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Bad year for banks

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BoU admits 2012 was an abnormal year for the industry but is optimistic about 2013

2012 is a year commercial banks in Uganda want to forget quickly. The majority of them recorded only marginal profits in the year compared to 2011, others have incurred heavier losses; while others saw a decline in their profits.

With most of the banks publishing their balance sheets; one entry that stands out is that of the non-performing loans and other assets, which are the worst ever, largely resulting from failure by most borrowers to meet their loan obligations.

Speaking to journalists at their monthly press briefing on May 3, Bank of Uganda officials appeared to sympathize with some of the financial institutions but were adamant that the industry was on the right track.


“It was an abnormal year,” admitted Adam Mugume, the executive director for Research at BoU. “But overall the performance was good. There is no problem in the industry.”

Though banks remained largely well-capitalised, concerns about the growing non-performing loans and other assets (NPAs) – loans for which interest is no longer accrued - will remain a key concern going forward. The industry average of NPAs currently stands at about 6%, up from 2.2% in 2011.

The banks’ exposure to the harsh economic indicators including the high exchange rate, high inflationary pressures and the tight monetary policy and the low demand for bank credit and other commercial services; remained major challenges during the year. In 2013, all eyes will focus on these indicators to become affable.

The Central bank noted that the high inflationary pressures negatively affected economic growth, which grew at between 4-5% in 2012 slightly above 3.4% in the FY 2011/12. But market analysts believe this growth would have been better if the economic indicators were favorable.

“This is a key concern for all businesses,” said Lawrence Bategeka, a senior economist and Research Fellow at the Economic Policy Research Centre at Makerere University. He warned that if banks continue experiencing a rise in non-performing loans and other assets, they will be forced to deal with only prime customers and invest in risk-free instruments (bonds and treasury bills) at the expense of small private sector borrowers. This will impact negatively on the much needed rise in economic productivity.

Top earners

Standard Chartered Bank profit after tax grew by 35%; from Shs 98.2 billion to Shs 132.1 billion. Total assets grew by 26%; from Shs 1,957 billion to Shs 2,465 billion. Loans and advances grew by 16%; from Shs 1,099 billion to Shs 1,275 billion. Customer deposits grew by 23%; from Shs 1,384 billion to Shs 1,704 billion.

Shareholders’ equity increased by 37%; from Shs 271billion to Shs 372 billion.

Herman Kasekende, the managing director, said 2012 was a milestone year for the bank and the group in general.

“We have managed to achieve our success by sticking to our strategy, focusing on the basics of good banking, with clients and customers with whom we have deep and long relationships,” he said, adding, “We have kept a tight grip of the risks in our operations by empowering and motivating our staff and ensuring we are an exemplary corporate citizen.”

Centenary Bank, one of the local banks, recorded a Shs 54.9 billion profit after tax in 2012 up from Shs 47.9 billion in 2011. Officials said the growth was powered by the bank’s robust capitalisation and healthy liquidity profile, which put it in a strong position to take advantage of rising business opportunities in the highly competitive market.

The bank remained focused on microfinance particularly in rural areas. Going forward, Fabian Kasi, the bank’s managing director, said the bank would leverage its wider branch network to recruit more customers into its fold.

“We expect 2013 to be a much better year than 2012,” he said, adding that they would continue with their expansion program, putting in place adequate platforms to serve their customers better.

Stanbic Bank, Uganda’s largest commercial bank, posted Shs 130bn profit after tax in 2012 up from Shs 121bn in 2011.

The bank’s expenditure increased from Shs 267bn in 2011 to Shs 383bn in 2012. The bad debts written off jumped to Shs 93bn in 2012 from Shs18bn in 2011. As expected, interest on loans and advances increased to Shs 312bn in 2012 from Shs 266bn a year earlier.

The bank’s managing director Phillip Odera said they would have done better if the economy had been supportive enough. Going forward, Odera said a favorable economic environment in 2013 would position the bank in a very sound position to remain profitable.

“The bank is very, very sound,” he said.

Barclays Bank Uganda posted an increase in its profits from Shs 21billion in 2011 to Shs 36billion in 2012. This could have been boosted by an increase in the overall interest income which went up to Shs 130billion from Shs 109billion in 2012 and 2011 respectively. However, the bank’s non-performing loans and other assets grew from Shs 80billion in 2011 to Shs 106billion in 2012.

Profitability of other banks

Bank 2012 net profit (loss) Shs 2011 net profit (Loss) Shs
Baroda 29.3 bn 27.7 bn
Cairo 999 mn 1.8 bn
DTB 14.9 bn 9 bn
Fina 6.7 bn 745 mn
Imperial 1.7 bn 2.4 bn
BOA 9.7 bn 6.2 bn
Tropical 1.6 bn 624 mn
KCB 1.0 bn 9.0 bn
Post Bank 4.2 bn 1.6 bn
Equity 2.1 bn 544 mn
DFCU 29.8 bn 31.5 bn

New banks performance

NC Bank Uganda Limited, which opened business, last year recorded Shs 363 million in losses. This could have resulted from the bank’s initial capital expenditure. The overall expenditure of the bank was recorded at Shs 5.2 billion during the year. The bank recorded Shs 2.9 billion as interest on deposits and placements and Shs 294 million as interest on loans and advances. The bank’s overall total income was recorded at Shs 4.5billion.

Bank of India Uganda, which launched operations with NC Bank,  managed to record profits to the tune of Shs 896 million in its first year. The results indicate that profits arose from interest ascertained from deposits and placements, which were recorded at Shs 1.1bn in 2012.

Mugume defended the “bad” performance of the new banks saying the initial expenditure might not have favored them to record good profits.

“That is understandable,” he said.

Going forward, Mugume said they expected economic activity to peak up and demand for credit to improve since most commercial banks are reducing lending rates as a result of the cut in the central bank rate.

“We expect all banks to improve on their general performance in 2013,” he said, adding inflation which had become stubborn touching the highs of 30.4% at the end of 2011is stabilising in single digits, the main target for the central bank.

Expert view

Stephen Kaboyo, the managing director at Alpha Capital Partners who is knowledgeable about the banking sector in Uganda, predicted that in a competitive market like Uganda “we could see consolidation, mergers and acquisitions along the way.”
He said particularly for banks that are carrying losses, this may not be business as usual.

He added however, that the overall financial performance of banks in Uganda was generally good in 2012 despite the tough macroeconomic environment that was characterized by high interest rates, a slowdown in credit growth amidst increasing levels of non-performing assets.

“Some commercial banks were able to navigate these conditions by diversifying their income sources through enhancing other non- interest income sources,” he said, adding that a case in point is where the market witnessed some banks taking advantage of investment banking opportunities that were lucrative.

Looking at the drivers of growth in the banking sector, Kaboyo said, one cannot miss the ongoing structural changes in particular the emergence of mobile money platforms.

“This development is definitely transforming the existing business models,” he said.
He added that a stable macroeconomic and financial environment, continuous reforms and the projected economic growth on account of oil discovery could be key drivers of growth in the banking sector going forward.

Comments (2)Add Comment
written by Sam Kajoba, May 15, 2013
Why is it that , the government of uganda still taxes savers saving ? To the based of my knowledge this is double taxation. Due to the fact that the government taxes most individuals on PAYE, and given the goverment monopoly of the NSSF which is also a taxe in itself. and the little disposable income left for me to save for my family, once it is banked the government comes again to chop it.
This is to un accptable .if we are to encourage people to be responsible with money then this discourages me to put my cash in any bank for that matter.
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