Banks look to recover lost ground in 2014

A banker counts money. Credit uptake is expected to increase this year. File photo

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2014 appears brighter as real economic activity is expected to pick up, coupled with expectations of lower inflation.

Commercial banks were optimistic about their performance in 2013 than they were in 2012 last year when most of them posted marginal growth in profits while others incurred losses.

However, going by the look of things and given that some of them have been struggling for the most part of the year, 2013 profits could even be lower than they were in 2012.

Housing Finance Bank outgoing managing director Mr Nicholas Okwir affirms this.
He told this newspaper recently that 2013 was a difficult year for the banking industry due to a slowdown in economic growth, which he says may affect profit growth.

“Demand is still subdued, household consumption is minimal and a few people are borrowing yet majority are unable to meet their loan repayment obligations,” he says.

Mr Stephen Kaboyo, Alpha Capital Partners managing director also notes that 2013 was a tough year for most businesses, characterized by constrained credit flow due to high bank lending rates.

Sluggish borrowing
Subdued loan uptake in the market, coupled with low deposits is expected to trim profits in the industry since interest income and fees are the main sources of income for commercial banks.

While no commercial bank has so far made public its full year financial performance results, Stanbic Bank posted a fall in its half-year profits, declining by 1.7 per cent to Shs57.3 billion for the six months that ended June 30, 2013, from Shs58.3 billion the previous year.

Stanbic managing director Philip Odera attributed the fall in the half-year profits to the lag effects of the 2011 inflationary pressures and the resultant increase in lending rates that constrained individuals and businesses, resulting in low demand for loans and trimmed deposits.

The low appetite for loans is partly attributed to high interest rates, which have made it difficult for borrowers to pay back loans amid the high cost of living.

Stanbic for instance posted a reduction in loans and advances to customers in the first half of 2013, falling by 7.5 per cent to Shs1.36 trillion while deposits declined by 15.6 per cent to Shs1.74 trillion from Shs2 trillion in the same period last year.

Stagnant lending rates
Although Bank of Uganda reduced the Central Bank Rate – the rate at which it lends to commercial banks – to 11.5 per cent in December owing to a fall in inflation, from 23 per cent in January last year, commercial banks’ lending rates have been stagnant, averaging at 21 per cent from an extreme of 34 per cent over the same period.

The BoU December Monetary Policy report also reveals constrained growth in private sector credit, which grew by only 0.8 per cent in October compared to 1.1 per cent in September.

In 2012, only a few banks including Stanbic, Centenary, Standard Chartered and Barclays among others posted marginal growth in profits while United Bank for Africa, Fina, Ecobank and Global Trust incurred losses.

It should, however, be noted that while the provision for bad loans in the industry increased to 4.3 per cent – as a percentage of the Shs7.6 trillion loan portfolio held by commercial banks – at the end of 2012 from 2.2 per cent in 2011, banks may post lower bad loan rates in 2013 due to the tightening of borrowing procedures, in addition to restructuring repayment arrangements to enable those who had borrowed money to pay back.

DFCU Bank for instance posted a 12.7 per cent dip in the allowance for impairment of loans to Shs2.5 billion in the first half of 2013, from Shs2.8 billion in the same period last year while Stanbic’s impairment charge for credit losses more than halved to Shs23.3 billion from Shs59.9 billion.

Mixed fortunes
Unlike Stanbic and Dfcu, however, Bank of Baroda, Uganda (BOBU) doubled its provisions for bad and doubtful debts in the first six months to Shs4 billion, from Shs2.7 billion posted for the financial year 2012.

Low levels of non-performing assets mean a healthy banking sector as they encourage credit growth whereas high levels imply that banks have to put aside huge sums of money to cater for possible losses, a situation that creates risk premiums which can translate into higher lending rates.

Despite the low appetite for loans, Mr Okwir notes that deposits on the other hand have been growing.

New bank, mergers take shape
Finance Trust Limited; formerly a Micro Finance Deposit-Taking Institution (MDI) was given a green light in November by BoU to commence retail commercial bank services in the market, joining 24 other players already in the market.

It was also announced in July that Nigerian lender - Guaranty Trust Bank (GT Bank) had reached an agreement to acquire 70 per cent stake in Fina Bank through a share purchase for about $100 million (about Shs254 billion).
By the end of last year, the deal was still pending regulatory approvals in countries where the bank operates including Uganda, Kenya and Rwanda.

Also important to note is that London based private equity fund, Actis, sold a 45 per cent stake in DFCU Bank for $43.2 million (about Shs106.8 billion) to Rabo Development B.V. and the Norwegian Fund for Developing Countries (Norfund) through the Uganda Securities Exchange.

And like was the case at the beginning of 2013, Mr Okwir anticipates better performance in 2014 as the economy rebounds.

Mr Kaboyo also notes that 2014 seems brighter given the fact that real economic activity is beginning to pick up in line with the accommodating monetary policy stance while inflation is expected to drop further.

“Credit flow is expected to gain momentum as banks get back to lending, underpinned by the continued accommodating monetary policy stance,” she says.
Despite the anticipated fall in profits for the year, it should be noted that all Ugandan banks remain well-capitalised.


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