As many as 13 commercial banks in Uganda risk being under-capitalised if their top three borrowers defaulted, Bank of Uganda's stress test has revealed.
In the annual report for December 2016, BOU assesses the concentration of lending to a few borrowers in an attempt to limit the risk of loan defaults.
BOU said: "100 per cent default from top three borrowers makes 13 banks become under-capitalised with an aggregate capital shortfall of Shs 514bn."
The central bank also found that if non-performing loans increased by 200 per cent as many as nine banks might become under-capitalised. Here, they would need Shs 247.4bn in capital injection.
Stress tests are regular exercises carried out by the regulator to assess the ability of banks to withstand shocks. In the same report, BOU said 2016 was a very tough year for the banking sector, where profitability dropped significantly, loan defaulters increased and the quality of assets held by banks deteriorated.
This is not surprising given the slower expansion of the economy. The economy grew by 3.9 per cent in 2016/17, below the projected five per cent. Also, many businesses struggled, with quite a number folding.
The year 2017 is likely to be better but some bank managers still believe it will be just as tough. Announcing Stanbic bank's performance for the first half of 2016, chief executive Patrick Mweheire told reporters that a drop in interest on government securities meant that banks would not be able to make "the lazy money."
This will significantly affect their earnings. The BOU report indicates that the total industry assets grew by 9.1 per cent to Shs 23.7tn from Shs 21.7tn between December 2015 and December 2016.
Most of the assets were in government securities, which increased by 25.6 percent from Shs 4.1tn in 2015 to Shs 5.1tn in 2016.
In 2016, capital levels held by the banks were lower than in 2015, although the central bank says they were still above the minimum threshold to withstand shocks.
"The decline in bank capital was also largely reflected by the accumulated losses recorded in the comprehensive statement recorded by Crane bank," the bank said.
On the quality of assets, BOU notes that the ratio of non-performing loans to total gross loans increased to 10.5 per cent in December 2016 from 5.3 per cent in December 2015.
Bad loans more than doubled to Shs 1.2tn in December 2016 from Shs 573.4bn in December 2015, the report said.
DROP IN PROFITABILITY
Profit after tax dropped to Shs 302.1bn at the end of 2016 from Shs 541.2bn in 2015. This was after the sector's income grew by 12.7 percent in 2016, but lower than the 14.1 per cent rate in 2015.
The money earned on equity - the money injected in by shareholders - dropped while that on assets halved to 1.3 per cent in 2016.
Meanwhile, expenses for most banks grew. The expenses were in the form of interest expense on deposits. Also, a lot of money was set aside to cater for bad debts that banks failed to recover from borrowers.
Money set aside to cover for loans defaults doubled to Shs 637.2bn.