Ugandan banks recorded a sharp drop in after tax profits to $82.8 million last year from $148.3 million the previous year, attributed to a slowdown in credit growth and increase in non-performing loans.
As a result, the sector's average return on equity dropped from 16 per cent to 8.3 per cent as returns on assets also halved to 1.3 per cent last year.
"Total bank credit increased by 6.1 per cent in 2016 to $3.1 billion, lower by 14.9 per cent as compared to 2015.
The shilling-denominated loans grew by 7.5 per cent to reach $1.75 billion, while foreign currency denominated loans grew by 4.4 per cent in 2016," the Bank of Uganda annual supervision report says.
This mirrors the slow credit growth across the region last year, which also saw Kenyan banks lose $250.7 million. The Kenyan banks recorded an 11.2 per cent drop in net profit to $495.6 million for the first six months of this year compared to last year.
Cautious lending strategy
Bank of Uganda said that the reduction in loan growth was on account of banks' cautious lending strategy following an increase in non-performing loans in the year under review.
Last year, only 59.7 per cent of the loan applications were approved, which was lower than the 62.5 per cent value approved in 2015.
"In 2016, we had a difficult year for the sector which saw large exposures to banks by borrowers who failed to repay their loans on time pushing up the non-performing loans (NPL) numbers. These NPLs were the result of higher interest rates and oversupply in the property market," the BoU Governor Emmanuel Mutebile said.
"The loans to the personal and household sector increased by 14.9 per cent to reach $520.7 million last year. Conversely, total credit to the building, construction and real estate sector and the trade and commerce sector increased at a slower pace than in the previous year," the BoU said.
The Ugandan banks continued to rely on retail funding with customer deposits accounting for 81.1 per cent of the total liabilities of the banking sector. Last year saw the bank's deposits growth drop to 9.5 per cent in 2016, down from 12.1 per cent in 2015.
The total assets of Uganda's banking sector grew by 9.1 per cent from USh21.7 trillion ($6.03 million) to USh23.7 trillion ($6.58 million) between December 2015 and December 2016. This was lower than the growth of 10.9 per cent in 2015.
The increase in bank assets was mainly on account of increased banks' holdings of government securities by 25.6 per cent from USh4.1 trillion ($1.14 million) to USh5.1 trillion ($1.42 million) in the same period.
The banking sector's overall asset quality continued to decline in 2016, with the ratio of non-performing loans to total gross loans increasing from 5.3 per cent in 2015 to 10.5 per cent last year.
The increase in the NPL ratio was mainly on account of bad loans which more than doubled from $157.19 million in 2015 to $328.9 million last year.
The banks also saw their total expenses grow by 9.3 per cent, mostly in the form of interest expense on deposits, while the increased provisioning for bad debts also reduced the banking sector's earnings for the last year increasing by more than 100 per cent to reach $174.6 million in 2016.