13 Ugandan Banks Risk Closure

13 Ugandan banks risk collapsing  if three of their largest borrowers defaulted, according to the 2016 Annual Supervision Report published by Bank of Uganda (BoU) last week.

If the three borrowers defaulted, the banks would become significantly undercapitalized; a thing that might see BoU take them over just like it did to Crane Bank in October last year.

This shock would result into “an aggregate capital shortfall of Shs513.86 billion.”

ALSO READ: 2016 Results: Uganda’s Best, Worst Performing Banks Named

The report sanctioned by Prof. Emmanuel Tumusiime-Mutebile adds that seven (7) banks could collapse if their single largest borrower defaulted.

The report also indicates that nine banks would become undercapitalized if their Non-Performing Loans (NPLs) increased by 200%. Seven banks would also go under if their NPLs increased by 100%.

“If NPLs were to increase by 200 percent, assuming the increase is in the loss category which requires full provisioning, 9 banks would become undercapitalised with an aggregate capital shortfall of Ushs247.39 billion,” the report says.

The report says that BoU conducted stress tests on a quarterly basis to quantify the magnitude of losses which banks would incur in the event that   they encounter specific shocks, and the impact of these losses on the banks’ capital.

The shocks included in the stress tests were: decline in net interest margin, decrease in interest income on government securities, depreciation of the Uganda Shilling against the United States dollar, increase in non-performing loans and 100% loan loss of each bank’s top 3 borrowers.

“The shocks chosen were those considered plausible and realistic while others  are  pegged  to  previous adverse  experiences  such  as  the  bank  closures of 1999 to 2001 and the economic  downturn of 2011/2012,” the report says, adding: “The results of the tests conducted on the banks’ financial positions at the end of December 2016.”

The report states that  year  2016  was  a  very  difficult one for  the  banking  system, with loan  quality deteriorating terribly.

NPLs to total gross loans rose from 5.3% to10.5% between December 2015 and December 2016.

This led to a slowdown of private sector credit growth and a drop in bank profitability.

In October 2016, Crane Bank, one of  the  largest  banks  in  the  market,  was  taken  over  by  the  BoU and placed  under statutory management because its huge burden of NPLs placed depositors’ funds at risk, the report says.

It adds that Crane Bank was resolved in January 2017 with the transfer of the bulk of its assets and liabilities to DFCU Bank.

“The resolution of Crane  Bank,  despite  its  size,  was  achieved  without  any  contagion  to  the  rest  of  the  banking  market  and without its depositors incurring any losses,” the report says.

Besides Crane Bank Limited, the report adds that there was another bank that had fallen below the required minimum capital of Shs25bn, but it injected in fresh capital on directions of BoU.

The 2016 Annual Supervision Report provides information on the supervisory activities conducted by the Bank of Uganda.

It also provides an assessment of the performance of the financial system and potential risks to financial stability, as well as the reforms to the regulatory framework undertaken during the year.