While banks in 2021 saw improvements – double digit growth in income and profits there was still some hesitancy to jump right back into business, as we saw the tail end of the Covid pandemic, according to an analysis of their annual results.
Total operating income was up 14 percent to about sh4.5trillion
from sh3.9trillion in 2020 and industry profits were up 43.5 percent to
sh1trillion from sh706billion during the same period. The bigger percent of
these gains, about seven in every ten shillings of these, attributable to the
top five banks by assets.
The five biggest banks by assets are Stanbic, Centenary,
ABSA, Stanchart and DFCU in that order.
Interestingly the smaller banks while they saw their
holdings in the risk free government securities jump eight percent, growth in
their loan portfolios surpassed this rising 12 percent.
"The bigger banks the above suggests were more hesitant to get
back into the game at the first sign of improvements in the economy, which came
with the partial lifting of the lock down in June 2021. The figures showed that
these banks easing out of government securities was only just matched by
increases in their lending portfolios as a group....
This suggests that with full reopening of the economy
earlier this year banks will be straining at the bit to lend to the more
lucrative but riskier private sector.
Be that as it may the major challenge for the industry is he
high cost of doing business. Most of the industry’s income, 73 percent was
eaten up by costs, but again this average masked the huge disparities between
the best and the rest, with the best on giving up 37 percent of their income
and the worst spending 147 percent of what they earned, meaning they were loss
making and had to dip into their shareholders’ pockets to cover the hole.
Interestingly embedded in this is the cost of funds for
banks. While the industry average is three percent, measured by how much
interest they pay on deposits, one bank’s source of funds is below one percent.
The instituion with the priciest funds is 18.1 percent.
This is one figure and the disparities suggested therein,
has major implications for bringing lending rates down.
A few weeks ago the Uganda Bankers Association (UBA) had a
meeting to hear a report on how to lower their cost of doing business as a way
to eventually lower lending rates to the public.
"While government increased borrowing has major implications for lending rates – why lend to risking businesses when government is borrowing at double digit rates? The bankers recognize their own high costs of doing business is not helping the situation....
While in the last two or so years the introduction of agency
banking, mobile banking and ebanking have helped lower costs but these savings
again have been hogged by the bigger banks. That being said more can be done by
the bigger banks and the industry as a whole if there was more collaboration in
infrastructure sharing – data centers, ATMs and the movement of cash around.
With the mobile money snapping at their heels – MTN and
Airtel’s mobile money companies reported between themselves deposits of
sh1.5trillion, which would have made them the seventh largest bank by deposits,
there is a sense that collaboration rather than the current
everyone-for-himself-and-the-devil- take-the-hindmost will account for the
smallest bank but also weaken the industry’s ability to fend off the mobile
money companies.
As mentioned earlier government borrowing continues to hold
up lending rates but also are some regulatory requirements, like the insistence
that every bank have its own infrastructure, means there is only so much the
banks can do to bring down lending rates.
"It goes without saying that the health of the banking sector is critical to the smooth running of the economy. Its increasing profitability suggests there is plenty enough to go around....
The mobile money sector has stepped in to do what banks
couldn’t do with their huge cost bases, which is to increase financial
inclusion by reaching us where we are whenever we want.
The future of banking may very well be that they cede the
personal banking space to the mobile money companies and the fintechs and
provide the upstarts with the wholesale banking services that they need.
The Bank of Uganda has already signaled that it makes little
sense to persist with the dated brick and mortar model of opening branches to
reach customers. But with the pervasiveness of the mobile phones now, there is
more than 60 percent mobile phone coverage, even when accounting for people
with multiple accounts, the agency bankers are just place holders for an
eventual total digitization of the financial sector.
Arguably Covid hastened this progression.
It is possible therefore that by the time the banking
industry is ready to get back fully on their feet they will come up to the
realization that the industry has moved along and some very hard questions will
need answering.
