-on-year. Based on the third quarter growth rate, gross income is projected at N114.2 billion for Union Bank at the end of 2015. This will be a drop of 16% from the gross earnings of N135.80 billion the bank posted at the end of 2014.

Another major area of favourable cost behaviour is in respect of operating expenses, which increased slightly at 1.1% at the end of the third quarter. Compared with an increase of 6.4% in gross earnings, the bank reduced its operating cost margin from 55.5% in the third quarter of last year to 51.6% at the end of September this year. This is still well above the average banking industry operating cost margin of 44.6%.

The bank closed third quarter trading with an after tax profit of N9.34 billion, which is an increase of 15.5% year-on-year. The improvement came from moderation of operating cost and the drop in loan loss expenses over the review period. This improved net profit margin from 10.2% to 11% over the review period.

The full year profit outlook isn’t that promising to maintain the growth seen at the end of the third quarter. On full year basis, the bank has lost profit margin and that has undermined profit capacity for this year. Net profit margin is down from about 20% at the end of last year to 11%. Based on the third quarter performance, after tax profit is projected at N12.8 billion for Union Bank at the end of 2015. This is a likely drop of 52.2% from the after tax profit of N26.82 billion it reported at the end of 2014.

The bank improved earnings per share from 44 kobo to 55 kobo over the review period. The full year expectation is 76 kobo per share at full year, which would be a sharp drop from earnings per share of N1.52 at the end of 2014.

The bank carries a large retained deficit of nearly N250 billion, which is a big mountain on the way to resuming dividend payment. The retained deficit black hole will have to swallow up profits of many years to come to level up.

PZ Cussons heads for another profit drop

PZ Cussons lost profit for the second year at the end of its 2015 financial year ended May and it is headed for yet another profit drop in the current financial year ending May 2016. The company lost one-third of the after tax profit on year-on-year basis at the end of its first quarter operations in August. The margin of profit drop is expected to widen at full year if the current growth rate is maintained. Profit drop accelerated in 2015 and looks likely to speed up further in the 2015/16 financial year.

The company’s weakening profit capacity reflects its inability to grow sales revenue for the fourth year running. The company has not been able to push sales revenue reasonably above the figure it posted in 2012 and the revenue weakness has continued to register adversely on profit performance.

It closed first quarter operations with a turnover of N14.92 billion, which a slip over the revenue figure in the same period last year. Based on the first quarter growth rate, turnover is projected at a little over N62 billion for PZ Cussons at the end of the 2015/16 financial year. This would be a drop of about 15% from the sales revenue of N73.13 billion it reported in 2015.

The company’s sales revenue has been virtually stagnant over the past three years. Flat revenue and rising cost have been the challenges facing the company. This year, the prospects for a drop in turnover have increased the operating pressure.

Given the inability to grow sales revenue, the company’s profit capacity has continued to weaken under rising costs. The company is able to keep all other major costs under control except interest expenses, which soared by about 504% to N164 million at the end of the first quarter. The company has lost profit margin from 4.3% in the first quarter of last year and from 6.3% at full year to 2.9% at the end of the first quarter of the current year.

The company reported an after tax profit of N428 million at the end of the first quarter, which represents a drop of 33.3% year-on-year. Based on the first quarter performance, after tax profit is projected at N2.6 billion for PZ Cussons at full year. This would be a drop of 43.1% from the after tax profit of N4.57 billion the company reported at the end of the last financial year. This will be an accelerated drop compared with the profit drops of 10% and 4.5% the company recorded in the preceding two years.

The company’s profit performance has followed a pattern of rise and fall over the past six years.  Its after tax profit of N5.32 billion in 2013 was a recovery after two years of drops. The peak profit record remains the N5.58 billion it posted at the end of the 2009/10 financial year.

Earnings per share declined from N1.16 in the preceding year to N1.02 in 2015. It paid an interim dividend of 20 kobo per share last year and has announced a final dividend of 61 kobo per share. The company’s register is scheduled to close between 14th and 18th September while payment is slated for 30th September 2015.