Investors in Ugandan banks may be headed for a period of low returns, with projections showing disappointing half-year earnings for 2014.

Poor loan recovery and moderate growth in new loans are likely to dominate performance trends in the industry at the end of June as the sector battles the effects of limited cash flows in many sectors, analysts say.

Several banks have switched their attention to recovering the bad loans in an effort to increase profits and improve asset quality.

Total loan recoveries recorded in the industry grossed Ush8.5 billion ($3.3 million) in March compared with the Ush50.4 billion ($19.8 million) recorded in January, according to the Bank of Uganda (BoU). Total loan recoveries stood at Ush116 billion ($45.6 million) in March 2013.

The sharp decline in loan recoveries experienced during March is largely attributed to diminished demand for real estate properties, legal cases filed by distressed borrowers seeking to prevent attachment of assets and generally low spending power in the economy. Comparatively, fundamentals for Kenyan banks are looking up.

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While the big banks carry a substantial burden of unrecovered loans, smaller banks are projected to benefit more from credit recoveries; a trend driven by modest loan books composed of niche clients.

For instance, one medium sized bank out of 27 players accounted for 24 per cent of the value of total loans recovered at the end of March, a pattern expected to dominate the first six months of 2014, analysts said.

According to sources, Ugandan banks faced with depreciated prices for real estate collateral and a scarcity of buyers are reportedly off-loading real estate assets to property agents at discounted prices in an attempt to minimise default expenses on bad loans and unlock monies in their credit provisions for alternative use. But the returns for real estate dealers taking big bets in a weak market environment are still unclear.

“This practice could cause loss of accumulated interest and unrecovered professional costs, which will affect half year profits quite significantly,” said a source at Barclays Bank, Uganda.

The backlog of cases in the judiciary has slowed down efforts to recover bad loans, financial experts argue. Commercial cases filed in Ugandan courts currently take a minimum of six months to dispose of at the first stage of trial — a situation that constrains business decisions.

After months of muted credit flows in the industry, net loan extensions — the difference between the value of loans issued and total repayments rose sharply from Ush89 billion ($35 million) in February to Ush139.1 billion ($54.8 million) in March with similar momentum experienced in April, sources said.

In contrast, net loan extensions posted a negative value in January, according to BoU data, a scenario that highlighted subdued credit appetite within the banking industry.

“We have recorded notable growth in scheme based lending for retail borrowers during the first four months of 2014. This was largely driven by scrapping of credit insurance charges on our unsecured loans. Around 80 per cent of total industry loans are secured and this has left many banks stuck with real estate properties that have not attracted buyers for several months,” said a source at Barclays Bank Uganda.

Lending rates have stayed flat, averaging 21 per cent since January— a direct consequence of a neutral policy stance that has seen the Central Bank Rate remain stagnant at 11.5 per cent over a four month period.

“A moderate pick up in lending activity is beginning to be felt in the market with refinancing loans meant to purchase mortgaged collateral gaining some momentum. The reduced backlog at the land registry also boosted lending in the first quarter, but its impact will be felt more significantly in the second half of this year.

But lack of massive growth in private sector credit has left overall non performing loans (NPLs) almost flat,” said Benedict Sekabira, BoU’s deputy director for bank supervision.

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Total industry NPLs stood at 6 per cent in December 2013 and rose slightly to 6.1 per cent at the end of March, development attributed to bad loans arising from borrowers stranded with huge unpaid bills accumulated against supply orders originating from war-affected South Sudan.