Slow growth of loan books, customer deposits and increased investments in Treasury bills and bonds are expected to determine earnings of listed banks in Uganda for the first six months of the year, market sources claim.
Steep lending rates and poll jitters ahead of next year’s General Election are likely to slow down credit growth among lenders, with many industry players posting flat growth in their loan portfolios for the first half of the year.
The tighter monetary policy actions recently pursued by the Bank of Uganda in an attempt to curb rapid depreciation suffered by the shilling since mid June alongside risks of imported inflation from foreign sourced items alongside persistent pressure exerted against yields earned on Treasury bills and bonds, have apparently caused spikes in lending rates since January.
The Central Bank Rate (CBR) was raised from 13 per cent in June to 14.5 per cent at the beginning of this month, an action that has put further pressure on lending rates and eroded prospects for strong credit growth.
Consequently, commercial bank prime rates have risen to a range of 23-24 per cent since the announcement, compared with an average of 20 per cent recorded at the beginning of this year.
The latest BoU data shows private sector credit grew by 17.1 per cent at the end of May but falling credit growth was registered in the business services, electricity and water services sector. Zero credit growth was recorded in the transport and telecommunications sectors between March and May, the data showed.
Credit extended to the trade sector rose by four per cent in the period under review. Quarterly growth in household lending averaged 1.9 per cent in the 20142015 financial year compared with 10 per cent recorded in 201314.
Low economic activity driven by diminished company budgets and weak consumer spending are bound to erode deposit growth, with many customers preferring to hold onto their money.
The economy grew by five per cent in 201415 compared with an official target of 5.3 per cent, according to BoU figures. Economic growth stood at 4.6 per cent in 201314.
While some leading banks have opted to raise deposit rates to as high as 15 per cent in order to attract deposits from retail clients, smaller players are targeting big fund managers such as the National Social Security Fund (NSSF) with enticing rates of around 13 per cent tagged to large fixed deposits with a duration of 12 months.
Faced with limited growth, many banks have exploited rising yields earned on Treasury bills and bonds in an effort to compensate for lost interest incomes.
Analysts project notable growth in portfolios of government securities held by commercial banks by close of June, but also anticipate strong gains in trading incomes generated from forex trading.
However, cost-cutting pressures are anticipated to rise further in coming months as banks seek to cushion their revenue margins against increasing operational expenses driven by higher inflation.
“Banks that moved quickly to mobilise cheap deposits during the year are bound to maintain reasonable credit growth for the rest of the year, as against those lenders who did not. This is because the tighter monetary policies, recently introduced by the central bank have rendered costs of funding unsustainable to lenders with limited deposits.
“In the same context, those banks that hold fairly large deposits tend to profit a lot from periods of currency volatility and this phenomenon will be felt in the industry’s half year results.
“However, cost cutting is likely to become rampant across the industry in the remaining months of this year as banks move to protect their revenue margins in a tough environment,” said Claver Serumaga, general manager for business development at Bank of Africa Uganda.