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Why 2017 Will Be A Bad Year For Ugandan Banks

Profits recorded for Ugandan banks in 2017 are set to drop as effects of the hard economic times begin to manifest.

In 2016, banks registered huge profits, having concentrated their efforts on recovering Non-Performing Loans (NPLs) while remaining cautious towards lending.

Consequently, total industry profit increased to Shs676.73bn in 2016, up from Shs489.64bn recorded in 2015. However, despite of the double digit growth, the industry recorded high impairment levels of 10.5%.

NPLs also increased sharply.

Statistics indicate that banking sector profitability dropped 4% Year on Year as at June 2017 compared to 18% growth same time last year.

The most profitable bank in Uganda in recent years-Stanbic Bank Uganda Ltd (SBU) recorded Shs95.4bn net profit in half year results for 2017, down from Shs107.2bn recorded in the year ended June 2016. This represents a decline of 11%.

Releasing the results on August 15 at Serena Hotel, Kampala, Patrick Mweheire , the Stanbic Bank Uganda Chief Executive Officer, attributed the bank’s performance to the continued drop in interest rates plus slower than expected credit uptake.

“This plus slow economic activity and the flat currency all led to a drop in the profit after tax,” Mweheire said, adding that demand for credit across the sector has remained subdued.

The bank also registered a 6% decrease in total income to Shs314bn in June 2017, down from Shs334bn in June 2016.

“2017 is going to be a difficult year [for the banking sector]. Industry half year profit for 2017 is about Shs300bn,” he said, adding that 60% of industry loan books are in local currency but they have dropped by 4%.

According to Mweheire, the slowdown in 2017 across the industry was expected as “rates drop and bottom out which should provide a strong base for 2018 growth.”

However, due to Crane Bank acquisition early this year, dfcu bank that is headed by Juma Kisaame as Managing Director posted an impressive Shs114bn net profit in half year results for 2017, up from Shs23.3bn in June 2016. Therefore, while industry profits are likely to drop in 2017, dfcu maybe an exception.

Lending Subdued

Statistics indicate that industry client loans and advances growth has remained under 1% despite reduction in the Central Bank Rate (CBR) by Bank of Uganda from 17% in early 2016 to 10% in June 2017.

ALSO READ: Hard Economic Times As Lending To Private Sector Remains Subdued

This has seen unutilized credit limits in the industry  sector exceed Shs1.7 trillion in June  2017, having moved from an average of 1.2 trillion in 2015 (40% higher).

BoU’s Monetary Policy Report for June 2017 said Private Sector Credit (PSC) has remained subdued as banks remain cautious towards lending.

“Modest PSC growth despite sustained monetary easing in part highlights supply-side constraints,” BoU says, adding that demand for credit as witnessed by loan applications remains robust while supply (loan approvals) remains subdued.

“There is significant disparity between value of loan applications and approvals especially for the Manufacturing and Building, construction & real estate sectors,” BoU says.

In an earlier interview, Wilbrod Owor, the Executive Director at Uganda Bankers Association told Business Focus that low loan approvals is beyond  monetary easing and pricing factors.

 He noted that the “appetite for lending is still low” given the history of arrears-many customers are still struggling to pay back their loans.

“The outlook [for the economy] isn’t yet encouraging. If I give a loan given the macro-economic environment, will the borrower make profit you give a loan?” Owor said, adding that banks assess the situation before approving loans.

He noted that the situation is compounded by lack of serious local content laws that has seen the biggest percentage of government spending benefit foreign contractors, a thing he said restraints lending locally.

Uganda’ economy is projected to grow at above 5% in 2017/18 driven by efficiency in implementation of public sector Investments.

“Oil and Gas sector spend of circa $15.0 billion should be a strong catalyst for 2018-2020,” Mweheire says of the outlook for banking sector.


Taddewo William Senyonyi
William is a seasoned business and finance journalist. He is also an agripreneur and a coffee enthusiast.

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