Stanbic Bank Uganda posted impressive earnings for 2017 as increased lending to agriculture and trade finance sectors paid off, coupled with strong revenues from project-related transactions.
But the share price of the country’s largest lender by assets remained stagnant as stockbrokers struggled to digest the numbers.
The bank’s profit after tax rose by five per cent to Ush200 billion ($54 million) by end of December 2017 while its total assets grew by 17.9 per cent to Ush5.4 trillion ($1.46 billion) during the same period, according to the lender’s latest financial results.
Whereas net interest margins fell from nine per cent to 7.1 per cent last year under steady pressure from policy rate cuts by the Central Bank, intense lending to agricultural and trade finance borrowers brought big yields for Stanbic and partly compensated for lost interest incomes.
A reduction in lending rates usually leads to smaller revenue margins.
For example, the 1.9 per cent drop in net interest margins saw Stanbic Bank lose interest income estimated at Ush100 billion ($27 million) — a consequence of significant loan sizes issued by the bank and a loose peg maintained between the Central Bank Rate (CBR) and Stanbic’s prime lending rates.
While the CBR was slashed from 9.5 per cent in December 2017 to nine per cent in February 2018, Stanbic’s prime lending rate similarly fell from 17.5 per cent announced in January to 17 per cent effective May 2018.
A strong push into agriculture lending saw the segment’s portfolio expand by Ush173 billion ($46.8 million) during 2017, with most of the loans allocated to ongoing projects and major players in the agro marketing chain.
New interest incomes earned from this lending segment yielded roughly Ush25.95 billion ($7 million) last year.
Its trade finance portfolio grew by Ush99 billion ($26.8 million) as the lender scaled up issuance of letters of credit to traders and some high rated suppliers.
An increase in bank guarantees and performance bonds issued in favour of large infrastructure projects in the energy and transport sectors apparently boosted the bank’s non-interest income through transaction fees paid by clients.
Non-interest incomes increased by six per cent to Ush283 billion ($76.5 million) but total incomes fell by one per cent to Ush636 billion ($171.8 million).
Total operating costs declined by three per cent to Ush341 billion ($92 million) and profit before tax increased by five per cent to Ush266 billion ($71.8 million) by close of December 2017.
Loans and advances grew by eight per cent to Ush2.13 trillion ($575.7 million) while customer deposits expanded by 18 per cent to Ush3.6 trillion ($972.9 million) during the same period.
High default rates
SBU’s cost to income ratio fell to 50.5 per cent while its default ratio dropped to 1.3 per cent- a change attributed to business recovery reported among certain corporate banking clients that suffered distress in 2016.
SBU’s return on equity fell to 25.3 per cent while its return on assets declined to four per cent.
“Net interest margins are no longer a sustainable, sole source of incomes for banks. The new trend is hinged towards diversification in areas like trade finance which carry bigger revenue potential over the long term. Investments in new, cutting edge individual-based products are also key in this context,” said Samuel Frederick Mwogeza, SBU’s chief finance officer.
“The SBU earnings for 2017 were surprising to some of us. We expected a decline in the bank’s non-interest income but it shocked us with a remarkable increase in non-interest income and a record profit figure.
“But we still need to figure out the real impact of the difficult economic times on its revenue streams in order to understand its performance better,” William Nyakatura, a stockbroker at African Alliance Uganda, said.
“Besides that, Stanbic Uganda ought to clarify its growth strategy, its impact on key financial performance indicators, market share and dividends before institutional investors consider buying more of its stock and raising its share price,” Mr Nyakatura added.