UGANDAN BANKS HOLDING ON TO EXCESS CAPITAL, NOT INVESTING

Centenary Bank Uganda. Commercial banks average core capital-weighted assets ratio stood at 20.3pc against a requirement of 8pc.

Ugandan banks have maintained excess capital levels over the past three years at the expense of diversification of resources into areas that promise higher returns on investment, industry sources say.

The industry’s average core capital to weighted assets ratio — a key indicator that compares the size of capital and quality of assets held by a bank — stood at 20.3 per cent at the end of June 2014 while the minimum requirement stands at eight per cent, according to the latest Financial Stability Report issued by the Bank of Uganda (BoU).

The average core capital to risk weighted assets ratio stood at 22.8 per cent by end of June 2014 against a minimum benchmark ratio of 12 per cent.

In comparison, core capital to weighted assets and core capital to risk weighted assets stood at 21.3 per cent and 24.3 per cent respectively by close of June 2013, BoU’s Financial Stability Report for June 2014 shows. Commercial banks’ minimum paid up capital was raised to Ush25 billion ($8 million) in February 2013.

The total number of commercial banks fell slightly to 25 at the end of last year, following the closure of Global Trust Bank, a subsidiary of Nigeria’s Industrial and General Insurance (IGI) Ltd.

In spite of surplus capital accumulated on their balance sheets, signs of low exploitation of capital within the banking industry are visible. For example, the country’s credit to GDP ratio is estimated at 17 per cent compared with the sub-Saharan average ratio of 25 per cent.

This outcome, analysts say, partly reflects limited investment in lending activities by commercial banks (which hold the largest share of loans and advances) and relatively tight conditions imposed on many borrowers. The number of registered borrowers is estimated at less than three million out of a total population of 35 million people, official data indicates.

“Some of this excess capital could be deployed in alternative areas that are more rewarding in order to minimise risks of generating lower returns on investment that occur when too much capital is injected in a fiercely competitive market. These investments could in turn compensate for lost incomes during periods of falling industry growth,” explained Adam Sengooba, senior manager in charge of enterprise risk services at Deloitte and Touche Uganda.

In contrast, industry executives and the local regulator cite strong growth in assets and higher concentration of surplus capital among small but less profitable lenders for the sector’s inability to exploit diverse opportunities.

READ: Ugandan banks to maintain growth

Current supervision rules compel banks to increase capital levels to match growth in assets, a factor that forces many lenders to accumulate huge amounts of capital in order to counter regulatory pressures, sources say. Therefore, further growth in assets, particularly loans and advances, translates into less capacity to deploy capital in other areas.

Total bank assets grew by 14.5 per cent from Ush15.7 trillion ($5 billion) in June 2013 to Ush18.6 trillion ($6 million) while total loans and advances increased by 14.3 per cent from Ush7.7 trillion ($2.5 billion) to Ush8.8 trillion ($2.9 billion) during the same period, BoU figures show.

Further growth in the number of top tier banks that hold assets of more than Ush1 trillion ($329 million) implies fewer lenders with disposable resources to invest in alternative areas.

Whereas small banks reportedly hold more excess capital compared with their peers, fairly large losses experienced in the past and weak growth patterns have apparently pushed them to lock in their capital to buffer against future market shocks.

Ecobank Uganda for example, posted a big loss of Ush17.5 billion ($5.8 million) in 2013 but recorded a smaller loss of Ush5.2 billion ($1.7 million) last year. The number of loss making banks fell from nine in 2013 to five in December 2014, according to Stanbic Uganda data.

On the other hand, large banks hold less surplus capital that bears less commercial benefits for a diversification strategy, observers say. For example, Stanbic Uganda’s tier one core capital ratio increased slightly from 16.7 per cent in 2013 to 17.4 per cent by end of December 2014.

“Banks are using the excess capital to support strong growth in assets. Under existing compliance rules, commercial banks are required to increase capital levels as total assets grow over time. Besides that, the central bank reserves the right to approve any alternative ventures undertaken by banks and this restricts an institution’s ability to diversify its commercial base,” noted Fabian Kasi, managing director at Centenary Bank.

With the exception of investment banking, the industry regulator seems receptive towards diversification strategies proposed by banks.

“Ugandan banks are fully capitalised but the introduction of Basel 3 principles has forced some of them to increase retained earnings so as to fulfil new capital requirements in the near future.

However, small banks hold much of the excess capital but are less comfortable deploying it elsewhere due to profitability challenges. Nevertheless, commercial banks are free to invest in other financial institutions like insurance companies,” argued Benedict Sekabira, BoU’s deputy director for supervision.

In recent years, some prominent lenders have invested in stockbrokerage businesses in an effort to tap into steady growth registered by the local bourse.
These include Orient Bank, Bank of Baroda and Crane Bank.

However, modest returns posted by stockbrokers compared with commercial banks have raised questions about the quality of investment choices made by industry players.

The East African