Uganda bank profits rose 27% in 2021 amid pandemic concerns

The banking industry except two credit institutions held strong capital buffers signalising increased resilience to potential shocks

Kampala, Uganda | ISAAC KHISA | Uganda bank profits rose 27% in 2021 from the previous year as the economy partially recovered, but the industry’s future faces uncertainty due to the ongoing Russia-Ukraine conflict and the surge in commodity prices.

The industry posted Shs 1.07trillion in profits in 2021, a sharp increase from Shs 846.2 billion in the previous year driven by income from investments in government securities and loans, according to the Bank of Uganda’s latest Annual Supervision Report.

The ratio of non-performing loans was largely unchanged between 2020 and 2021 at 5.27% versus 5.26% respectively.

BOU Deputy Governor, Michael Atingi-Ego, said the banking industry remains resilient though tightening of monetary policy, supply-side shocks and rising commodity prices could have a spillover adverse effect on the country’s financial system.

BoU early this month raised the central bank rate by one percentage point to 7.5% for the first time in the last two years to tame inflation that had jumped to 6%, one percentage above the usual annual target.

Similarly, Credit Institutions or Tier II financial institutions’ net profit improved from Shs14.7billion loss in 2020 to Shs 4.3 billion profit last year.

On the other hand, the microfinance deposit-taking institutions (MDIs)’ net profit reduced from Shs 33.9 billion to Shs 36.8 billion loss over the same period under review following a 71.5 percent increase in provisions for bad loans due to the impact of the COVID-19 pandemic on micro borrowers.

“Going forward, the main risk to supervised financial institutions’ (SFIs’) profitability remains the potential increase of non-performing loans and provisions as SFIs’ loans may become permanently impaired as a result of the effect of the pandemic on economic activity,” BoU said in the report.

Private sector credit up

The industry’s credit growth continued to recover during the year but remained moderate. The total loans by all the supervised financial institutions grew by 6.3 percent to Shs18.4 trillion in the year to end-December 2021, compared to the 12.6 percent growth over the period ended December 2020.

Banks registered the strongest growth in credit during the year at a rate of 8.8 percent, to 17.7 trillion as MDIs registered a 2.3 percent growth in loans advanced. Credit institutions, meanwhile, saw loans advanced contract by 58.4 percent following the upgrade of Post Bank to a commercial bank.

Loans to all sectors increased except to the business and social services sectors where credit contracted by 6.2 percent and 11.7 percent respectively.

But BoU hopes that reopening of the economy is expected to support recovery in credit intermediation, with improving demand for credit by borrowers and easing risk aversion by supervised financial institutions.

Credit risk, however, remains high as the Non-Performing Loans increased by 6.7 percent to 995.9 billion, with MDIs and commercial banks recording 64.8 percent and 8.5 percent increases, respectively.

Credit institutions and MDI’s aggregate NPL rations worsened from 8.3 percent to 8.9 percent and from 6.3 percent to 10.1 percent respectively, while the aggregate banks’ NPL ratio remained unchanged at 5.3 percent, with transport and communication, social services and real estate sectors contributing the highest share.

But the industry regulator is hopeful that the reduction in prices of residential properties in the Greater Kampala Metropolitan Area will see recovery and stability in the valuation of real estate property, which collateralizes most of the financial institution’s lending, minimising credit risk and supporting credit intermediation going forward.

“Additionally, to further minimize excessive leverage and potential risks from adverse movements in real estate prices, BOU shall maintain the prudential policy on loan-to-value ratio limit of 85.0 percent on residential mortgages and loans for land purchases,” states the report.

BoU said the, the stock of loans that remained under the Credit Relief Measures program stood at Shs3.1 trillion as at the end of December last year compared to Shs 4.8 trillion in 2020.

Customer deposits hits Shs28.6trillion

Customer deposits, which remain the main source of stable funding for commercial banks and constitute about 84 percent of total liabilities, grew by 6.8 percent to Shs 28.6 trillion.

The proportion of foreign currency-denominated deposits to total deposits continued to decline, from 37.2 percent in December 2019 to 35.7 percent in December 2020 and to 35.2 percent in December 2021, reducing commercial banks’ exposure to foreign exchange risk.

Similarly, customer deposits for MDIs increased from Shs 355.9 billion to Shs383.2 billion during the same period under review. Customer deposits for credit institutions reduced from Shs 593.7 billion to Shs 226.3 billion due to the upgrade of Post Bank to commercial bank status.

The entire banking industry except two credit institutions held strong capital buffers in 2021 and thus increased resilience to potential shocks.

Commercial banks profits in the last 5 years

Source: BoU