The Bank of Uganda’s Financial Stability Review for June 2020 released on September 4, 2020 indicates that overall, systemic liquidity risk in the banking sector diminished, as liquidity buffers in all institutions including all systemically important banks (DSIBs) improved, enhancing their resilience to tightening of funding conditions.
Systemic wholesale funding and liquidity conditions eased in the quarter to June 2020, in line with BOU monetary and macro prudential policy measures.
The risks from wholesale funding costs eased, with the weighted average overnight and 7-day interbank rates averaging 6.5 percent and 7.5 percent, down from 9.3 percent and 10.3 percent in March 2020, respectively. The spread between the 7-day interbank rate and the CBR, a key indicator of market volatility, reduced relative to the previous quarter. Indicators also show that volatility in the flow of foreign investor funds, whereby outflows which had increased in March 2020, stabilized in the quarter to June 2020.
“Nevertheless, there are bank-specific funding shortages among a few institutions. In June 2020, one commercial bank accessed USh.20 billion from the COVID-19 Exceptional Liquidity Assistance Facility that was established by BOU to support banking institutions during the pandemic. In July 2020, one credit institution applied for USh.2.0 billion but withdrew its application, and another commercial bank borrowed USh.40 billion from the Lombard Window,” BoU’s report reads in part.
It adds that the ratio of liquid assets-to-total deposits increased for all supervised financial institutions (SFIs) (Table 1) and was well above the regulatory minimum of 20 percent for banks and credit institutions, and 15 percent for microfinance deposit-taking institutions (MDIs).
“Similarly, the commercial banks’ aggregate liquidity coverage ratio (LCR) shows that save for one bank, all banks were able to meet the 100 percent minimum requirement on a consolidated basis (all currencies) at the end of June 2020, thereby holding sufficient high quality liquid assets (HQLAs) to meet their net cash out flows over 30 days. The rise in liquidity buffers was accounted for by increased,” the report says.
The report obtained by Business Focus explains that in order to further address normal bank-specific funding stress, BOU set up a Standing Lending Facility in July 2020, which is in the process of operationalisation.
The report further shows that Credit growth remains hampered by the slowdown in economic activity and cautious lending by banking institutions due to the rising credit default rates.
“Credit risk from deterioration in loan quality remains the key risk to financial stability. Loans extended by commercial banks increased by 14.0 percent to USh.15.5 trillion over the year to June 2020. However, growth in the six months to June 2020 was subdued, with lending partly comprised of recapitalised interest from loans restructured under credit relief measures amounting to USh.373.5 billion, as well as lending to government for budget support,” the report says.
Furthermore, it adds risks to credit performance arising from the real estate sector increased as residential property prices declined by 2.9 percent during the quarter ended June 20203.
However, the impact of falling property prices on banking institutions’ collateral values was alleviated by prudent loan-to-value (LTV) ratios maintained by SFIs, which remained below the limit of 85 percent on residential mortgages and land purchase loans that was set by BOU in May 2020, the report says.
It should be noted, though, that the aggregate LTV ratio on foreign currency loans for land purchase remains above 90 percent.
“Asset quality, as measured by the ratio of non-performing loans to total loans (NPL ratio), worsened across the banking industry through the year ended June 2020,” the report says, adding that the NPL ratio for commercial banks rose from 3.8 percent in June 2019 to 5.8 percent in June 2020, largely due to a rise in non-performing loans (NPLs) of 73.5 percent or USh.378.5 billion over the year, with a 14.0 percent or USh.109.8 billion increase in NPLs over the quarter to June 2020, with deterioration largely coming from the real estate, trade and commerce, and household sectors.
Similarly, the NPL ratios for credit institutions and MDIs rose to 7.6 percent and 10.8 percent respectively during the same period, the report says.