What you need to know:
According to Bank of Uganda, commercial bank profitability increased by 26.9 percent to Shs1.073 trillion from Shs846.2b. However, a number of risks, including a surge in commodity prices, continue to present challenges.
Commercial banks profitability was slightly above the Shs1 trillion mark for the period ended 2021, according to the Bank of Uganda Annual Supervision report.
The report, which highlights the performance of the banking sector in a number of aspects noted that despite a difficult economic environment occasioned by Covid-19, the banking sector remained resilient during the period ended December 2021, supported by gradual recovery of the economy.
The resilience, the report further noted, was also as a result of strong capital and liquidity buffers, supported by effective policy measures implemented by Bank of Uganda.
Dr Michael Atingi-Ego, the Bank of Uganda deputy governor, indicated that commercial banks profitability had during the period increased by 26.9 percent to Shs1.073 trillion from Shs846.2b, while the ratio of non-performing loans was largely unchanged between 2020 and 2021 at 5.27 percent and 5.26 percent, respectively.
The growth was largely driven by an increase of 24.4 percent and 7.9 percent in interest income from government securities and loans, respectively.
Overall, Dr Atingi-Ego noted, that despite existing risks resulting from commodity price shocks, financial stability remains elevated and resilient to potential shocks given strong and enhanced loss absorbency capacity reflected in existing liquidity and capital buffers.
The report also noted that losses among credit institutions, decreased to Shs4.3b from Shs14.7b, while those attributed to microfinance deposit-taking institutions reduced slightly, falling to Shs33.9b from Shs36.8b over the period.
However, the report noted that the main risk to supervised financial institutions’ profitability remains the potential increase in non-performing loans, which will result into growth in provisions for loans that may become permanently impaired.
Total customer deposits, which remain the main source of stable funding for commercial banks and constitute about 84 percent of total liabilities, grew by 6.8 percent from Shs26.8 trillion to Shs28.6 trillion.
However, the report noted a slight drop in the proportion of foreign currency-denominated deposits, which in the last three years, have dropped from 37.2 percent in 2019 to 35.2 percent.
Customer deposits for micro depositing-taking institutions increased from Shs355.9b to Shs383.2b, while deposits for credit institutions reduced from Shs593.7b to Shs226.3b, largely due to the upgrade of Post Bank to a commercial bank status.
Bank of Uganda also noted that supervised financial institutions during the period continued to hold strong liquidity buffers, supported by growth in deposits and holdings of government securities.
For instance, commercial banks’ aggregate liquidity coverage ratio, which measures the ability of a financial institution to withstand a 30-day liquidity stress, increased from 229.6 percent to 251.2 percent, underlining the sector’s strong resilience.
Lending and credit
During the period, lending and credit continued to recover but remained moderate. Total loans advanced by supervised financial institution grew by 6.3 percent to Shs18.4 trillion compared to the 12.6 percent growth over the period.
Commercial banks registered the strongest growth in credit, increasing by 8.8 percent to Shs17.7 trillion. Loans by micro deposit-taking institutions increased by 2.3 percent while those by credit institution contracted by 58.4 percent due to the upgrade of Post Bank to a commercial bank.