While the Covid-19 pandemic destabilized a considerable section of the economy, the Bank of Uganda (BoU), says “the banking sector remained resilient, supported by strong capital and liquidity buffers as well as BOU policy measures”.
According to the central bank’s 2020 Annual Supervision Report, bank assets in the year ended December 2020 grew by 16.8 percent (Shs.5.5 trillion) from Shs.32.8 trillion in December 2019 to Shs.38.3 trillion in December 2020.
BoU says this growth rate was slightly higher than the 16.7 percent growth registered in the year ended December 2019.
“This was largely on account of an increase in holdings of government securities which rose by 39.9 percent (Shs.2.9 trillion) to Shs.10.1 trillion, gross loans and advances by 12.3 percent (Shs.1.8 trillion) to Shs.16.3 trillion, and balances with banks abroad which increased by 22.6 percent (Shs.0.59 trillion) to Shs.3.19 trillion,” reads the report.
According to the report, the banking sector saw aggregate net-after tax profit rise to Shs848.5 billion compared to Shs887.5 billion earned during the year to December 2019.
Five commercial banks, albeit small by their relative asset size in the industry, were loss-making, during the year ended December 2020.
On the side of lending and borrowing, gross loans and advances increased by 12.3% (Shs1.8trn), to Shs16.3trn, which was higher than 11.8% growth over the period ended December 2019.
BoU says this growth partly reflected a pickup in lending in the quarter ending December 31, 2020, and a significant component of capitalization of interest on restructured loans, which, as a share of new net lending increased from 4.5% in the year to December 2019 to 11.6% in the year to December 2020.
“Shillings and foreign currency-denominated loans increased by 19.9 percent and 12.3 percent compared to growth of 19.4 percent and 12.4 percent in 2019 respectively,” reads the report.
“The proportion of foreign currency-denominated loans to total loans increased from 35.4 percent to 36.4 percent over the year.”
The report indicates that the community and social services, and transport sectors registered the largest nominal increase in loans by Shs738.4bn and Shs435bn respectively.
This translates to 140.5%.
However, BoU says, “despite the pick-up in loan growth to some sectors, asset quality remains a major risk, due to the slow economic recovery”.
Because of weak economic activity, banks saw a 46.9% rise in bad loan write-offs, from Sh165.2bn in 2019 to Shs242.6bn in 2020.
The report further indicates that Aggregate non-performing loans (NPLs) increased over the year ended December 2020 across all banking institutions.
The NPL ratio for commercial banks, credit institutions and microfinance deposit-taking institutions rose from 4.9 percent, 3.6 percent and 3.6 percent in December 2019 to 5.3 percent, 8.1 percent and 6.3 percent in December 2020, respectively,” says the report.
“It should be noted that the rise in NPLs would have been higher but was effectively moderated by the Credit Relief Measures introduced by BOU, which have ensured that the economic stress faced by borrowers has a muted negative impact on SFI’s asset quality.”
By sector, NPLs under the trade and commerce sector registered the largest rise of Shs24.6 billion (or 11.8 percent), and the sector’s NPLs accounted for 27.1 percent of the industry stock of NPLs as at end of 2020.
However, the utilities sector held the highest NPL ratio of 18.2 percent.
The central bank expects that the slow pace of recovery is likely to continue negatively affecting loan quality until economic activity is stronger. Meanwhile, the number of bank branches decreased from 580 in 2019 to 566 in 2020 while the total number of automated teller machines (ATMs) operated by Commercial Banks decreased from 851 in 2019 to 837 in 2020.
“This decrease was attributed to closure of branches by banks. Increased preference to digital channels such as Internet Banking, Mobile Banking, Mobile Money and Agent Banking was overserved during the year,” says the report.