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Bad 2016, gloomy 2017 for banks

BoU Governor Tumusiime Mutebil

Experts blame it on bad economy, call for quick fixes

Kampala, Uganda | JULIUS BUSINGE | On Sept. 07 Bank of Uganda (BoU) released a delayed annual supervision report for the financial sector for the year ended December 2016. The reasons that delayed the report that normally comes out in July were not shared but it comes when the half year banks performance for 2017 indicates a 4% drop in industry profitability when compared to the same period last year.

As always, the latest report provides information on the supervisory activities conducted by the BoU and 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.

A quick analysis about the sector, going by the findings of the report shows a bad 2016 compared to 2015.

“The year 2016 was a very difficult one for the banking system,” Tumusiime Mutebile, the governor of BoU notes in his foreword of the 40 page report.

The report indicates that net profit for the sector dropped from Shs541 billion in December 2015 to Shs302 billion in December 2016.  Return on assets for the industry declined from 2.6% in 2015 to 1.3% in 2016; return on equity almost declined by 100% from 16% in December 2015 to 8.3% in the same time in 2016.

Non-performing loans (NPLs) to total gross loans rose from 5.3% to 10.5% in the period between December 2015 and December 2016; this led to a slowdown in private sector credit growth and a drop in bank profitability.

The capital ratios of banks to risk weighted assets fell from 18.6% at the end of 2015 to 17.3% at the end of 2016, although the latter was still above the regulatory minimum of 8%. This partly led to the takeover of two banks – Crane Bank, one of the top three out of the 25 and a middle sized bank, Imperial Bank Uganda Limited – by the central bank and later sold to DFCU bank Limited and   Exim Bank Uganda Limited respectively.

According to the report, some banks exhibited weaknesses in corporate governance practices as well as in the management of strategic, credit, operational and compliance risks. On a positive note, the cost to income ratio reduced by 2.2% to 67.2% in December 2016.

Although Mutebile argues that banks remain highly capitalised to overcome shocks, he says “risks from low GDP growth and high NPLs are likely to remain the major source of concern for stability”.  He said strong capital and liquidity buffers held by banks provide the banking system with a high degree of resilience to shocks such as losses on their loan portfolios.

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