Commercial banks registered strong growth in customer deposits of 17.1 percent from USh22.9 trillion in 2019 to USh26.8 trillion over the year ended December 2020 in spite of the slow pace of economic recovery.
This revelation is contained in Bank of Uganda’s Quarterly Financial Stability Review December 2020 released in March 2021.
“Most of this increase in deposits, amounting to 13.6 percent, occurred between March 2020 and December 2020,” the report says.
Going forward, BoU says, potential downside risks to banks’ liquidity conditions include: higher non-performing loans if some borrowers under credit relief are still distressed, and a potential reduction in government expenditure with associated accumulation of domestic arrears due to lower revenue.
The report adds that liquidity risk reduced in the quarter ending December 2020, as most Supervised Financial Institutions (SFIs) including all domestic systemically important banks (DSBIs) accumulated ample liquidity buffers, resulting in an improvement in resilience to liquidity shocks.
“This positive outcome is an indication of the effectiveness of BOU’s monetary and macro-prudential policy actions; as well as a significant buildup of deposits driven by fiscal expansion, and increased investment in government securities amidst heightened risk aversion to lending,” the report obtained by Business Focus reveals.
The improvement in liquidity conditions was reflected in several indicators. First, the cost and volatility of domestic interbank funding, a key indicator of systemic liquidity stress, reduced further over the quarter to December 2020.
“The 7-day interbank rate reduced to 7.3 percent in December 2020, from 9.1 percent in December 2019. In addition, the spreads between the central bank rate and both the 7-day interbank rate and 7-day implied rate on foreign currency swaps reduced compared to the quarters ended March and June 2020,” the report says.
Second, it adds, inflows from offshore investors recovered, increasing their total assets in Uganda to USh.2.3 trillion, the highest level since November 2016, attracted by the relative stability and returns in the domestic financial markets.
“Third, aggregate banking industry liquid assets grew. As a result the aggregate ratio of liquid assets to total deposits was well above the regulatory minimum of 20 percent for commercial banks and credit institutions, and 15 percent for microfinance deposit taking institutions (MDIs),” BoU’s report reveals.
Fourth, the report says, the Liquidity Coverage Ratio (LCR), an indicator of banks’ ability to withstand a 30-day liquidity stress period, remained well above the 100 percent benchmark in the period under review, indicating that on aggregate, banks have built up significant stocks of high quality liquid assets (HQLA) to meet their short-term liquidity needs.
“Macro stress tests conducted by BOU suggest that most SFIs have adequate capital to absorb losses from deterioration of all past due restructured loans. Nevertheless, banks’ resilience will be tested in the next six months if past due restructured loans and loans under second restructuring continue rising materially,” the report reads.
