High profits boost banks, regulator sees more resilient sector in 2013
When the Bank of Uganda (BoU), the national banking regulator, directed that all commercial banks operating in Uganda must raise their minimum capital to Shs 10 billion by March 2011 and to Shs 25 billion by March 2013, some industry observers thought the policy would spell doom for the smaller commercial banks.
However, all indications are that almost all the 25 commercial banks in Uganda have successfully scaled the hurdle ahead of the March 2013 deadline, according to a top BoU official. However, major challenges remain and the economic outlook does not look too rosy for the mainstream financial services players as the blossoming non-bank players continue to gnaw away at their market niche.
Dr. Adam Mugume, the executive director for research at BoU, told The Independent on Jan.19 that the capital adequacy requirement has not been too much of a problem for most of the majority of the almost 25 commercial banks operating in Uganda.
"Almost all of them have raised that amount and others have gone beyond it," he said, adding, "Actually most of them already had almost that amount with us and so it wasn't a big issue for them."
The policy of raising the capital requirement was agreed by the regulatory authorities in the East African Community (EAC). Any new commercial bank entering the Ugandan market effective November 2010 had to have the required minimum capitalization of Shs 25 billion.
That helped the Central Bank to ensure that it won't have to run around for the new comers over the requirement but the other older banks also found raising the money a simple walk in park following the huge profits they amassed in 2011 and 2012 thanks to the high interest rates they charged in response to the Central Bank's policy of 'inflation-targeting lite.'
The real test however, will be how profitable they will be in 2013 as the pressure to reduce interest rates mounts and as the pain of their numerous non-performing loans continue to hurt their income statements. Profits soared as interest rates passed the 30% mark at the peak of the CBR, but most banks have now been forced to scale it down to an average of 24%, which could drop even further in the coming months.
Capital requirement here is composed of two separate components - is a minimum paid up capital requirement and an ongoing capital adequacy requirement which measures capital to risk weighted assets. It is the minimum paid up capital that has been raised. The requirement was pushed by the members of the EAC three years ago in response to the global economic crisis and that all the banks in the region were required to raise the equivalent of Shs 25bn in their respective currencies.
In Tanzania, reports say 22 of the 33 commercial banks have managed to raise the TShs 15 bn cash some 24 months ahead of schedule. The said capital represents the portion of the bank's assets, which does not have to be repaid and therefore is available as a 'buffer' in case the value of the bank drops as a result of losses. So, the capital acts as a cushion when banks are impacted by large losses or in cases of insolvency.
Indeed, Mugume said most banks recorded good profits in the last financial year and chose not to issue dividends with most shareholders being persuaded to forego the cash to fulfill the capital requirement. Market analysts had predicted mergers and buy outs for some banks would be a possibility if the smaller banks failed to raise the said capital. Only Crane Bank managed to take over NBC but for other reasons other failure to raise the capital. Mugume, though, did not rule out future mergers and acquisitions of the smaller banks in the next few months.
"You can raise the capital but then later you choose to merge or sell your assets for various reasons," he said, adding that for instance, if a bank thinks they are not doing well or are likely to fail to hit a certain target they can easily opt for a merger or to sell their assets. Also, the shareholders might choose to close business in one market and go to other markets in the region for various business reasons.
The bigger and older banks took advantage of their massive clout to use other means to raise capital such as the issuance of bonds, rights issues (for listed banks) and issuing bonus shares among others. Stanbic and Bank of Baroda for example, issued bonus shares to their shareholders to help raise the capital. The former recorded over Shs 50 bn as its minimum capital, which the bank's officials described as a good move that would help the bank beat any future shocks.
Mugume said he wasn't surprised to see the banks raising the capital ahead of schedule. "Most of them are doing well and are targeting particular customers, which is why they continue to post good results," he said. He added that since the 1990s when Greenland Bank and Cooperative Bank were closed, the Central bank has maintained a tight regulatory framework, which has helped the sector to thrive.
The capital requirement is a key regulatory reform in the revised Financial Institutions Act 2004 that the Bank of Uganda recommended to the Finance ministry.
Other key reforms include broadening the scope of permissible non-bank activities, harmonisation of regulations under the East African Community (EAC) framework and addressing challenges from global integration of finance.
Bank bosses positive
Most of the commercial bank bosses who talked to The Independent were largely positive saying they were working to even surpass the capital requirement. A. R Kalan, the managing director of Crane Bank, Uganda's largest indigenous bank, said they had registered Shs 200bn as their paid up capital and "were working to grow the figure even further." "That shows you that our shareholders have confidence in the bank," he said. "For the customers, that means we are ready to grow and expand the network of our branches to other areas where we don't exist."
Centenary Bank Managing Director Fabian Kasi said they hit the Shs 25bn milestone in the middle of last year from profits and issuing bonus shares to the shareholders. On the return on the massive investment for their shareholders, Kasi said their prayer was that businesses in the country and the economy in general would thrive. "Banks are there because of the other businesses in the country," he said.
But with asset quality being hit as the ratio of non-performing loans to total loans continues to soar and as competition from the non-bank actors such as mobile money and SACCOs register phenomenal growth, commercial bank profitability is likely to hit generally, which some analysts say might force many of them to scale down on their expansion plans or think of other options or to be more aggressive in their marketing and creativity.
Stephen Kaboyo, the managing director for Alpha Capital Partners and a former director for financial markets at BoU, said in the aftermath of the global financial crisis that rocked the global economy, banking regulators around the world recognised the importance of strengthening the bank's capital to ensure that they have the financial muscle to absorb external economic shocks. He said capitalisation has been generally very low in Uganda compared to other markets.
He added that where banks fail to meet the capital requirement, the natural direction is for mergers and buy outs. But he was positive that BoU's gradual approach in implementing the new capital requirement gave the commercial banks plenty of lead time to mobilise capital from shareholders and strategic investors.
"As the markets dynamics continue to change we expect to see a more competitive banking sector going forward," he said.