Banks swim in profits as loans become more costly

Commercial banks in general have had improved performance, according to the recently published financial statements. The profitability of banks has improved by 25 per cent to Shs536b in 2014.
In 2014, the sector performance was beginning to look gloomy when Bank of Uganda (BoU) closed Global Trust Bank over sustained losses.
This is a recovery from the reduced profitability in 2013 when banks experienced a 22 per cent reduction as a result of reduced lending and a fall in income from loans.
In 2014, banks lent more, earning more from loans as well as growing customer deposits, which grew by 18 per cent to Shs13 trillion.

The status-quo remains
Even with improved performance, the dominance of at least eight banks shows the bigger the bank, the better the profitability.
The top eight banks share between them more than Shs1 trillion in assets.
They include Stanbic, Standard Chartered, Crane, Centenary, Bank of Baroda, Barclays, Dfcu and Diamond Trust Bank.
DTB is the newest entrant to this club which accounts for at least 96 per cent of all profits of the entire banking sector with 25 commercial banks.
This has been the trend over the years with Stanbic Bank and Standard Chartered leading the pack with profits in excess of Shs100b.
“The Profit After Tax performance is a mixed story. However, we are getting back to levels we were in back in 2011,” said Patrick Mweheire, the Stanbic managing director, while commenting on the performance of the sector.
In 2011, only four banks posted losses, however, the number has since increased to seven.
The top eight also dominate customer deposits, lending, income and none-performing loans.

Loss recovery
There was recovery by commercial banks that have been in the red for some time. Ecobank had the highest loss in 2013 of Shs17.5b. However by end of 2014, it had reduced to Shs5.2b.
Orient Bank, which had the second highest loss in 2013, halved its drop from Shs16b to Shs8b in 2014 by lending less, which reduced their exposure to none-performing loans.
In February 2015, the founders of Orient Bank bought back majority ownership with the hope of turning around the bank.
Bank of Africa also recovered from a loss of Shs6.7b in 2013 to post a profit Shs1.2b.
There were other loss recoveries from UBA and Imperial Bank. Cairo International Bank is the only bank that dropped from the profit zone to the loss zone, due to slowed income growth.

Imperial Bank swims closer to the sharks
During 2014, accumulated losses of Imperial Bank had started to erode the bank’s core capital.
The central bank requires that all commercial banks have minimum core capital of at least Shs25b.
By end of 2014, Imperial Bank’s core capital had fallen to Shs24.1b but shareholders, including Amzal Holdings (A Mukwano Group holding company) and Imperial Bank of Kenya, saved the bank’s capital from further depletion and possible BoU sanctions.
“A further injection of Shs2.3b by issue of 2,300 ordinary shares of Shs1,000,000 each was effected in January 2015 to bring the bank in line with regulatory requirements,” reads the statement from the bank.

Increased lending
Banks make the bulk of their income off interest rates and advances, which increased in 2014.
Customer borrowing increased by 16.6 per cent to Shs9.2 trillion in 2014, which is mainly attributed to the recovery of private sector performance and growth in the economy.
The top eight banks also dominated in this segment, accounting for at least more than 75 per cent of the entire loan portfolio.
“There was growth in the economy which saw growth in private sector credit, thus returning more revenue,” said Fabian Kasi, the Centenary Bank managing director. Interest income for the entire banking sector rose to Shs1.6 trillion in 2014, a 7per cent rise from 2013.
Interest rates were relatively stable in 2014, after the reductions seen in 2013, which has encouraged more people to borrow.
However, interest rates have since begun a steady rise after the central bank raised its key lending rates to 12 per cent on the account rising inflation.
However, Kasi told this newspaper: “The implication of the increase in interest rates should not adversely affect growth of the economy and therefore banks, as long as they remain within acceptable levels and investments increase as the case is for infrastructure investments.”
The last time interest rates rose banks made more money in 2012, however by 2013, they were paying the price for higher none-performing loans.
Banks have also spent more in terms of interest expenses to customers with fixed deposit accounts, among others.
In 2014, banks paid out interest of Shs467b up from Shs400b in 2013.
Crane Bank continues to spend the most money on paying more interest to customers.
It has dominated this position for the last four years, paying Shs89b in 2014 on interest expenses, the highest for the entire banking sector, up from Shs56b in 2013.
Notably, Crane Bank is the third largest deposit taker and lender after Stanbic Bank and Standard Chartered Bank respectively.

Additional reporting by Jonathan Adengo

Numbers
Shs536b
The combined sum of profits that commercial banks posted for the year ending December 31,2014.

23%
The average cost of lending for commercial banks in terms of interest rates.

Costly loans

These are really hard times for anyone thinking of drawing a loan from a bank.
Almost all commercial banks have revised their lending rates northwards after the central bank increased its key lending rate from 11 per cent to 12 per cent on the account of rising inflation, currency depreciation and unstable and falling economic fundamentals.
Traders like Ali Male, who trades in sugar in Kikubo, a Kampala business hub have already recieved letters notifyng them that thier loan repayments will be revised beginging May 1.
This will happen for those, whose loans where taken but on a non-fixed rate.
At least all banks have revised thier interest rates by an average of 1.5 per cent.
This last happened in 2011 when the economy went through a turbulent interest rate regime, which forced a number of businesses on thier knees.

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