Lending to government boosts bank earnings

Bank of Uganda headquarters in Kampala. Interest on government securities started rising as the end of 2014 was approaching, which attracted commercial banks to lend to government, which is less risky. FILE PHOTO

Kampala- Bank of Uganda’s annual supervision report is giving a glowing review to Uganda’s banking sector. The 2014 Annual Supervision Report shows that the banking sector indicated a 17.2 per cent increment in profitability during the year on account of lending to government.

“The rise in banks’ earnings was mainly on account of the growth in interest income from government securities by 21.9 per cent or Shs77.3 billion,” the report reads.

By end of December 2014, commercial banks were holding at least Shs4.4 trillion in government securities, up from Shs3.6 trillion in 2013.

Government securities also generated almost the same amount of income as loans and advances to the private sector.

The report indicates that commercial bank’s income from lending to the private sector rose by 4.7 per cent to Shs1.5 trillion. If compared to the government securities, income for banks grew by 18 per cent to Shs415b.

Interest on government securities started rising as the end of 2014 was approaching, which attracted commercial banks to lend to the less risky government.

These earnings from government securities also pushed bank profitability upwards as the banking sector continues to recover from the shocks of 2011.

“The sector registered a 17.2 per cent increase in profit, from Shs414 billion in 2013 to Shs485.2 billion in 2014. Whereas credit risks eased during the year with overall sector vulnerability being low, non-performing loans still posed a challenge to some banks during 2014,” says Dr Louis Kasekende, the Deputy Governor BoU.

The level of non-performing loans dropped to 4.1 per cent of total loans, from 5.6 per cent in 2013.

The stress tests carried out by BoU on commercial banks also revealed that commercial banks were capitalised – to withhold shocks – above the regulatory requirements.

The one bank, Global Trust Bank, which failed stress tests, was closed in July 2014 by BoU. The report noted that at least five banks would see their capital eroded below regulatory requirements, if the largest borrowers decided to default.