Banking sector profits drop by Shs39.1 billion

The banking sector has seen a rise in non-performing loans that have eaten into profitability. Photo | Edgar R Batte

By MARTIN LUTHER OKETCH

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Banking sector profitability declined by 4 per cent in the year ended December 2020, according to

details from Bank of Uganda.
In its Quarterly Financial Stability Review, Bank of Uganda indicated that banking sector profits for the year ended December 2020 had declined by Shs39.1b due to Covid-19 related disruptions, among which included a three month total lockdown. 

During the period for instance, the Central Bank indicated, profitability had declined from Shs883.4b for the year ended December 2019 to Shs844.3b in 2020. 
Banks, including dfcu, have already issued profit warnings, noting that they expect a decline in net profit due to the impact of Covid-19 on customer businesses, which has seen an increase in loan provisioning.
Other reasons for the fall in profits, it was highlighted, included a higher than anticipated write-off of loans and advances, which had formed part of the financial sector assets.
 
Non-performing loans, according to available data, grew to 5.3 per cent in December from 5.1 per cent in September. 
The Central Bank in the review also noted that it had conducted macro stress tests, which returned optimism with findings indicating that majority of supervised financial institutions had sufficient capital to absorb losses from deterioration of all past due to restructured loans.

However, it warned that financial institutions’ “resilience will be tested in the next six months [January-June 2021], noting that if restructured loans, some of which have been restructured for the second time, continue rising, it will present trouble to the economy. 
“Nevertheless, banks’ resilience will be tested in the next six months if past due restructured loans and loans under second restructuring continue rising materially,” the Central Bank said.

Early this week, Dr Adam Mugume, the Bank of Uganda director for research told Daily Monitor that financial institutions had restructured nearly half of their loan portfolio, signaling the devastating effect of Covid-19 on the economy. 
By January, he said, financial institutions had restructured nearly half of their loans, which represented 46 per cent of the total loan portfolio in the banking sector.  

This was an increase from 40.5 per cent in September, which translated to Shs7.7 trillion or restructured loans. 
In April last year, the Central Bank had directed all financial institutions to restructure loans as a way of limiting exposure that had been heightened by Covid-19 related disruptions. 
Banks are also expected to hold back dividend payments to preserve capital amid growing uncertainties and the possibility of a new wave of Covid-19. 

In March last year, the Central Bank had asked financial institutions to hold back the payment of dividends and other discretionary distributions to preserve capital for the real economy. 
However, such payments would be granted on condition that their satisfactory internal capital adequacy can contain shocks and risks in financial institutions.