Fresh from a rich 2018, Ugandan banks in the 3 months ending 31st March 2019 posted combined revenues of UGX772.2 billion, an increase of 17.2% from the UGX658.9 billion reported in March 2018.
According to Bank of Uganda’s latest Financial Stability Review report, the growth in revenue was driven by “improvements in asset quality” that “translated into reduction in provisions for bad debts and increased profitability of the sector.”
3 banks, however remained loss making, according to Bank of Uganda.
Banks’ total assets increased by 9.9% to UGX26 trillion at the end of March 2019, largely driven by increased holdings of government securities and upsurge in loans & advances.
“Banks’ investment in government securities rose by 29.5 percent while loans grew by 11.8 percent (7.9 percent in March 2018) – UGX12.23 trillion in March 2018 to UGX13.61 trillion in 2019. Notably, the proportion of foreign currency denominated loans to total loans reduced to 37.7 percent in March 2018, from 40.3 percent in the previous year,” notes BoU in their report.
Lowering interest rates and improved loan quality
Asset quality, as measured by the ratio of non-performing loans to total gross loans and advances (NPL ratio) improved to 3.8 percent, from 5.3 percent recorded in March 2018.
“The improvement in asset quality was largely attributed to the significant reduction in the industry stock of non-performing loans from UGX.618.7 billion to UGX.498.4 billion during the period under review,” according to Bank of Uganda.
“Consistent with banks’ reduction in exposure to foreign currency denominated loans, the proportion of foreign currency denominated NPLs relative to total NPLs reduced from 43.5 percent to 26.6 percent between March 2018 and March 2019,” BoU further reported.
The improvement in asset quality also coincided with lowered interest rates. There was an 8% aggregate reduction in lending rates from 21.4% at the start of the year to 19.61% at the end of March for UGX denominated loans. The central bank attributes this to its maintaining the Central Bank Rate at 10% throughout the period.
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Treasury bill rates on the 91 Days, 182 Days and 364 days also went down by 8.1%, 9.3% and 4.1% respectively further stimulating the appetite for banks to lend and lend cheaper.
Interest rates on foreign currency denominated loans however went up by 10.8 percentage points from 6.56% at the start of the year to 7.57% at end of March 2019.
Banking sector remains resilient
BoU reports that the industry also remained resilient with adequate capital buffers during March 2019.
“The aggregate industry tier 1 capital adequacy ratio (CAR) & total CAR were 20.4 percent and 22.3 percent respectively, well above the minimum requirement of 10 percent for tier 1 CAR and 12 percent for total capital CAR. However, this was a marginal reduction from the capital ratios held at the end March 2018. This was largely attributed to faster growth in credit which translated into an increase in the Risk Weighted Assets by 16.5 percent,” according to BoU.
The central bank also reported that although there was a reduction in the liquid assets–to–deposits ratio from 52.9% held as at March 2018 to 44.1% as at March 2019, this was “well above the minimum requirement of 20 percent.” This was a result of banks’ shift in asset allocation to longer term government securities.
The Liquidity Coverage Ratio (LCR) test showed that 22 banks held sufficient high quality liquid assets (HQLA) to sustain them through a 30-day stress scenario on a consolidated basis.
The central bank further said that it expected a “continued, but prudent, growth in credit, cognizant of macroeconomic developments and outlook.”