UGANDAN BANKS LIKELY TO RECORD LOW GROWTH THIS YEAR, SAYS REPORT

Crane Bank Limited. A slowdown in the growth of deposits plus increased provisions for bad loans in the small and medium business segment could adversely affect the performance of Ugandan banks, a new report says. 

A slowdown in the growth of deposits plus increased provisions for bad loans in the small and medium business segment could adversely affect the performance of Ugandan banks this year, a new report says.

The report, published by the African Alliance Uganda, cited slow economic recovery as a major challenge facing industry performance this year.

This is largely reflected in the weak consumer spending patterns across many sectors, widespread closure or stagnation of small businesses, postponement of new projects funded by big companies and reduced tax collections.

Total industry deposits grew by 12 per cent to Ush11.5 trillion ($4.3 billion) as at the end of June 2014, compared with the 17 per cent growth recorded during the same period in 2013, according to the African Alliance report.

The share of industry deposits held by top lenders fell during the same period while some small lenders saw their market share rise slightly on account of new gains from increased competition for retail deposits.

For example, Stanbic Bank Uganda’s share of industry deposits dropped from 20 per cent to 15.5 per cent, while that of Standard Chartered Bank Uganda declined to 14.9 per cent from 16 per cent. Similarly, Orient Bank’s share of industry deposits fell slightly from 3.9 per cent to 3.7 per cent, while that of Bank of Africa fell from 2.87 per cent to 2.6 per cent at the end of June.

By contrast, Crane Bank’s share of total deposits increased slightly from 8.06 per cent to 9.2 per cent while Centenary Bank’s share of total deposits grew from 7.8 per cent to 8.4 per cent during the same period.

Some analysts anticipate lower overall growth in industry deposits at the end of this year due to weak economic activity.

“We have received repeated requests to open new fixed deposit accounts in one of the leading banks over the past two weeks while some West African-owned banks have asked us to extend the duration of existing facilities. Similarly, some of the top banks are pushing harder for new deposits in order to strengthen their ability to lend at cheaper rates,” said Kenneth Owera, an investment analyst at asset management firm Stanlib Uganda.

A credit officer at Barclays Bank Uganda Ltd who requested anonymity said low government spending patterns and a recent move to close its accounts in commercial banks have adversely affected growth in deposits.

“Deposits held by small corporates are scattered across various banks and have less commercial benefit. As a result, several banks are keen to tap into mobile money transfer services in order to reinforce their deposit base,” he said.

Bad loans

Analysts at African Alliance Uganda project average provisions for bad loans to remain high at the end of this year.

In spite of limited disbursement of new loans by local banks, relatively high default rates particularly with regard to old loans continue to haunt lenders, especially those with undervalued credit risks.

This trend is partly responsible for marked growth in the industry’s non-performing loan (NPL) ratio, which rose from 5.6 per cent in December 2013 to 6.2 per cent at the end of June this year, according to BoU data.

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“Most of the tier one banks were prompted to raise credit provisions during the first half of 2014 in order to cope with high NPLs. For example, DFCU Bank increased its credit provisions from Ush2.5 billion ($930,271) to Ush5.2 billion ($1.9 million) by the close of June,” said Amanda Bbosa, a research analyst at African Alliance.

“By contrast, Stanbic Bank made huge credit provisions in 2012 which partly led to modest declines in bad loans that dropped from Ush23 billion ($8.6 million) to Ush21 billion ($7.8 million) in June 2014.”

However, loan recovery rates within the industry could come under pressure from the significant bad loans held by SMEs. Due to prevailing civil conflict in South Sudan, analysts argue many of these borrowers could turn out too distressed to pay up their loans.

But the industry regulator disagrees.

“Though credit provisions surged at the end of 2013, they appear to have declined at the end of June. As a result, we expect declines in NPLs over the next 12 months, which in turn will boost loan recovery rates alongside low inflation,” said Dr Charles Abuka, BoU’s director for financial stability.

“While all this is happening, the central bank must be on high alert, as sustained levels of depreciation may bring about import induced inflation.”

The East African