United Bank Limited has suffered a loss of more than Rs. 1 billion from the closure of its foreign branch operating in New York, according to official data.
The closure of the branch will cause a significant drop in revenues not only to the bank but also to the country. Meanwhile, there is no indication of any financial impact in respect of post-closure related regulatory matters.
According to the official statement disclosed in the annual report:
UBL’s NY Branch was closed as of January 28, 2019. As a result, costs including, among regular expenses, additional legal and consultancy costs, and staff severance costs and contract termination charges related to the closure of the Branch, the NY Branch incurred a net loss of Rs. 1,071.720 million for the year ended December 31, 2018. The bank also suffered a loss of Rs. 18.138 million in 2017 from the same branch.
UBL claimed that the bank’s decision to close the New York branch was purely a commercial decision, which was taken after evaluating the commercial viability of continuing operations of the branch.
However, UBL claimed that its business related to trade finance and other forex activities will not be hurt as the bank had established multiple correspondent banking relationships with renowned banks to provide continued U.S. dollar clearing services that were previously provided by the UBL’s New York branch.
United Bank Limited Vs Habib Bank Limited
The management of the UBL was wise to shut down its branch in New York as its incurring losses were not as huge as Habib Bank Limited (HBL). The bank’s management protected the bank from the penalty, which could have had an adverse impact on its balance sheet.
HBL shut down its branch in New York in 2017 and it faced a penalty of $225 million in addition. HBL incurred a huge loss of Rs. 23.7 billion from the closure of business in New York along with the payment of the penalty to the concerned financial department.
According to the HBL’s annual report:
This has materially impacted HBL’s declared financial results for the year. Consequently, HBL has recorded a pre-tax profit of Rs. 28.8 billion for the year 2017. Excluding the impact of this payment, profit before tax for 2017 would be Rs. 52.5 billion.
The overall profit dropped by 76 percent to stand at Rs. 8.2 billion in 2017
UBL International Business in The Red
Due to a few overseas markets, UBL’s international operations were in the red during 2018.
UBL International’s average deposits were recorded at $2.1 billion in 2018, down 6% over the previous year. Cost of deposits was maintained at the last year’s level of 2.2%, despite a 100 bps rise in the FED rate during the year. The average loan portfolio moved from $1.6 billion in 2017 to $1.3 billion, in line with the strategy to maintain a more liquid balance sheet and reduce risk-weighted assets. The investment portfolio, which comprises of mainly foreign fixed income securities, closed at $636 million from $708 million of the last year.
Non-Performing Loans increased from $218 million to $293 million from 2017 to 2018 as a result of the economic slowdown and cash flow constraints in the UAE and Qatar. The bank took a conservative and proactive stance towards assessing the risk of its credit portfolio and accounts were downgraded in a prudent manner in line with regulatory guidelines.
Besides, the bank injected an amount of Rs. 509 million in its Tanzanian branch to meet its regulatory conditions however the bank decided for a strategy to sell off its business to a local bank.
2018 was a difficult year for the business, owing to tepid economic conditions in the GCC region. The oil sector was constrained by range-bound prices coupled with OPEC supply cut agreements. In addition, the non-oil private sector was impacted by the removal of subsidies, the introduction of VAT and various energy price reforms.
UBL posted a massive decline in its profitability by Rs. 10 billion in 2018 which stands at Rs. 15 billion.