News Column

Commercial Banks Reeling

May 5, 2014

Julius Businge

If the profit and loss statements published by banks recently are anything to go by, the financial services sector is feeling the pinch, and the economy has caught the flu. Indeed, when the Uganda Revenue Authority Commissioner General Allen Kagina appeared before the Finance Committee of Parliament on Apr.22 to explain the cause of the tax body's Shs 270 billion revenue shortfall for the period up to Jan. 2013, she attributed the situation partly to the poor performance of the banking industry.

She told the MPs that commercial banks are chalking off billions-worth of bad debts, which has drastically affected their profitability. Also, Kagina added, the banks posted a deficit due to the reduction in demand for new loans and higher default rates on existing ones.

Kagina's observation is clearly vindicated by the various financial statements issued by several commercial banks for their performance in 2013.

The statements surely didn't make good reading for most top bank chiefs, who in the 'good old' days, used to pocket huge bonuses for their good performance.

As shareholders also pensively study the financial statements, one thing will be clear to them - they will take home much less or even no dividends at all.

Loans are the main source of revenue for banks, as are customer deposits on which they levy bank charges.

When bankers fail to meet targets on these two revenue heads, the stakeholders get very worried.

Yet, non-performing loans and other assets (NPAs) and bad debts written off continued to eat into the banks' profits, thus reducing their profitability. This is the key performance indicator cutting across all commercial bank financial statements seen by The Independent.

NPAs are one of the indicators that describe how well or bad the banking sector is faring. An increase in the percentage implies negative growth by the sector and vice versa.

The loans/assets are deemed to be nonperforming when debtors are in arrears for a period exceeding 90 days without any form of repayment or plan for restructuring for interest.

Most bankers, analysts say, are suffering from the spillover effects of 2011 when inflationary pressures touched the 30% mark, the highest since 1993. Also, the depreciation of the local unit to the tune of Shs2, 900 in 2011 and some parts of 2012 and a tight monetary policy that led to a hike in commercial bank lending rates continue to hurt the general profitability levels for banks.

The tight monetary policy, which made it difficult for borrowers to access credit, hurt economic growth in the end, which nosedived to 3.2% in 2011/2012 from 6.7% a year before.

Monetary policy implementers believe the economy will rebound from the 5.8% growth registered in 2012/13 to over 6% in 2013/14 due to the somewhat favorable exchange rate, lower inflation and stable interest rates.

But many of the managers of Uganda's 26 commercial banks can be forgiven for being cautiously optimistic.

Some of the bankers told The Independent that they are extremely cautious about who to lend money to and that some customers are still shying away from their banks thanks to the experience they went through.

"It is true that most customers still fear to get loans from banks because of what they went through in 2011 and 2012," said an official at Stanbic Bank. It is a clear case of 'once bitten twice shy.'

Indeed, Arthur Isiko, the acting managing director at Bank of Africa, which though is yet to publish its financial results for 2013, told The Independent on Apr.25 that their customers were still reeling from the effects of a difficult 2011 and that the bank was still re-assessing potential credit recipients. He says it is a general stance for all banks and it is affecting productivity.

"Five years ago private sector credit was at around 20%, but today it is at around 6% that shows you where we are," he said.

Non-rosy figures

That situation has spelt doom for the banking industry, which three years ago was one of the most profitable in the country. Equity Bank's bad debts written off doubled to Shs 2.9 billion in 2013 from Shs 1.1 billion in 2012, while NPA's shot to Shs 8 billion compared to Shs 7 billion in 2012. Interest earned on deposits and placements and interest earned on fees and commission were the only source of revenue for the bank. Consequently, the bank's total revenue dropped by Shs 1.3 billion to Shs 58.2 billion. Centenary Bank's bad debts written off almost doubled to Shs 7.8 billion from Shs 4.7 billion in 2012.

Managing Director Fabian Kasi said the general profitability of the banking industry has declined despite the stabilization of the economic factors such as inflation, interest rates and exchange rates mainly because banks are emerging from very hard conditions registered in 2011/12.

"Clients who had borrowed then found trouble generating enough cash flows to meet their loan obligations in time, thus the increased non-performing loans and write offs," he said, adding that demand in the economy is just rebounding thus the low demand for credit in the economy.

On the increasing number of NPLs, Kasi said, it is a concern for everybody.

"What matters now is how to control them," he said, thus the focus of the bank is to assist clients manage the loans they have while ensuring that new loans are properly assessed and extended to those who have the capacity to pay back.

Stanbic Bank, Uganda's biggest bank by assets, took the heaviest hit, recording a 25% drop in net profits amounting to Shs 101.8 billion down from Shs 130.7 billion in 2012, despite a decline in NPLs to Shs79.1 billion in 2013 from over Shs 101 billion in 2012 while the bad debts written off also went down to Shs 65.3 billion from Shs 93.4 billion in 2013 and 2012 respectively.

Consequently, the bank became more cautious with the result that loans and advances to customers reduced to Shs 1.41 trillion from Shs 1.46 trillion in 2012. Customer deposits also dropped to Shs 1.78 trillion down from 2.09 trillion in 2012, mainly attributed to more competition in the banking industry. However, total assets increased to Shs 3.24 trillion from Shs 3.09 trillion in 2012. Shareholders will therefore not be surprised to learn that management proposed Shs 50 billion as dividends for 2013 down from Shs 70 billion in 2012.

Top officials attributed the lower performance to "lower government activity" as the institution is the biggest commercial banker to the government. Significantly, uncertainty in government spending patterns impacted on the bank's business, which is why they are proposing to reduce on over-dependency on the government.

Going forward, officials said they expect more public investments specifically in infrastructure and heavy investments in oil and gas, which will hope would have a multiplier effect on the general economy especially on agriculture and the industrial sector. This has made them positive about the next 12 months.

"We expect balance sheet growth and in 2015/16 we should see our balance sheets continuing to grow after heavy investment in our system," the officials said.

KCB Bank's NPAs doubled to Shs15.3 billion from Shs 7.5 billion in 2012. Bad loans written off rose to Shs 3.2 billion from Shs 2.1 billion in the same period. Imperial Bank, one of the newer players, managed to increase its total assets to Shs 214.6 billion in 2013 up from Shs 35.2 billion in 2012 but recorded a loss amounting to more than Shs 200 million. Diamond Trust Bank saw its NPAs rise to Shs 2.5 billion in 2013 from Shs 297.5 million in 2012.

DFCU wrote off bad debts amounting to Shs 15.65 billion up from Shs 8.73 billion in 2012 while its provision for "bad and doubtful" debts grew to Shs 13.7 billion from Shs 11.78 billion the year before.

Bank of India, also one of the newer banks, saw a drop in profit after tax after recording just Shs 612 million in 2013 from Shs 896 million in 2012.

Crane Bank's net profits went down to Shs 47 billion in 2013 from Shs 80 billion in 2012. The Bank's bad debts written off grew to Shs 29 billon from Shs 26 million in 2013 and 2012 respectively.

Housing Finance Bank recorded Shs 6.4 billion net profits in 2013 down from Shs 8.1 billion in 2012. Finance Trust Bank net profits grew by 13% to Shs 1.7 billion in 2013 from Shs 1.5 billion a year before.

Stephen Kaboyo, a financial sector analyst, suggested that the increase in impaired loans can be attributed to the lag effects of a hostile economic environment of the years 2011/12 that impacted businesses negatively particularly the SME sector that form the bulk of businesses in Uganda.

Kaboyo said in the past year constraints around credit extension to the private sector remained and that there was evident lack of credit appetite from the commercial banks, which affected the bankloan books. In order to go around this challenge, he said, some banks were able to focus on areas that would increase non-funded income and quite clearly some were able to achieve this as seen in the component of fees and commissions.

He said the loosening of the monetary policy during the period did little to entice commercial banks to lower their lending rates and as a result borrowers kept away.

Going forward, in order to enhance profitability, Kaboyo suggested that banks have to embrace and invest more in market innovative strategies that increase efficiency and improve service delivery to customers.

In addition, he said, banks need to adopt new technologies that support internet banking, mobile banking, credit cards, point of sale etc.

Financial innovation driven by technology hold the future by offering affordable products and services that are compatible to the needs of a rapidly growing electronic market place, Kaboyo added.

Speaking to journalists at the beginning of April, Central Bank Governor Emmanuel Tumusiime Mutebile was positive that private sector credit had picked up slightly in March though the growth remains slow. He noted that faster recovery in credit growth may be impeded as banks focus on improving credit quality.

Adam Mugume, the BoU executive director for research, said it is expected that commercial banks should be more conscious about their customers.

He said the level of NPA ratio has increased from 4.9% in September last year to 6.9% in December 2013. Comparatively, the NPA ratio in China stands at 1.1% and 3.2% in the US. Over the same period, Uganda's private sector credit grew by 6.8%, which was far below the projection of 15%, according to BoU's monetary policy report for April. With such scenarios, banks can only hope that 2014 would present better prospects than 2013.

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Source: AllAfrica

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