Monday, May 7, 2012


Commercial banks reported record profits last year on the strength of higher lending rates but also anticipate a greater proportion of their loans going bad.

Analysts also warn that as a result of determined central bank anti-inflationary measures tighter liquidity will lead to lower lending volumes which will negatively impact bank profitability.

Last year most banks reported double digit growth in net profits.

Barclays Bank led the way more than doubling its profits to sh21.2b from sh9.7b in 2010 driven mainly by profits booked on their currency trading.  The bank, which returned to profit two years after a particularly messy integration of the former Nile Bank, saw interest income – money from lending, rise to sh109.8b from sh100.6b the previous year there was a doubling of net trading income to sh23.7b from sh12.5b the in 2010.

Stanbic Bank, the country’s biggest bank by any measure, also saw profits jump 85% to sh162.5b in 2011 from sh87.6b the previous year. The boost in the bank’s bottom line came from sh100b jump in interest income.

Also noteworthy is that the banks increased their provisioning for bad debts. Every year banks examine their loan books and put money aside to cover anticipated bad loans.

Of the five top banks their average ratio of bad loan provisioning against the size of their loan books was 1.3% up from 1.16%, weighed down by a reduction in provisioning by Barclays Bank.

“It is not surprising that the bank profits are up significantly this year – higher lending rates and the treasury bill and bond yields made sure of that,” one retired banker speaking on condition of anonymity told Business Vision.
“The higher provisioning for bad loans was not a surprise too, but it is unlikely this will have a huge negative impact on the sector, if the results are anything to go by the percentage of bad loans to loan book remains in very manageable territory.”

Banks however will continue to draw criticism for their high lending rates when viewed against the interest they pay on deposits.

The average cost of money for the top five banks is about 4.4% while the average base lending rate – the rate at which banks lend to their most favoured customers is above 20%. The Bank of Uganda reported an industry wide weighted average lending rate of about 26.83%. The difference between the two figures is as high as 25% and at least in double digits.

“The truth is these banks have huge cost bases and someone has to pay for these,” the retired banker said.

Observers note that whereas the banks make huge profits year in, year out their services are restricted to the urban areas and even then to trade and services.

“The economy is growing every year but this growth is concentrated in the urban areas and more specifically in the services – banking, telecommunications and construction. Banks don’t lend to agriculture and they don’t lend to manufacturing they argue that they are not agricultural or development banks and rightly so, but this is not sustainable,” Makerere University Lawrence Bategeka said.

Bategeka a senior fellow at the Economic Policy Research Center (EPRC) the banks success shows how skewed our incentives are towards services and not production.

“If everyone is in banking who will be in agriculture and manufacturing. The productive sectors is where most of our labour force is and yet growth there is not matched by thatin the services,” he said.

“There is something fundamentally wrong when the returns on equity of banks far outstrips those of industry. In developing countries like us the productive sector should be enjoying returns on equity of between 15 and 20% with the banks around the same. As it is now banks are doing 20% and industry are seeing single digit returns,” another observer noted.

Return on average equity in the five banks polled stood at 32% with Stanbic Bank reporting a 55% return on average equity.

But in this year banks may witness a slowing down of profit growth weighed down by a tightening of liquidity and reduced lending on account of higher lending rates.

Though inflation and the central bank rate have been falling we have not seen a corresponding drop in lending rates.

“Banks are ok the real fall out going forward is going to be in the Small & Medium sized Enterprises (SMEs) a lot of these companies rely heavily on debt for their operations but are in very competitive sector. Look for them to go burst and this has implications on property as well as many of them are mortgaged to the hilt,” the former banker predicted.

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