Banks register robust growth in assets - BoU

The Bank of Uganda yesterday said in its annual report for the Financial Year 2022/2023, the total commercial banks’ assets grew from Shs44.6 trillion in June 2022 to Shs48.3 trillion in June 2023.

 “The increase in banks’ assets was mainly attributed to holdings of Government of Uganda securities, which rose by 12.2 percent, amid a slowdown in credit growth. Concerns about slowing economic growth induced greater caution in banks towards extending loans to the private sector,” said the Bank of Uganda. 

The Central Bank explains that commercial banks’ gross loans and advances increased by 4.7 percent from Shs18.6 trillion in June 2022 to Shs19.4 trillion in June 2023. This was considerably lower than the 12.2 percent growth posted in the previous year. 

“Nevertheless, the growth observed this year was boosted by net extensions that amounted to Shs635 billion within the period leading to June 2023. This is suggestive of a potential shift in banks risk tolerance vis-a-vis private sector lending, which could stimulate economic expansion moving forward,” the Central Bank explained.  

Adding: “However, it should be noted that like in the previous year, net capitalised interest on loans, which accounted for Shs895.5 billion, remained a significant contributor to the overall increment in loans. Commercial Banks maintained strong capital buffers, majorly due to the increase in the regulatory minimum capital requirements and profitability.”

The deputy governor of the Bank of Uganda, Dr Michael Atingi-Ego, said Uganda’s economy grew by 5.3 percent during 2022/2023, an improvement from 4.6 percent in the previous year. 

“This growth was mainly driven by the services and industry sectors, particularly trade, manufacturing, and construction. This growth demonstrates the resilience of the Uganda economy to the global headwinds that dominated the year,” he said. 

 Dr Atingi-Ego said despite inflation and geopolitical tensions, the Ugandan banking sector remained resilient, pointing out that total bank assets increased and supervised financial institutions maintained strong capital buffers partly due to increased regulatory minimum capital requirements in line with the Financial Institutions (Revision of Minimum Capital Requirements) Statutory Instrument that was issued in November 2022. 

The chairperson of Uganda Bankers Association (UBA), who is also the managing director of Citibank Uganda, Ms Sara Arapta, told Daily Monitor  that the bank increased lending to the private sector and it shows that Ugandan banks are strong. 

“We have grown our assets in the last one year by lending more to the private sector despite the difficult economic environment,” she said.

In the report, the Central Bank said over the last one year, commercial banks’ core capital adequacy ratio (CAR) increased from 21.4 percent to 24.8 percent, in part due to a 25.4 percent boost in banks’ current year net after-tax profits and 71.7 percent increase in banks’ permanent shareholders’ equity. 

This followed the issuance of the Financial Institutions (Revision of Minimum Capital Requirements) Instrument, 2022 on December 16, 2022, by the Minister of Finance, Planning and Economic Development (MoFPED) aimed at enhancing SFIs’ resilience. 

Under the instrument, the minimum required paid-up capital for financial institutions was, effective December 31, 2022, increased to Shs120 billion and Shs20 billion from Shs25 billion and Shs1 billion, for Tier I (Commercial Banks) and II (Credit Institutions), respectively and to Shs150 billion and Shs25 billion by 30 June 2024. Most banks, including all Domestic Systemically Important Banks (DSIBs), have met the minimum capital requirements. 

The Central Bank further states that in pursuant to the Financial Institutions (capital buffers and leverage ratio) Regulations 2020, banks complied with the additional capital conservation buffer requirement of 2.5 percent, and the additional Systemic Risk Capital buffer in the range of 0.0 – 1.0 percent for DSIBs ( Domestic Systemically Important Banks) depending on their level of systemic importance.

 On the other hand, the Central Bank explains that although initially challenging, liquidity and funding conditions improved towards June 2023. The improvement in funding conditions was partly due to maturities of banks’ investment in treasury bonds that were not rolled over in the bond switch, and an increase in retail deposits from customers. 

As a result, the industry ratio of liquid assets to total deposits (liquidity ratio) increased from 46.5 percent in June 2022 to 49.4 percent in June 2023, with all banks meeting the regulatory minimum of 20 percent. 

The report shows that the industry liquidity coverage ratio (LCR), a measure of the ability of banks to withstand a 30-day liquidity stress period, increased from 184.5 percent in June 2022 to 373.4 percent in June 2023, well above the 100 percent benchmark.

Assets quality

The Central Bank states that Asset quality on the other hand remains a concern, characterised by the anemic growth in lending activity and an increase in non-performing loans. 

The banks’ aggregate non-performing loans (NPLs)–to–gross loans ratio increased from 5.3 percent to 5.7 percent during the year ended June 2023, as the stock of NPLs increased by 12.7 percent compared to only 4.7 percent for gross loans.