Uganda: Stanbic Uganda's Record Half-Year Profit Down to Cautious Lending

Stanbic Uganda Holdings half-year profits exceeded Ush100 billion ($26.9 million) for the first time since it listed on the local bourse in 2007, an achievement driven by strong growth in revenues and low expenses.

The country's biggest lender's full-year results, however, reveal a cautious approach towards exploiting big opportunities offered by its new ownership structure amid restrained lending activity.

The company's profit after tax rose from Ush96 billion ($25.7 million) at the end of June 2018 to Ush134 billion ($36 million) by end of June 2019, while total assets increased from Ush5.1 trillion ($1.4 billion) to Ush6.1 trillion ($1.6 billion) during the same period according to latest financial results.

Interest income grew by 23 per cent to Ush232 billion ($62 million) by end of June 2019 while non-interest income -- a revenue source derived from bank charges and commission fees -- expanded by 21 per cent to Ush183 billion ($49 million) during the first six months of 2019.

RELUCTANCE

As a result, total revenues jumped by 24.1 per cent to Ush399 billion ($107 million) at the end of June 2019.

Total operating costs rose by 13.7 per cent to Ush201 billion ($54 million) at the end of June 2019 while the cost to income ratio fell from 51.9 per cent in June 2018 to 48 per cent in June 2019, a sign of subdued cost pressures in Stanbic Bank's operations.

Total loans and advances increased by 21.6 per cent to Ush2.76 trillion ($741.7 million) at the end of June 2019 while total customer deposits grew by 9.7 per cent to Ush4.1 trillion ($1.1 billion) during the same period.

Despite the remarkable half-year earnings, the listed lender appears reluctant to exploit lucrative economic opportunities unlocked by its new holding company structure.

Under the new ownership structure that took effect in April 2019, Stanbic Uganda Holdings became the parent company of Stanbic Bank Uganda and its local subsidiaries, which include SBG Securities Uganda, a stockbroking business and a data vending company soon to be established by Stanbic Africa Holdings.

The latter is the majority shareholder in Stanbic Bank Uganda, with 80 per cent shares. The new holding company structure allows the company to own and invest in land and buildings; a privilege not offered under local banking licences issued by Bank of Uganda for risk management reasons, sources say.

However, the listed financial services is unwilling to venture into large scale real estate investments contrary to investor expectations.

"The holding company structure will help us optimise our real estate assets that we inherited from the former Uganda Commercial Bank. For example, a branch located in Mbarara town has enough space for banking operations on the ground floor while the upper floor can be rented out to a local client, possibly a law firm that will generate more income for our business," Patrick Mweheire, managing director at Stanbic Bank Uganda said.

"Our credit default rates have gone down and we see strong opportunity to grow our client numbers by at least 2,000 in a year's time. We lent Ush200 billion ($53.7 million) in new loans out of Ush400 billion ($107.5 million) during the first half of 2019 to local businesses which are keen on tapping into economic benefits of high population growth that adds 1.2 million people per year to the country's households instead of waiting for opportunity to catch up with them later on," Mr Mweheire added.

While the new credit facilities mainly benefitted clients in the manufacturing, services and agricultural sector, widespread signs of a struggling economy have raised doubt about returns on funds allocated to those sectors.

"There are many business opportunities that could be pursued through the holding company structure but it is safer to take it slow until the business environment shapes up in its favour. For that reason, the holding company's balance sheet may not grow beyond Ush1 trillion ($268.7 million) in the medium term.

LOAN DEFAULT RATES

The credit life cycle usually takes 7-9 years to complete its course and it is punctuated by high growth rates, knock on effects on the economy and temporary spikes in credit default rates.

As a result, it may take fairly long to realise the full economic benefits of Stanbic's current lending activity though it offers some clues about the health of the economy," said Mubbale Kabandamawa-Mugalya, investment manager at Sanlam Investments Uganda.

Stanbic Uganda Holdings Ltd's share price was largely stable at Ush29 ($0.007) last week, in spite of strong results published last week; a consequence of expired dividend book closure dates and investor grievances over the size of previous dividends.

"We were hit hard by non-performing loans last year but we have recovered from that shock. But new international accounting standards requiring us to provide as much as 80 per cent against a loan before it is disbursed and also make forward looking provisions in case a borrower is making losses have complicated matters for many. That is why a bank is safer lending money to only profit making businesses," said Phillip Sendawula, chief finance officer at Exim Bank Uganda.

Case for real estate

Signs of the commercial potential in Uganda's real estate industry are mainly reflected in a massive housing gap of more than 500,000 residential units per year and a growing demand for Grade A commercial office space -- a type of office building that offers considerable parking space, digital utility and security management systems and a strategic location.

Occupancy rates for Grade A office space in Kampala City have averaged 70-80 per cent since 2017, according to real estate industry experts.

Whereas some investors were counting on the new ownership structure to initiate new investments in the underdeveloped real estate industry through buy and sell transactions for commercial office buildings, low cost housing projects and joint ventures with large real estate developers, the bank's top management prefers optimisation of existing office space to generate additional income and minimise risk exposure to real estate assets.

Besides renting out some office space, Stanbic Uganda Holdings plans to invest in a new head office building- a move that places it in the growing club of lenders keen to invest in their own office space as opposed to renting from property owners.

However, the listed financial service is unwilling to venture into large scale real estate investments contrary to investor expectations.

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