Banking analysis: Lending falls as banks exercise caution

Bundles of ten thousand shilling notes on a counter. PHOTO BY RACHEL MABALA

What you need to know:

Banks in 2017 saw their interest income reduce as they took precautionary measures to lend to borrowers. Daily Monitor’s analysis shows how some banks soldiered on in a tough economic environment to post profits while others were hit hard.

Kampala – Bank of Uganda (BoU) figures show an improvement in earnings and profitability by commercial banks. In 2017, the industry’s return on assets (ROA), which shows how efficiently banks are able to generate income from their assets, expanded to 2.7 per cent, the highest it’ has been in five years.

Additionally, the combined return on shareholders’ equity (ROE) also rose to its highest in five years, to 16.4 per cent. Not surprisingly, the ratio was spectacularly bad in 2016, falling to its lowest (8.33 per cent) since 2000.
The ratio of non-performing loans to total loans fell to 5.6 per cent in 2017 after a sharp rise in 2016 to 10.5 per cent due to Crane Bank.

Impact
These figures illustrate the impact of sluggish economic growth, poor asset quality, and slow loan growth on the profitability of the banking system in 2016 which stretched into 2017.
Crane Bank, which was closed in October 2016, was responsible for 46.9 per cent of the sector’s non-performing loans by the end of December 2016, according to Bank of Uganda’s financial stability report for 2016/2017.

With economic activity picking up last year - real GDP growth was 6.4 per cent compared to 2016’s 3 per cent - and the growth of nonperforming loans contained following the resolution of Crane Bank and tighter credit standards across the industry. It is no surprise that earnings and profitability improved.
The sector’s profitability would have been more impressive had it not been for BoU’s cautious monetary policy and conservative lending.

The Central Bank Rate which determines the cost of short-term financing to banks and acts as a policy signal on the relative cost of credit, was cut four times in 2017, falling by 2.5 per cent, in an effort to stimulate economic activity.
Lending rates fell as a result, checking interest income growth. The aggregate net interest margin, which measures the return on earning assets, fell to 11.6 per cent from 12.8 per cent in 2016.

Assets
The total value of assets for all 24 commercial banks increased by 18.1 per cent to Shs26.6 trillion, up from Shs22.5 trillion in 2016, with Crane Bank excluded. (Adding the shuttered lenders assets to the 2016 figure brings it to Shs23.7b, translating into an asset growth of 12.3 per cent.) This means the sector recorded its fastest asset expansion in three years, following increases of 9.1 per cent and 10.9 per cent in 2016 and 2015, respectively.

All but three banks increased their assets in 2017. Dfcu recorded the biggest increase propelled by its acquisition of Crane Bank, which was finalised in January 2017. Its assets rose 76.4 per cent to Shs3 trillion driven by increases in its loan book, cash and balances with the central bank and other assets.

Equity Bank also posted a significant growth in assets, as a rise in marketable securities and loans and advances pulled up total resources by 60 per cent to Shs1 trillion.
At the other end of the scale was Exim Bank, Standard Chartered Bank, and Citibank, the only three banks that saw a fall in assets. Exim Bank’s assets reduced by 8.8 per cent from 2016 to Shs284.8b.

Citibank and Standard Chartered had declines of 4.5 per cent and 2.6 per cent, respectively - driven by a reduction in deposits with parent and other group companies in both banks.
But the fall in Standard Chartered’s assets barely had an effect on its standing as one of Uganda’s biggest banks. What knocked it out of the second spot to third, was the boost dfcu got from acquiring Crane Bank, which had assets worth Shs1 trillion when the sale was finalised.

Stanbic Bank remains Uganda’s biggest bank, growing its resources to Shs5.4 trillion in 2017.
Between them, the eight banks with assets exceeding Shs1 trillion control more than three quarters - 77 per cent - of the total banking sector resources.

The four biggest banks, on the other hand, control just more than half of the total banking sector assets.
The combined financing base of the sector increased by 11.5 per cent to Shs21.6 trillion (Crane Bank’s liabilities were excluded from 2016’s figure). Dfcu had the biggest increase in liabilities of 68.7 per cent to Shs2.5 trillion, driven by customer deposits.

An increase in customer deposits at Equity Bank was also responsible for the 57 per cent growth in liabilities. Just like in 2016, Stanbic Bank had the largest financing base with liabilities worth Shs4.5 trillion.
Standard Chartered moved to third, overtaken by Dfcu, with liabilities of Shs2.2 trillion.

Deposits
Customer deposits constituted 83.8 per cent of combined liabilities, growing by 16.6% to Shs18 trillion.

Dfcu posted the biggest increase in customer deposits of 75 per cent to Shs1.9 trillion. This was followed by Equity Bank at 51.6 per cent to Shs729.4b.
Just over half of total customer deposits were held by the four biggest banks. Of these, only Standard Chartered registered a decline of 4 per cent to Shs1.9 trillion.
Loans and advances to customers comprised the bulk of most banks’ assets save for two, Citibank and United Bank for Africa, where deposits and balances with other banks had the largest share.

Bad loans
Dfcu, Equity Bank, and UBA recorded the biggest growth in loans with rises of 59.9 per cent, 55.3 per cent and 55.2 per cent, respectively.
Four banks saw their loan book decline from 2016. Diamond Trust Bank had the biggest decline of 18.6 per cent, followed by Exim Bank with a 6.9 per cent fall. Tropical Bank’s lending went down by 2.1 per cent, while Standard Chartered’s loan book fell 0.9 per cent.

Just like in 2016, Stanbic Bank closed the year with the biggest loan book worth Shs2.1 trillion, followed by Centenary Bank and dfcu with Shs1.3 trillion each. Standard Chartered moved to fourth position - occupied by dfcu in 2016 - with outstanding loans worth Shs1.2 trillion. Barclays Bank was fifth with loans worth Shs1 trillion.

The increase in assets should indicate an increase in earnings since assets are used to generate income. The sector recorded growths in both after-tax profit and total income. The aggregate after-tax profit of all 24 banks increased by 13.6 per cent to Shs768.8b from Shs676.9b in 2016 (excluding Crane Bank), driven by dfcu’s profit growth.

Dfcu’s net profit rose by Shs81.3b to Shs127.6bn, while the sector aggregate net profit increased by Shs91.9bn. With Dfcu out of the picture, aggregate after-tax profit would have risen by a modest 1.7 per cent.
Finance Trust Bank, Ecobank, KCB Bank, and Equity Bank also reported impressive jumps in net profits. Finance Trust’s rose 131.2 per cent to Shs2.3b, Ecobank’s increased by 90.5 per cent to Shs1.5b, KCB’s to Shs10.2b after rising by 89 per cent. Equity Bank’s profit increased by 65 per cent to Shs28b.

Not surprisingly, the largest banks made the biggest profits. Stanbic’s Shs200.4b after-tax profit was more than a quarter of the sector’s total profitability. Other large earners were dfcu, Centenary Bank with a net return of Shs100.2b, Standard Chartered Bank with Shs93b and Barclays Bank with a profit of Shs72b.

Losses
Out of the 24 banks, only five banks made losses. ABC Capital Bank reported a loss of Shs533m, down from a Shs1b profit in 2016 due to a fall in interest income.
Cairo International Bank also fell into the red, posting a loss of Shs1b following a reduction in interest income.
The other four loss-making banks of 2017 are the same banks that were in the red in 2016.
Commercial Bank of Africa and Tropical Bank reduced their losses to Shs1.3b and Shs5.5b, while Exim Bank and Guaranty Trust Bank increased losses to Shs5.9b and Shs1.9b, respectively.

Drop in profitability
The number of profitable banks posting a fall in profits also increased to seven from four in 2016. These include three of the eight biggest banks whose earnings were eaten into by lower interest income - for Standard Charted Bank and Diamond Trust Bank - and an increase in operating expenses, in the case of Centenary Bank. Citi bank’s net profits reduced because of a fall in non-interest income.

Profit before income taxes rose 17 per cent from 2016 (with Crane Bank excluded from the aggregate figure) to Shs1 trillion, driven by an increase of Shs109.3b at dfcu. Other impressive additions were Equity Bank with an increase of Shs17.5b, Barclays Bank with Shs15.4b, and Stanbic Bank where pre-tax profit increased by Shs11.7b.

Efficiency
Combined, the return on average assets - which measures the efficiency with which the sector employed its assets - was 3.1 per cent, indicating that Uganda’s banking sector is highly profitable (for comparison, the return on average assets for all U.S. banks in 2017 was 1.03 per cent). Using that indicator, the most profitable bank was dfcu with a ROA of 5.4 per cent, followed by Citibank with 4.2 per cent, and Centenary and Stanbic Bank, both of which had a ROA of 4 per cent.

With interest rates falling in reaction to Bank of Uganda’s cautious expansionary monetary policy, combined interest income -the lion’s share of the revenue - in the sector grew at a slower rate in 2017 compared to 2016.
Aggregate interest income was Shs2.6 trillion, growing by 5.8 per cent from 2016.
Ten banks reported a fall in interest income last year. Nine of the ten also posted lower revenues.

Net profit growth in nine of the banks that reported a fall in interest income was significantly lower than in 2016, in the case of Stanbic Bank, subdued - for Bank of Baroda - or negative in the case of Standard Chartered, Diamond Trust, and Citibank. The remaining four - Exim Bank, Tropical Bank, Cairo International Bank, and ABC Capital - made losses.
Only KCB Bank reported a reduction in interest income and a big jump in profits after a 14.2 per cent fall in other operating expenses led to a 7.5 per cent fall in total costs.

But the picture changes slightly when the analysis moves to net interest income, which measures a bank’s gross profit from its interest-earning assets - a relatively less sensitive indicator to change than gross interest income or interest expense.

Net interest income declined at a higher rate than interest income at Stanbic Bank, Tropical Bank, Cairo International Bank, and ABC Capital Bank. This indicates that the funding costs those banks paid on their interest earning assets rose faster than interest earnings on loans and securities.
Commercial banks’ credit to the private sector in December 2017 grew by 6.2 per cent from a year earlier to Shs12.2 trillion.

While growth in commercial bank lending to the private sector improved in 2017 following steep drops in 2016, it was still below historic levels, and in spite of the central bank’s expansionary monetary policy and leading indicators showing increasing business confidence and a pick-up in economic activity.
The risk aversion by banks follows high default rates in 2016 when the ratio of non-performing loans climbed to 10.5 per cent, an 18-year high.