Recently, Bank of Uganda (BoU) published the seventh issue of the
Annual Supervision Report corresponding to the year ending December
2016. BoU reiterates that the banking industry remains sound, well
capitalised, liquid and profitable. This indeed is instrumental in
restoring confidence to the sector following the takeover of Crane bank
in October 2016 and the subsequent disposal of some of its assets and
liabilities to DFCU bank in January 2017. In the same report, it is
underscored that the handling of Crane Bank by BoU was without any
contagion despite the regulatory weaknesses, fraud in the bank and the
associated misreporting by then a Domestic Systematically Important
Bank.
On profitability of the sector, the report indicates a reduction in profits after tax from UGX 541 billion in 2015 to UGX 302 billion in 2016 – the lowest in five years. However, this is inconsistent with the published information by the 24 commercial banks that reveals that the net profits increased to UGX 677 billion. The difference (UGX 375 billion) is arguably attributed to Crane Bank losses which accounted for nearly 50% of the industry non-performing loans (NPLs) in December 2016. The asset deterioration depicted by the rise in NPLs (10.5% of total loans) and bad loans (UGX 574 billion) in December 2016 imply that the sector risks remain pronounced. The stress tests reveal that if each bank's largest three borrowers were to fully default, 13 banks would become undercapitalised with the cumulative shortfall of UGX 512 billion. Together with NPLs and bad loans, they compare unfavourable to the commendable Deposit Protection Fund (DPF) of UGX 405 billion end of December 2016. The DPF capitalisation is through premiums paid by the respective banks - of which 95% is invested in government securities. Additionally, DPF only accounts for 2.5% of the total deposits.
The deposits imperatively offer leverage for the banking sector as they account for 70% of the total assets (an equivalent of 81% of the total liabilities). However, the deposits are mainly of short term nature – implying arguably the banks do not offer long term lending. The ratio of total deposits to loans remains above 1, and grew to 1.4 largely representing the sluggish growth (6.1%) in credit in 2016. Loan approvals were at less than 60%, implying for every 10 loan applications – only 6 were granted. While credit to personnel and households increased to UGX 1.9 trillion ( 16% of the total loan book, some banks are re-adjusting their portfolio either in safer assets, areas of comparative advantage ( for example Housing Finance Bank for mortgages) and others like equity have indicated they will stop personnel lending. Credit to real estate and trade sectors has remained stagnant over the last couple of years.
Banks instead increased their investment in government securities reaching UGX 5.1 trillion in 2016 from UGX 4.1 trillion in 2015 – representing a 25.6% increase. This may be suggestive of the crowding out of the private sector whose growth in the last 5 years has been lower than the historical average. Also total private sector credit at UGX 11.5 trillion represents 13% of GDP which is low compared to Sub Saharan Africa average of over 20% - which illustrates low credit penetration and that private sector is not optimally leveraged yet the banks are seemingly so. This also corroborated by the cumulative number of financial cards reaching 1.38 million in December 2016. Low credit penetration is attributed inter alia information asymmetry on the borrowers, small middle income class, the slowing economic activity plus the associated downside effect on employment and the reducing household income in real terms. Household income data remains desperately needed and to be frequently updated for proper and effective economic planning. The last household data available is from 2012/13 and economy has since encountered numerous shocks and changes.
In conclusion, with total shareholders' equity at UGX 3.7 trillion (16% of the total bank assets) implies that banks are highly leveraged by deposits. Despite the high interest rate spread (difference between loan and deposit rates), banking profitability remains unpropitious particularly for the bottom 15 banks (five were loss making in 2016). The high deposit share of bank assets reiterates the need for heightened supervision to mitigate the recurrence of Crane Bank and restore full confidence in the sector. The alternative is client panic and bank runs and this could adversely strangle the economy.
On profitability of the sector, the report indicates a reduction in profits after tax from UGX 541 billion in 2015 to UGX 302 billion in 2016 – the lowest in five years. However, this is inconsistent with the published information by the 24 commercial banks that reveals that the net profits increased to UGX 677 billion. The difference (UGX 375 billion) is arguably attributed to Crane Bank losses which accounted for nearly 50% of the industry non-performing loans (NPLs) in December 2016. The asset deterioration depicted by the rise in NPLs (10.5% of total loans) and bad loans (UGX 574 billion) in December 2016 imply that the sector risks remain pronounced. The stress tests reveal that if each bank's largest three borrowers were to fully default, 13 banks would become undercapitalised with the cumulative shortfall of UGX 512 billion. Together with NPLs and bad loans, they compare unfavourable to the commendable Deposit Protection Fund (DPF) of UGX 405 billion end of December 2016. The DPF capitalisation is through premiums paid by the respective banks - of which 95% is invested in government securities. Additionally, DPF only accounts for 2.5% of the total deposits.
The deposits imperatively offer leverage for the banking sector as they account for 70% of the total assets (an equivalent of 81% of the total liabilities). However, the deposits are mainly of short term nature – implying arguably the banks do not offer long term lending. The ratio of total deposits to loans remains above 1, and grew to 1.4 largely representing the sluggish growth (6.1%) in credit in 2016. Loan approvals were at less than 60%, implying for every 10 loan applications – only 6 were granted. While credit to personnel and households increased to UGX 1.9 trillion ( 16% of the total loan book, some banks are re-adjusting their portfolio either in safer assets, areas of comparative advantage ( for example Housing Finance Bank for mortgages) and others like equity have indicated they will stop personnel lending. Credit to real estate and trade sectors has remained stagnant over the last couple of years.
Banks instead increased their investment in government securities reaching UGX 5.1 trillion in 2016 from UGX 4.1 trillion in 2015 – representing a 25.6% increase. This may be suggestive of the crowding out of the private sector whose growth in the last 5 years has been lower than the historical average. Also total private sector credit at UGX 11.5 trillion represents 13% of GDP which is low compared to Sub Saharan Africa average of over 20% - which illustrates low credit penetration and that private sector is not optimally leveraged yet the banks are seemingly so. This also corroborated by the cumulative number of financial cards reaching 1.38 million in December 2016. Low credit penetration is attributed inter alia information asymmetry on the borrowers, small middle income class, the slowing economic activity plus the associated downside effect on employment and the reducing household income in real terms. Household income data remains desperately needed and to be frequently updated for proper and effective economic planning. The last household data available is from 2012/13 and economy has since encountered numerous shocks and changes.
In conclusion, with total shareholders' equity at UGX 3.7 trillion (16% of the total bank assets) implies that banks are highly leveraged by deposits. Despite the high interest rate spread (difference between loan and deposit rates), banking profitability remains unpropitious particularly for the bottom 15 banks (five were loss making in 2016). The high deposit share of bank assets reiterates the need for heightened supervision to mitigate the recurrence of Crane Bank and restore full confidence in the sector. The alternative is client panic and bank runs and this could adversely strangle the economy.
No comments:
Post a Comment