Officials inspect an oil rig in Western Uganda.A new report compiled by African Alliance Uganda has lifted the lid on affairs inside Uganda's banking industry, which could give stakeholders some serious food for thought.
While African Alliance is positive about the outlook in the industry in the next two years, the research and investment company's findings show that the competition in the industry is getting more intense - a situation that could precipitate mergers and acquisitions in the short/medium term.
The report, titled, "Banking Sector overview," sorts the 24 players into three categories - Tier 1 (six banks with total assets in excess of Shs 900 billion), Tier II (five banks with assets in excess of Shs 500 bn) and Tier III (13 banks with assets lower than Shs 500 bn).
However, T1 banks, which hold a total average of 60% of total industry deposits, are facing stiff competition from T2 and T3 banks, which grew their deposits and loans more aggressively compared to the T1 banks thanks to their intense marketing strategies.
In fact T1 and T2 banks recorded an average deposits growth of 38% and 29.5% respectively compared to 13.4% for the T2 banks. T2 loans grew by 26% compared to just 6.2 for T1 banks.
However, half of the 13 banks in this category are yet to break even due to an above average cost of income. Crane Bank, is the only local bank in the T1 category, which with a cost to income ratio of 32%, is one of only five banks below the 50% mark.
The report notes that compared to Kenyan bigger banks, non interest income/revenue (NIR) - the income that banks derive primarily from fees, charges and commissions - as a percentage of total income is still low among Ugandan banks.
They made an average of 28% compared to the 35% that their Kenyan counterparts earned in FY2012. Only three banks - United Bank of Africa, Ecobank and KCB managed to reach the 50% mark of NIR as a percentage of total income.
Examples of non-interest income include deposit and account transaction fees, ATM charges, penalties, monthly account service charges, cheque and deposit fees, among others. The Mobile Money service has also become an important NIR stream though some telecom companies are unfairly favouring foreign banks at the expense of indigenous banks.
For example, the report shows that Stanbic Bank, Uganda's biggest bank by assets, made 33% of its income from NIR compared to Crane Bank's 19%. Ideally, the lower the NRI the better particularly for retail customers as it means they are paying lower bank charges and fees.
With low NIR, banks have no choice but to keep interest rates high to remain in business. However, Arthur Nsiko, the head of research at the company, was positive that the situation could change in the short particularly when the oil production comes on board.
However, he warned that the local banking industry might not be in position to fund investments in the oil industry due to the huge funding requirements, which is compounded by the high interest rate offering in the Ugandan market. "Most of the foreign investors in the oil industry can't afford to take credit in local banks at such a high interest when they can get cheap credit in their countries," he said. However, he local banks could still gain from advisory, transaction fees and other spillovers.
The report does not paint a rosy picture of the banking sector in terms of non-performing assets and loans (NPLs), which doubled to 4.2% in 2012 compared to 2.2% in 2011. However, the NPL rate is not too bad, as it is still below the regional average of 6.5% - probably an indication that the Ugandan market is relatively more conducive than those of her regional counterparts.
Nsiko dismissed claims that the market had reached saturation point, saying he would not be surprised when several new entrants are licenced in the near future. Largely, the upsurge in NPLs was attributed to the tough economic conditions, the high interest rates and declined productivity, which made borrowers - particularly real estate debtors - to default on their loan obligations.
As required by Bank of Uganda, the regulator, all the 24 banks are sufficiently capitalized, a strategy devised by the Central bank to ameliorate concerns about the financial health particularly of foreign owners.
Understandably, most of the banks have a relatively low return on assets (ROA) - an indicator of how profitable an entity is relative to its total assets. T1 banks recorded ROA of 5.3% while T2 got only 3.3% on average.
Though a few banks in T3 broke even in 2012, their ROA was below 1% and some recorded losses, a clear indication that their management is yet to use their huge asset base efficiently to generate earnings.
However, Kenneth Kitariko, the African Alliance chief executive officer, suggested that this situation might not worry some banks because their owners might have different strategies some long-term. "They might not be making profits now yet they have set a strategy that they hope will give them high ROA in the next five years," he said.
Reacting to the report, A.R Kalan, the Crane Bank managing director, said if there is "a level playing field" his bank would never be worried about the competition from the new smaller banks (T3s). "We at Crane Bank don't fear competition, whether from the big or small banks," he said. "All we care about is a level playing field whereby for all the players who qualify can have access to all the available privileges."
He said while Crane Bank is currently profitable and well capitalized, they have a long term strategy, which is why they are investing a great deal in branch network expansion across the country without increasing their fees and charges. "We are an indigenous bank thinking long-term and our ultimate goal is to be the number 1 bank with the best services in Uganda," he said.
Going forward, Kitariko said the next two years - particularly 2014 - will be a "good year" for the financial services industry as they increase efficiency, lay strategies to model at minimum cost and develop products that suit the local market's needs.