Commercial banks made huge profits and amassed more assets in 2011 but left a daunting question in the minds of many: How did they perform this well as many Ugandans battled the worst financial squeeze in two decades? The balance sheets of the five largest banks with assets worth more than Shs 900bn or $360m - Stanbic, Standard Chartered, Barclays, Crane, and Centenary - offer a clue. Barclays bank, which had a rough time after buying Nile bank six years ago, and then struggled to find its footing as top managers came in and left, recorded a headline net profit growth of more than 100% at Shs 21.1bn.
Stanbic, Uganda's banking bellwether, whose listing of shares on the Uganda Securities Exchange in 2007 revolutionalised the public's perception of stocks, but whose share price has since then failed to live up to its much-hyped billing, made a record-breaking profit of Shs 121bn- crossing the Shs 100bn borderline for the first time.
Standard Chartered, Uganda's oldest bank (it marks 100 years this year) but one that has for long been accused of concentrating on the high-end corporate segment and ignoring those in the low-end market, expanded its asset base closer to Shs 2trillion - keeping up the pressure on the top spot, which remains firmly in Stanbic bank's hands.
Crane, owned by the wealthy Sudhir Ruparelia, became Uganda's largest local bank both in terms of profitability and assets, overtaking Centenary bank - a feat that has taken it just 16 years to pull off. Centenary, owned by the Catholic Church, recorded an admirable profit growth of 63% to Shs 47.9bn.
Raking in the cash
For a clue about how the banks generated such a flush of cash, the interest income on their books of accounts is the first point of call. Banks, by tradition, make money by lending it out. And banks jump at the slightest opportunity that offers them a perfect excuse to raise the interest rate charged on loans.
Such an opportunity came in the first week of July when Bank of Uganda, in an attempt to tame inflationary pressure, introduced what it calls inflation targeting lite as its key monetary policy. The bank raised its central bank rate, influencing commercial banks to follow suit, as a scheme to discourage borrowers from taking up loans.
Interest rates shot up to more than 30% a few months later, the result of which is written all over the income statements of the banks. To justify their exorbitant interest rates - the highest among the three biggest East African economies - Ugandan banks usually argue that they need to find the money to pay depositors, from whom they borrow the money they lend out, handsomely.
Bank of Uganda in its annual supervision report notes that "although deposit growth slowed, credit growth was very rapid in the first nine months of the year, an indication that banks intermediated a larger share of the deposits."
However, it's only customers with fixed deposits that earn a good return, about 14%-20%, which, nevertheless is far lower than what banks charge on the loans. Banks were also shielded from the mayhem in the foreign exchange market that was troubled by rumours, scary headlines, and unrelenting speculators. Bank of Uganda's supervision report notes that "the exchange rate volatility which occurred during 2011 had very little adverse impact on the financial condition of banks because their exposure to foreign exchange risk was very small."
Calm before the storm?
In a financial year when almost every sector is struggling to make ends meet, there remains a strong belief that the positive performance of commercial banks is simply the calm before the storm, and that they will not have it easy in 2012. While banks had already made enough money to cover up for any credit defaults that arose in the last half of 2011, the picture could get gloomy this year.
Javier Suarez, the World Bank specialist in charge of Finance and the Private Sector, commenting on the worries about the impact of defaulters on the banks, said: "The system is fairly stable. The banks are sound. [But] it's going to be painful, [and] there is no magic solution."
Bank of Uganda has also sounded an alarm of its own in its supervision report: "Although the percentage share of non-performing loans [the money banks fail to recover from borrowers] in total bank loans remained low in 2011, at 2.2 percent, the combination of higher bank lending rates and a slowdown in economic growth, coming on top of a very rapid expansion of banks' loan portfolios in 2010 and 2011, raises concerns about the potential consequences for future loan quality."
Stanbic bank offers a good idea; the bank's non-performing loan portfolio jumped to Shs 45.9bn in 2011, up from Shs 21.8bn in 2010, an increase of more than 100%. The trade and construction sectors are where most of the defaulters are expected to come from, according to BoU's report.