Ugandan banks are facing uncertainty this year as operational costs rise amid a backlash of surging bad loans.
Whereas the banks posted a rise in profits in 2012 amid tough economic conditions, massive growth in costs incurred on bad loans and weaker performance in new branches threatened to ruin the party, analysts said.
A mixed short term outlook has created uncertainty over this year’s forecast with analysts projecting a rise in bad loans.
A spell of aggressive lending experienced in 2009 and 2010 that was targeted at retail customers apparently backfired, with many small borrowers falling into financial distress in early 2012, analysts and bankers said.
“The first quarter of 2013 has been equally challenging but we are counting on reductions in operating costs to enable us guarantee good performance,” said A.R Kalan, managing director at Crane Bank Ltd.
Housing Finance Bank Uganda saw its bad loan costs grow by more than 100 per cent in 2012, grossing Ush5.9 billion ($2.3 million) while its non performing loans and assets grew by 99 per cent to Ush21.8 billion ($8.4 million) during the same period.
“Mortgage loans posed one of the biggest problems in the banking sector last year. Falling incomes from new branches opened in 2010 also depleted some banks’ earnings, especially the new players, and this compelled bank headquarters to subsidise certain outlets across the country,” said Stephen Kaboyo, Managing Director at Alpha Capital Partners, a forex trading and financial consultancy firm.
Last week, Bank of Uganda Governor Emmanuel Tumusiime Mutebile said he expected private lending to grow adding commercial banks had room to lower their rates further. The regulator held its key interest rate at 12 per cent for the fifth straight month.
In April, year-on-year rate of inflation fell to 3.4 per cent from 4 per cent the previous month.
Standard Chartered Bank Uganda’s non performing loans and other assets rose by 87 per cent to Ush10.3 billion ($4 million) in 2012 but its provisions for bad debts fell by 18 per cent to Ush7 billion ($2.7 million), a sign of positive outlook on the quality of its loan book in the medium term. Its assets increased from Ush1.9 trillion ($765.7 million) in 2011 to Ush2.5 trillion ($964.6 million) last year.
But some bankers see an upturn in the banks’ fortunes. “Though bad loans were a big problem for everyone last year, the business environment seems to be improving coupled with lower interest rates. This might help reverse some of the damage caused by huge bad loan expenses but the positive impact of this will most likely be felt in this quarter,” said Patrick Mweheire, the executive director at Stanbic Bank Uganda.
Slow economic recovery reflected in fewer customer deposits and transactions also affected overall incomes generated from new outlets, a scenario that reportedly forced bank headquarters to subsidise the former, analysts said.
ALSO READ: Kenyan banks face tough times in Uganda
While big players like Ecobank have posted losses for more than three consecutive years, Bank of India Uganda which resumed business last year after a four decade absence, recorded a profit after one year of business, a landmark achievement in the banking industry.
Bank of India Uganda recorded profit before tax of Ush937.9 million ($366,957) which was largely driven by interest earned on investment securities comprising of treasury bills and bonds, among others.
This portfolio contributed Ush2.5 billion ($969,296) to the bank’s total income, far higher than interest earned on loans and advances which stood at Ush66.9 million ($26,161) in 2012.