Banking sector profits fall by 39.1 billion shillings
The profitability of the banking sector declined by 4% in the fiscal year ended December 2020, according to details from the Bank of Uganda.
In its Quarterly Financial Stability Review, the Bank of Uganda reported that banking sector profits for the year ending December 2020 fell by 39.1 billion shillings due to disruptions related to Covid-19, including a total blocking of three months.
During the period, for example, the Central Bank said, profitability increased from 883.4 billion shillings for the year ended December 2019 to 844.3 billion shillings in 2020.
Banks, including the DFCU, have already issued profit warnings, noting that they expect a drop in net profit due to the impact of Covid-19 on corporate clients, which has seen an increase in provisioning of loans.
Other reasons for declining profits, it was pointed out, included a higher than expected write-off of loans and advances, which were part of the financial sector’s assets.
Nonperforming loans, according to available data, rose to 5.3% in December from 5.1% in September.
As part of the review, the Central Bank also noted that it had carried out macro stress tests, which brought optimistic results indicating that the majority of supervised financial institutions had sufficient capital to absorb losses due to deterioration of all track records due to restructured loans.
However, he warned that “the resilience of financial institutions will be tested within the next six months. [January-June 2021], noting that if restructured loans, some of which have been restructured for the second time, continue to increase, this will cause problems for the economy.
“Nonetheless, the resilience of banks will be tested over the next six months if delinquent restructured loans and loans under the second restructuring continue to increase significantly,” the central bank said.
Earlier this week, Dr Adam Mugume, director of research at the Bank of Uganda, told the Daily Monitor that financial institutions had restructured nearly half of their loan portfolios, 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% of the total loan portfolio in the banking sector.
This was a 40.5 percent increase in September, resulting in 7.7 trillion shillings or restructured loans.
In April last year, the Central Bank ordered all financial institutions to restructure lending in order to limit the exposure that had been heightened by the disruption related to Covid-19.
Banks are also expected to withhold dividend payments to preserve capital amid mounting uncertainties and the possibility of a new wave of Covid-19.
In March last year, the central bank asked financial institutions to withhold payment of dividends and other discretionary distributions in order to preserve capital in the real economy.
However, these payments would be granted on condition that their satisfactory internal capital adequacy can contain shocks and risks in financial institutions.