BoU Explains Bank Losses

Bank of Uganda has expressed concern over the continued credit and operation risks facing financial institutions in the country.

In its 2013 annual supervision report, the central bank said credit, in terms of loan quality, and operational risks posed the major risks to the banks’ financial health. It is because of these risks that many banks either recorded losses or drops in profit for the year 2013.

“The high credit risk exposure is attributed to the after-effects of high credit growth, the economic slowdown in 2011 and 2012, and the high interest rate regime which continued to negatively impact on the quality of the sector’s loan portfolio… ,” the report reads in part.

The ratio of non-performing assets to total aances deteriorated to 5.6 per cent as at the end of last year from 4.2 per cent registered in 2012. This, BOU says, affected bank profitability, which declined to Shs 414bn in 2013 from Shs 544.8bn in 2012. The central bank, however, noted all banks had adequate capital to absorb losses.

The banks’ financial reports released in April showed that three of the six largest banks, each with assets worth at least Shs 1 trillion, saw their profits drop by 20 per cent or more. Stanbic bank, Crane bank, and Standard Chartered bank, registered a drop in profit. Banks such as Ecobank, Orient, United Bank of Africa, Global Trust, Bank of Africa registered losses.

Arthur Isiko, the acting managing director for Bank of Africa, said “2013 was a challenging year characterized by slow growth and decline in revenue and profitability.” He, however, added that “most credit quality metrics have begun to improve as the economy gains strength. We have also strengthened our capital base through a rights issue of Shs 10bn during the year (2013), to be soon followed with another injection of Shs 10bn in 2014.”

While releasing the bank’s financial results recently, Stanbic Managing Director, Philip Odera said the effects of the 2011 economic slump affected the banking sector.

“Inflation [in 2011 and 2012] went through the roof. As a result, interest rates were pushed through the roof,” Odera said.

The BOU report says non-performing loans (NPLs), sometimes known as bad loans or loans that were failed to be serviced, increased in the business sectors of trade and commerce, and building and construction, posting the largest share of total NPLs in 2013.

Household and personal loans registered the least NPLs.

“The volume of NPLs grew at a higher rate of 41.5 per cent in 2013 from Shs 329.1bn to Shs 465.8bn compared to the growth in total loans of 6.2 per cent registered during the same period,” the report pointed out.

To avoid bad loans, some banks resorted to trading in government securities. This, however, as Ezra Munyambonera, a research fellow at the Makerere-based Economic Policy Research Centre (EPRC), argued, was not enough to make them significant profits.

“Up to 50 per cent of these banks’ capital assets are traded in treasury bills and bonds. This leaves little money available for the private sector,” he told The Observer.

BOU said operational risks were mainly driven by technological challenges as banks strived to offer unique products, which were not adequately supported by the existing banking systems, and therefore necessitated system up-grades. Such technological challenges exposed some of the banks to cyber fraud.

Source : The Observer

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