When the top six banks sneeze, the entire banking sector catches the cold

None of the top six banks posted losses. There was “just” a decline in profitability. They still made money. Inside the boardrooms however it’s a whole different story. The CEO’s have questions to answer. How to turn around a less than impressive year? 

The top six banks are Stanbic, Standard Chartered, Crane Bank, Centenary, Barclays and Dfcu Bank respectively. The top three saw their profits dip by 22.11%, 26% and 41% respectively to Ugx101.8bn, Ugx97.6bn and Ugx47.2. The other three, recorded a rise in profits by 3%, 4% and 5% respectively to Ugx58bn, Ugx39.8bn and Ugx34.8bn. The top six banks account for at least 82% of the entire banking sector net profits.

 In 2012 profitability of all commercial banks was Ugx586.5bn. This dropped by 21% to Ugx462bn in 2013. The top six banks account for Ugx379bn – 82%  - of the entire commercial bank profits.

The trouble for these banks was slowed operating income if compared to 2012. In 2012, the top six’s’ income had grown above 15% however in 2013, none of the banks had above 15% growth in income. In fact for Stanbic and Standard Chartered Bank, income fell by more 12% and 14%. Overall the entire banking sector recorded a 19% decline in income to Ugx1.9trillion. It should be noted that the top six contributed at least 81% of this income.

The less than impressive income by banks was mostly as a result slowed growth of money they make off lending. In 2012, interest income was surging with only Dfcu posting a rise of less than 11%. The rest were above 18%. Despite Stanbic Bank and Standard Chartered being diversified, their non-interest income also did not grow as well as it usually does.

The banks blame the economic environment as being unfavorable. Philip Odera, the CEO Stanbic Bank says banks still had to deal with the effects of the 2011 rise in interest rates, which led to an increase in loan defaults and provisions for these bad debts. Even at Bank of Uganda they admit the less than impressive performance of the sector was due cautious lending by banks and the poor performance of the real estate sector.

Expenses also grew and more notably were expenses to cover-up for the bad debts that were written off. The provisions grew by 34.8% in 2013 down from 157.4% in 2012. The top six banks accounted for 60percent of these provisions, with Standard Chartered Bank, Stanbic Bank and Crane Bank accounting for Ugx46.6bn, Ugx50bn and Ugx44bn respectively.

In terms of market share – calculated using deposits – the top six hold 63% in 2013. With the exception of Centenary, Dfcu and Barclays, the rest of the top six lost a market share. Stanbic’s share dropped by 3%, Standard Chartered also lost 1.2% and Crane Bank also declined by 1.4%. The slip up by these banks means that KCB, DTB, Ecobank, Imperial, Tropical, ABC, Housing Finance and Cairo International Bank increased their market share by at least 0.5%. The top six still control the largest chunk of banking assets, despite the 1% drop in their market share to 64%.

The implications of this less than impressive means that income tax contributions from commercial banks also declined by more at least 13%. 

Three years [almost] of inflationary targeting; what do we know so far?

“Central banks are mysterious institutions, the full details of their inner workings so arcane that very few outsiders, even economists, fully understand them” Liaquat Ahamed, in Lords of Finance. [Currently reading]

We swipe the access cards and walk through the revolving door to the elevator. Then we make it to level 7. To a heavily air conditioned boardroom. We sit. We wait for the governor to deliver a statement on inflation projections and the benchmark lending rate for the month. On the boardroom walls are framed pictures of previous bank governors. It is not that lavish a boardroom, but as we wait, looking around is perhaps the only option. The governor arrives. Face down. Walks in with a swagger. Then he sits. An aura of silence ensues for about 15 seconds. Staring at a piece of paper, he issues a monetary policy statement. The issuance of this monthly statement started in July 2011. 

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The policy known as Inflationary Targeting started in July 2011, at the height of double digit inflation. The bank every month issues a statement on what they project inflation to be in the next short and medium term. The governor, Prof. Emmanuel Tumusiime-Mutebile, then also announces the Central Bank Rate (CBR) – a benchmark lending rate. A signal to the market on the direction of interest rates. 

At the time the monthly issuance came in, the bank wanted to stem runaway inflation, so it increased the rate monthly, until November 2013, peak at 23percent. In turn, commercial banks also sent their interest rates through the roof, and by January 2012, the rates had gone up from an industry average of 21percent to 27.2percent.

The monthly increase in CBR slowed credit uptake by the private, which by then was growing at about 30percent year-on-year. The high interest rate environment slowed this growth. Bank of Uganda was criticized for the policy. Some economists and self-appointed-pseudo economists say the policy was hurting borrowers, slowing economic growth and not curbing inflation at all. Traders went hay wire overthe rates, closing their shops in protest of banks increasing lending rates onexisting loans. They even met the president – he met them, just that – but Prof. Mutebile remained steadfast about the policy.

Traders shut their shops in January 2012 protesting the high interest rates. Photo from The New Vision 

Dr Louis Kasekende, Deputy Governor BoU, at a recent conference on Transitioning to Modern Monetary Policy told central bankers from the sub-saharan region that the aim of the policy was to “influence bank deposit rates and wholesale bank funding rates, which determine the marginal cost of funds for banks, and thereby bank lending rates. These interest rates are clearly much more relevant for the saving and borrowing decisions of private sector agents in the real sector of the economy, and therefore for aggregate spending, which is what monetary policy ultimately aims to influence.”

As a result of the high interest rate environment, there was an increased number loan defaults, which increased to 4.2 percent at the end of 2012 from about 2 percent in 2011. Already, the fourth quarter of 2013, they had gone up to 5.9 percent, the highest for any quarter since March 2004.  Mortgage uptake slowed and so did the agricultural sector lending. Economic growth in 2011/12 also slowed to 3.2 percent, the lowest in over a decade. The government watched on, helpless. Ugandans worked hard, businesses collapsed, others survived and journalists wrote stories.

By the end of 2012, BOU had eased – or rather the template word, cautiously eased – the rate to 12 percent, lower than the July 2011 rate. The bankers meanwhile were also partly reacting. Average lending rates declined to 24.77percent. Currently, the policy rate is at 11.5percent, whereas bankers are lending at 22.14percent on average. Not good enough. Some economists say. Even BoU officials.

Dr Kasekende: “So far we have been less successful in influencing bank lending rates, which have proved more sticky [sic] than other interest rates.”

Adding, “Therefore, the acid test of monetary policy implementation in an ITL (Inflationary Targeting Lite) framework is the extent to which changes in the policy interest rate set by the central bank are transmitted to other interest rates in the economy which in turn affect private sector spending.”

Other governors in the room seemed to agree, as they were facing similar challenges in their countries. Stanbic Bank, Uganda’s largest bank, at the beginning of the year announced it was going to start setting interest rates based on CBR. An overriding factor why BoU is optimistic that this policy will be effective on commercial bank interest rates.

Ms. Antoinette Sayeh, Director, IMF African Department also says, “There is broad consensus that additional research is needed to fully understand the transmission mechanism of monetary policy in Sub-Saharan Africa, including on the sluggish response of lending rates to the recent loosening of monetary policy.”

On inflation. According to the UBoS, core inflation, which excludes food crops, energy, fuel and utilities, contributes at least 80percent to the entire headline inflation. BoU also targets core inflation because it considers it less volatile and when Inflationary Targeting came in, core inflation was at 15.6percent. As core inflation increased, so did headline inflation. Once it declined, then headline inflation would follow suit. The BoU projection: Core inflation to be in the 5percent range for the next twelve months. 

“The reason why we target core inflation is that we have potentially better control over core inflation than headline inflation. The goods and services whose prices are excluded from core inflation are generally more volatile and more subject to supply price shocks than are other prices in the consumer basket. Because the prices of food crops and fuel are mainly determined by developments on the supply side of the market, such as the abundance of the harvest, they are largely outside of the control of monetary policy,” Mutebile explained.

When BoU was implementing the ITL, it slowed borrowing and increased costs production. Then, no jobs were being created and some companies were not growing. Foreclosures also increased. Loan defaults were on the rise. Traders cried foul, all in vain. Customers started reading the terms and conditions of the loans clearly. Has inflationary targeting been a success? The bankers say "yes" whereas the citizens would want to disagree. 

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After reading his statement, not so flawlessly, we ask questions. Bullishly he answers “I did not say that”, “it is none of your business.” “Yes.” “I do not think so.” He then walks out confidently, knowing that the market will react positively to the news. 

Finance Trust Bank: Local bank but will it hack it as a commercial bank?

26 – The number of licensed commercial banks in Uganda. Not a terrible statistic considering that only one commercial has been closed down in the last five years. The Commercial Bank of Africa (CBA) and Finance Trust Bank are the latest entrants in Uganda’s commercial banking scene. More recently, Guaranty Trust Bank (GTBank) acquired a 70percent stake in Fina Bank. (I’ll write about the prospects for GTBank in Uganda next time) 

Finance Trust Bank is not entirely new to Uganda’s banking scene. Founded in 1984, Finance Trust Bank started as a microfinance institution until December 2013. Its focus: providing affordable to mainly women. It is, rather was, not a small microfinance. It boasts of 35 branches. The transition into commercial banking means that Finance Trust Bank made the baby steps just like Centenary Bank – Uganda’s 5^th largest bank by assets – did.

FTB with its current figures of Ushs43bn in customer deposits, Ushs58bn loan book and assets of Ushs91bn, will have its work cut out in the commercial banking segment. In customer deposits, it comes at number 20. On the size of the loan book it is ranked 18, just above United Bank of Africa (UBA). With its assets of Shs91bn, we can ideally say, FTB is now Uganda’s 19^th largest bank out of 26. In 2012, the bank also recorded after tax profit of Shs1.5bn, which would have placed it in 17^th position. These numbers considering that it already has 30 branches, means it has already spent on some start-up costs and will not have to go through the cycle again. 

Prof Mutebile, BoU Governor & Irene Muloni (Chairperson FTB)  Picture from New Vision 

The broader challenge however is managing to keep its customers happy, with attractive interest rates especially for micro-lenders who have grown with it over the years. Centenary Bank has managed to do this. When Equity Bank of Kenya acquired Uganda Microfinance Limited in 2008, some branches in rural areas were closed. They were not making money for the bank. It was hemorrhaging money on administration costs. Moral of the story: Commercial banking can be similar to microfinance but it is not the same thing.   

Commercial banking comes with more demands, expectations and survival. To begin with, FTB managers have to make sure the capital base of the bank remains above Shs25bn – the regulatory requirement – and also “innovative” [find ways of being more predatory] if they’re to sustainably grow. To shore up its capital base, the bank apparently had to seek some international funders to buy some stake in the bank, but to sustain this level of capital – or more – the bank will have to make money.

It is a whole new ball game for them. What advantage does FTB have over other banks? Irene Muluni the Board Chairperson, FTB says, “Most banks are in urban areas, which gives us the opportunity to go for rural women.”

FTB is a majority Ugandan owned bank. This we should be proud of as “locally owned banks” have been in short supply. Ugandan organizations – mostly women organizations – own 55.4percent of the bank. Only Centenary Bank and Crane Bank have above this local ownership threshold. Interestingly, Annet Nakawunde Mulindwa, the FTB CEO is only the second female CEO of a commercial bank in Uganda.

With all this bloom, will FTB making formal banking more attractive. A 2013 Finiscope study on Financial Inclusion [I have a hard copy of this report if you need it] indicates that between 2009 and 2013, the percentage of adult Ugandans with access to a formal bank had declined by 1percent to 20percent. This, even after the increasing number of commercial banks in the country. The same report indicates that the percentage of Ugandans saving with a commercial bank had fallen to 19percent in 2013 from 21percent in 2009. Additionally, the number of Ugandans accessing credit in a bank rose – marginally – from 5percent in 2009 to 6percent in 2013.

FTB will however be boosted by the fact that 73percent of borrowers – both formal and informal – take up small loans of Shs500,000 and 14percent taking up about Shs1,000,000. Since the FTB’s focus will be those Ugandans in rural areas, then they could succeed. Considering its focus to encouraging women entrepreneurship and financing, it could also help increase the percentage of women with access to formal banking services.

However, when FTB was a microfinance institution, it was also in the formal banking category and the numbers as we’ve seen have been stagnant. What will it do differently? We’ll wait and see.