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Bank of Uganda: Annual Supervision Report 2017

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6 years ago
Bank of Uganda: Annual Supervision Report 2017

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  1. BANK OF UGANDA ANNUAL SUPERVISION REPORT December 2017 | Issue No. 8 © Bank of Uganda 2017 Address: 37/45 Kampala Road Postal: P.O. Box 7120, Kampala Tel: +256 414 258 441/6 Fax: +256 414 233 818 Email: info@bou.or.ug Web: www.bou.or.ug ISSN print: ISSN web:
  3. CONTENTS FOREWORD ................................................................................................................................. v PART I: SUPERVISION OF FINANCIAL INSTITUTIONS ..................................................................................1 Chapter 1: Supervision of Financial Institutions ................................................................................ 2 1.1. 1.2. 1.3. Introduction................................................................................................................................... 2 On-site inspection ......................................................................................................................... 2 Off-site analysis of supervised financial institutions....................................................................... 4 Chapter 2: Regulatory Reforms to Strengthen the Financial Sector .................................................... 5 2.1. 2.2. 2.3. 2.4. 2.5. Licensing, approvals and expansion ............................................................................................... 5 Regulatory reforms........................................................................................................................ 5 The Deposit Protection Fund .......................................................................................................... 7 Credit reference bureau services..................................................................................................... 7 Strengthening supervision ............................................................................................................. 8 PART II: ASSESSMENT OF FINANCIAL STABILITY ....................................................................................... 9 Chapter 3: Performance of the Banking Sector ............................................................................... 10 3.1. 3.2. 3.3. 3.4. 3.5. 3.6. 3.7. Changes in banks’ assets and liabilities .........................................................................................10 Capital Adequacy..........................................................................................................................10 Funding and liquidity .................................................................................................................... 11 Performance of credit ...................................................................................................................12 Earnings and profitability .............................................................................................................14 Sensitivity to market risk .............................................................................................................. 15 Conclusion .................................................................................................................................... 15 Chapter 4: Performance of Non-Bank Financial Institutions and Oversight of Payment Systems ........ 16 4.1. 4.2. 4.3. 4.4. Credit institutions .........................................................................................................................16 Microfinance deposit-taking institutions ...................................................................................... 17 Foreign exchange bureaus and money remittance outlets ...........................................................18 Payment systems .........................................................................................................................19 Chapter 5: Systemic Risk Assessment and Outlook ......................................................................... 22 5.1. Summary of risks facing the banking sector ................................................................................ 22 PART III: STATISTICAL APPENDICES.......................................................................................................... 24 6.1 6.2 6.3 6.4 APPENDIX 1: Financial Soundness Indicators for Supervised Financial Institutions ......................25 APPENDIX 2: Aggregated Balance Sheets for Supervised Financial Institutions .......................... 28 APPENDIX 3: Income Statements for Supervised Financial Institutions ........................................ 31 APPENDIX 4: Credit Reference Bureau Activities .........................................................................34 Annual Supervision Report December 2017 | Bank Of Uganda iii
  4. ABBREVIATIONS AFRITAC Africa Regional Technical Assistance Centre BCBS Basel Committee on Banking Supervision BCPs Basel Core Principles BOU Bank of Uganda COMESA Common Market for Eastern and Southern Africa CBR Central Bank Rate CDS Central Depository System CRB Credit Reference Bureau CRS Credit Reference System CSD Central Securities Depository DPF Deposit Protection Fund DSIB Domestic Systemically Important Bank EAC East African Community EAPS East African Payment System ECS Electronic Clearing System EFT Electronic Funds Transfer FCS Financial Card System FIA Financial Institutions Act 2004 FSAP Financial Sector Assessment Program GDP Gross Domestic Product GIZ Deutsche Gesellschaft f ür Internationale Zusammenarbeit IMF International Monetary Fund KfW German Kreditanstalt fur Wiederaufbau LCR Liquidity Coverage Ratio MAC Monetary Affairs Committee MDIs Microfinance deposit-taking institutions MFPED Ministry of Finance, Planning and Economic Development NBFI Non-Banking Financial Institution NPLs Non-performing loans NSSF National Social Security Fund REPSS Regional Payment and Settlement System ROA Return on average assets ROE Return on average equity RBS Risk-Based Supervision RTGS Real Time Gross Settlement System RWA Risk Weighted Assets SACCO Savings and credit cooperative SFI Supervised Financial Institution UNISS Ugandan National Inter-bank Settlement System URBRA Uganda Retirement Benefits Regulatory Authority USh Ugandan Shilling iv Annual Supervision Report December 2017 | Bank Of Uganda
  5. FOREWORD The Bank of Uganda (BOU) publishes the Annual Supervision Report (ASR) to inform the public about issues relevant to the prudential regulation and financial soundness of Uganda’s financial sector. The ASR provides information on the BOU’s supervisory activities during the year, the reforms it has undertaken to the regulatory framework, an evaluation of the performance of the financial system, and an assessment of risks to financial stability. During 2017, the performance of the banking industry in Uganda strengthened. The commercial banks’ asset quality improved with the aggregate non-performing loans to total gross loans falling from 10.5 percent as at end-December 2016 to 5.6 percent as at end-December 2017, while the aggregate return on equity and return on assets increased from 8.3 percent and 1.3 percent respectively in 2016 to 16.4 percent and 2.7 percent in 2017. By maintaining capital and liquidity buffers well above the minimum regulatory requirements, the banking industry is resilient to shocks. The core and total regulatory capital adequacy ratios (regulatory capital to risk-weighted assets) improved from 17.3 percent and 19.8 percent at the end of 2016 to 20.9 percent and 23.2 percent respectively at the end of 2017. Crane Bank, which had been taken into statutory management by the BOU in October 2016 because it was insolvent, was resolved in the first quarter of 2017 through a purchase of assets and assumption of liabilities transaction with DFCU bank. The resolution of Crane Bank was carried out without any loss to the bank’s depositors or contagion to the rest of the banking system. The BOU is now pursing action through the Commercial Court to recover the large losses incurred by Crane Bank from its debtors, which include its shareholders. A major innovation in accounting standards which came into force at the beginning of 2018 is the implementation of the International Financial Reporting Standard (IFRS) 9 which, inter alia, requires banks to take a forward looking approach to determine their provisioning for potential losses. The BOU issued a circular to banks regarding IFRS 9 and is evaluating the banks’ compliance with the standard as well as its likely impact on capital adequacy and credit growth. The final guidance will be issued in due course. Annual Supervision Report, December 2017 | Bank Of Uganda v
  7. PART I : SUPERVISION OF FINANCIAL INSTITUTIONS Annual Supervision Report, December 2017 | Bank Of Uganda 1
  8. Chapter 1 : Supervision of Financial Institutions 1.1. management, and delays in addressing vacancies in Introduction key positions of banks’ organisational structures. This chapter presents the highlights of the activities For regional and international banks, the key undertaken by Bank of Uganda (BOU) to conduct concerns related to risks that emanate from oversight of supervised financial institutions (SFIs) overreliance through operational support. on-site inspections and off-site on the parent companies for surveillance. SFIs are financial institutions – commercial banks, credit institutions, microfinance With regard to strategic risk, the main findings deposit-taking were related to unrealistic assumptions underlying institutions, foreign exchange bureaus and money remitters – that are under the the strategic plans and lapses in the regulatory purview of BOU. implementation of strategic initiatives. Six banks, with a combined 4.7 percent share of the banking 1.2. On-site inspection industry total assets, made losses in 2017. This The objective of on-site examinations is to independently determine the financial condition of the SFIs and review their risk management systems using the risk-based supervision (RBS) poses a risk to their ability to conserve capital in order to support the implementation of their business models. Nonetheless, all banks remained adequately capitalised during the year. methodology. This also includes an assessment of While the SFIs’ level of compliance with all applicable concentration regulations, lapses were noted in the laws, regulations, prudential guidelines, circulars credit underwriting processes. However, the ratio and corrective actions stipulated by the BOU during of non-performing loans (NPLs) to total loans these examinations. improved during 2017. Commercial banks There were some concerns pertaining to some At end of 2017, there were 24 commercial banks in banks’ information communication technology operation. During the year, BOU conducted on-site (ICT) infrastructure. examinations of all commercial banks using the systems were obsolete, with weak embedded IT risk-based supervision methodology, with a special controls and unable to adequately support emphasis on areas that pose the highest risk to operations, financial institutions. challenges. Moreover, some banks’ systems could there were leading no breaches of credit Some banks’ core banking to routine operational not adequately assess money laundering/terrorismThe key supervisory concerns arising from the on- financing risks, and support robust financial site examinations of commercial banks were as reporting. follows:The findings regarding compliance risk were mainly For a number of banks, there were weaknesses in related the composition of board committees, succession international banks in the implementation of BOU’s planning directive to establish in-country primary data 2 for board members and senior to delays by some regional and Annual Supervision Report December 2017 | Bank Of Uganda
  9. centres . There was also misreporting of data in the arising from the on-site examinations involved statutory returns submitted by banks to the BOU as operational and credit risk. well as in the data submitted by banks to the Credit the BOU issued specific directives to the MDIs to examinations established cases of non-compliance address observed supervisory concerns and follow- with some provisions of the Financial Institutions up examinations were subsequently carried out to Act (FIA) 2004 and its implementing regulations, assess compliance. Reference Bureau (CRB). Additionally, BOU directives and guidelines, by some banks. Foreign exchange bureaus and money remittance As a result of examinations, BOU issued specific and time-bound directives to all banks for them to address all identified supervisory concerns. There were cases where BOU enforced punitive measures on the banks for non-compliance with supervisory directives. companies During 2017, 109 on-site examinations and 41 follow-up examinations of foreign exchange bureaus and money remitters were conducted. The major supervisory concerns related to: inaccuracies in the returns, poor record-keeping; lapses in The transfer of some of Crane Bank’s assets and internal controls, particularly those related to cash liabilities to DFCU Bank Limited was completed in management; and some weaknesses in anti-money the first quarter of 2017. In addition, BOU laundering and countering the finance of terrorism undertook measures, including legal proceedings in (AML/CFT) processes. Directives were issued to the the Commercial Court to recover the costs of concerned institutions, requiring them to address resolving Crane Bank Limited from its shareholders. the identified weaknesses. Credit institutions All foreign exchange bureaus submitted periodic During 2017, BOU conducted full scope on-site returns for off-site analysis throughout the year. examinations of three credit institutions; Top However, there were challenges with meeting Finance Bank submission deadlines on the Bank Supervision (Uganda) and PostBank (U); and a follow-up Application (BSA). In addition, some of the examination of Top Finance Bank (U). Key areas of management information systems used in the sub- supervisory concern included lapses in corporate sector did not have adequate functionalities to governance of support the tracking and monitoring of business strategic, operational, credit and compliance risks. performance. Directives were issued to the relevant The institutions were issued with specific and time- institutions to address these gaps. bound Bank (Uganda), practices directives and to Opportunity management address observed shortcomings. BOU, with support from the East Africa Regional Technical Assistance Centre (IMF East-AFRITAC), Microfinance deposit-taking institutions (MDIs) developed off-site and on-site AML and CFT In the course of 2017, on-site examinations of the supervisory tools for foreign exchange bureaus and five licensed MDIs were conducted. In line with the money remitters. These tools shall strengthen RBS approach, the on-site examinations focused on AML/CFT supervision for this sub-sector. areas of high risk. The key supervisory concerns Annual Supervision Report, December 2017 | Bank Of Uganda 3
  10. 1 .3. Off-site analysis of supervised SFIs and in the implementation of the risk-based financial institutions supervision methodology. It also ensures that the SFIs BOU conducted off-site surveillance of SFIs through comply with statutory and prudential requirements. the collection and analysis of financial information submitted to it. Off-site analysis plays a key role in the planning of scheduled on-site examinations of 4 Annual Supervision Report December 2017 | Bank Of Uganda
  11. Chapter 2 : Regulatory Reforms to Strengthen the Financial Sector 2.1. Licensing, approvals and expansion of 2017, up from 14 SFIs as at end of 2016, with Diamond Trust Bank being the most recent SFI to In 2017, Bank of Uganda received an application be connected. Accordingly, by end of 2017, 13 from BRAC Uganda Finance Ltd. for a credit commercial banks, 3 credit institutions, 1 MDI and 2 institution (Class 5) license. The review of this mobile money networks (M-Cash and MTN mobile application is ongoing, and is expected to be money) were connected to the Interswitch, concluded by end of June 2018. providing their customers shared access to a Bank branches and automated teller machines The total number of bank branches was declined from 570 in 2016 to 544 in 2017, and the total network of 477 ATMs. Table 2: Interswitch network activity Year number of automated teller machines (ATMs) operated by commercial banks decreased from 860 2011 Value (USh. billion) 14.0 Volume (000's) 115.5 Number of ATMS 80 This decline can be 2012 2013 14.1 17.0 229.8 253.3 98 109 attributed to: the closure of Crane bank; and 2014 85.0 1,135.5 301 increased emphasis on electronic banking channels 2015 2016 150.5 197.7 1,861.1 2,539.0 311 366 2017 257.0 2,516.7 477 in 2016 to 821 in 2017. to provide financial services, leading to the rationalisation of bank branches through mergers and closures. Table 1: Number of licensed branches/outlets for supervised financial institutions Commercial bank branches ATMs Foreign exchange bureaus Money remitters MDIs branches Credit institutions branches 2014 564 2015 573 2016 570 2017 544 830 267 842 280 860 267 821 260 204 70 55 225 76 57 241 78 61 241 78 66 Source: Bank of Uganda In 2017, a total of USh.257 billion was transacted over the Interswitch platform, representing a 30 percent year–on–year increment from the USh.197.7 billion transacted in 2016. 2.2. Regulatory reforms Regulations on Islamic banking, agent banking Source: Bank of Uganda and bancassurance As provided for under the 2016 amendment to the FIA (2004), the Financial Institutions (Agent Banking) Regulations 2017 and the Insurance (Bancassurance) Regulations 2017 were gazetted in Furthermore, the number of SFIs connected to the Interswitch1 network increased to 17 SFIs as at end July 2017, while the Islamic Banking Regulations were also gazetted in February 2018. Since then, a number of SFIs have applied to BOU to conduct 1 Interswitch is a financial technology company that offers interconnectivity across banks, mobile money networks and financial service providers. The platform enables customers to access their accounts using ATM Annual Supervision Report, December 2017 | Bank Of Uganda outlets of other member banks and mobile money platforms. 5
  12. agent banking , and to provide Bancassurance the Cabinet Secretariat by the MFPED. The products and services. And with the coming into Secretariat proposed some changes that are being effect of the Islamic banking regulations, BOU now addressed by the BOU and MFPED. has the regulatory framework in place to license Islamic banking and financial products in Uganda. BOU commenced the implementation of the External Auditor Appointment Guidelines for The Tier IV Microfinance Institutions and Money foreign exchange bureaus and money remitters. Lenders Act 2016 These guidelines require forex bureaus and money The Minister of Finance, through Statutory remitters to retain only external auditors that have Instrument No. 19 of 2017, appointed the first day passed BOU’s annual prequalification. of July 2017 as the commencement date for the Tier IV Microfinance Institutions and Money Lenders Act BOU continued with the implementation of the 2016. From this date, BOU started receiving approved strategy against unlicensed foreign applications for licences from registered institutions exchange trade. In this regard, a multi-stakeholder that meet the criteria set out under Section 110 of taskforce was established and held fact-finding the Act. Preliminary data indicates that about sensitisation meetings in a number of locations twenty registered institutions will apply for licences across the country. Out of these engagements, the from BOU. BOU received applications from traders wishing to regularise their foreign exchange operations. During the year, BOU held consultation meetings Consequently, licenses have been granted to with the Boards of Directors of the selected Savings foreign exchange bureaus at the Uganda-Kenya and Credit Cooperative Societies (SACCOs) that border in Malaba town, while other applications are meet the criteria in Section 110 of the Tier IV still under consideration. Public awareness will Microfinance Institutions and Money Lenders Act continue throughout 2018. 2016. These consultations have also included the draft Tier IV regulations, that will operationalise the Nevertheless, the need to enhance the regulatory provisions of this Act. framework and compliance in the sub-sector remains. BOU expects improvement in compliance Microfinance Deposit-taking Institutions Act 2003 upon enactment of the proposed amendments to The proposed amendments to the MDI Act 2003, the Foreign Exchange Act 2004 and the Foreign forwarded to the Ministry of Finance, Planning and Exchange Economic Development (MFPED) in 2015, are yet to Remittance) Regulations 2006. (Foreign Exchange and Money be finalised. BOU is continuing its follow-up with Also, inadequate awareness and/or application of MFPED on these amendments. good corporate governance practices in the subLegal and regulatory developments in the foreign sector continue to present a challenge. As a exchange bureaus and money remitters sub-sector remedial The proposed amendments to the Foreign workshops Exchange Act 2004 and the Foreign Exchange directors and employees of foreign exchange (Foreign bureaus and money remittance companies. Exchange Bureaus and Money measure, provides BOU through on-going periodic up-skilling to Remittance) Regulations 2006 were submitted to 6 Annual Supervision Report December 2017 | Bank Of Uganda
  13. 2 .3. bank transactions, BOU signed an MOU with the The Deposit Protection Fund National Identification and Registration Authority Pursuant to Section 38 of the Financial Institutions (NIRA). As a result, 1,375,663 financial card records (Amendment) Act 2016, the Deposit Protection have been transferred to NIRA for verification and Fund (DPF) became a separate legal entity. Its matching with existing records in the National management and operations were divested from Identification Register. From the records submitted the central bank. A board of directors was to NIRA, 45 percent or 619,865 financial cards were appointed by the MFPED, and four officers from processed, of which 453,275 financial cards BOU were seconded to the DPF as part of the initial matched had matching NIN records. The 166,590 steps to set up its management structures and fully financial cards that did not have matching records operationalise it as an independent entity. shall be processed manually. A memorandum of understanding (MOU) between The Uganda Bankers Association (UBA) technical BOU and the DPF has been finalised. It lays out the committee, the Financial Intelligence Authority areas of cooperation between the two entities and (FIA) and the BOU, have jointly approached NIRA to provides guidance on operational arrangements initiate modalities for accessing the National during this transitional period. Identification Register. The objective is to enable 2.4. online and almost real-time Know-Your-Customer Credit reference bureau services (KYC) verification and validation. It has been During 2017, 124,995 new financial cards were agreed that a working group be established to issued to customers of SFIs bringing the cumulative agree on identification related data fields that will number of cards in the financial system to be accessed by the financial services industry, the 1,503,324. There were 593 branches installed on the flow and security of this data, and how customer financial card system; and a total of 596,406 credit privacy and consent for access to personal data enquiries were made in 2017 in comparison to the shall be handled. Once conclusively defined and 614,620 made in 2016. agreed upon, they shall constitute the basis for the establishment and hosting of an Interface, and the In the pursuit of a competitive credit reference access modalities for the financial industry services environment, revised draft Financial stakeholders to the NIRA hosted and maintained Institutions National Identification Register. Credit Reference Bureau (CRB) Regulations 2017 have been forwarded to the MFPED for comments. Thereafter, they shall be CRB data utilisation and public awareness submitted to the First Parliamentary Counsel for consultancies, funded by KfW legislative drafting. The revised regulations will Following the evaluation of the tender bids for the enable access to the CRBs by other non-bank two consultancies funded by Kreditanstalt für lenders Wiederaufbau (KfW), M/s. AFC Consultants in and enhance the regulation and establishment of this market as competitive. conjunction with Akademie Deutscher e.v, won the contract to provide training on CRB data utilisation In line with the initiative to make the national to participating institutions and BOU, while M/s. identification number (NIN) a key identifier for all NOMAD Advertisement won the contract for public Annual Supervision Report, December 2017 | Bank Of Uganda 7
  14. awareness campaigns for the CRB , the Deposit The implementation of the International Financial Protection Fund and World Savings Day. These Reporting Standard (IFRS) 9 took effect on 1st contracts will commence in early 2018. January 2018 at the international level. 2.5. Bank of Uganda directed SFIs to conduct an Strengthening supervision Audits of information technology systems by assessment of their preparedness to implement external auditors IFRS 9. A review of the reports submitted by the The BOU requires SFIs to engage their external SFIs revealed that they are at varying stages of auditors to audit their ICT systems. The objective is preparedness with regard to the implementation of to obtain assurance on the capability of the ICT IFRS 9. Accordingly, BOU will continue evaluating systems to safeguard the institutions’ assets as well the SFIs’ implementation programs for IFRS 9, as as and well as its impact on their capital adequacy during confidentiality. These audits must be conducted on 2018 and provide guidance to the sector in due a periodic basis. course, where necessary. Home-Host supervisory relationships The Uganda Forex Bureau and Money Remittance The BOU participated in a number of supervisory Association colleges organised by the home regulators of some BOU, in conjunction with the Uganda Forex Bureau of the subsidiaries of foreign banks operating in and Money Remittance Association, continued its Uganda. Supervisory colleges bring together host capacity building programs for the sub-sector and home regulators to evaluate the risks facing throughout 2017. On 19th October 2017, a training banking groups and devising supervisory strategies workshop was held for the directors and managers to mitigate such risks. Some of the colleges held of foreign exchange bureaus and money remittance were for Stanbic Bank, Barclays Africa Banking companies. Group, Standard Chartered Bank, Ecobank Group, establishing a sound internal control environment; United Bank for Africa and Exim Bank. preparation and submission of statutory returns; ensure data availability, integrity International Financial Reporting Standard (IFRS) 9 – Financial Instruments 8 The topics covered included: and awareness about anti-money laundering and countering the financing of terrorism compliance obligations. Annual Supervision Report December 2017 | Bank Of Uganda
  15. PART II : ASSESSMENT OF FINANCIAL STABILITY Annual Supervision Report, December 2017 | Bank Of Uganda 9
  16. Chapter 3 : Performance of the Banking Sector 3.1. Changes in banks’ assets and liabilities 3.2. Capital Adequacy The total assets of Uganda’s banking sector grew, At the end of December 2017, all commercial banks in nominal terms, by 12.0 percent between met the regulatory minimum capital adequacy December 2016 and December 2017, from USh.23.7 requirements. The consolidated banking industry trillion to USh.26.5 trillion. This was a marked core and total regulatory capital adequacy ratios increase in bank assets, as compared to the 9.1 (regulatory percent growth achieved over the previous year, improved from 17.3 percent and 19.8 percent to 2016. This was mainly on account of a 204.1 percent 20.9 percent and 23.2 percent respectively in 2017. increase in banks’ holdings of BOU securities, from This improvement is largely attributed to better USh.0.8 trillion in December 2016 to USh.2.5 trillion profitability leading to a 30.1 percent increase in in December 2017. Loans and advances increased banks’ retained earnings, from USh.1.6 trillion in by 1.5 percent in 2017, which was much lower than 2016 to USh.2.1 trillion in 2017. The capital position the 6.1 percent growth registered in 2016. of the banking industry was also reinforced by the capital to risk-weighted assets) write-off of Crane Bank’s accumulated losses, The significant increase in the banks’ investment in which had, in 2016, significantly reduced the Government of Uganda and BOU securities, with a aggregate industry capital position. meagre increase in lending to the private sector indicates that banks’ remained risk-averse, perhaps Similarly, the because of high loan default rates experienced in leverage ratio 2016. This was in spite of the default rates easing requirement) improved from 9.6 percent at the end considerably during 2017, with industry NPL ratio of December 2016 to 11.3 percent at end- closing at 5.6 percent from 10.6 percent as at end of December 2017, which is significantly above the 2016. Basel III recommended minimum of 3.0 percent. Table 3: Excerpt of banks’ assets Table 4: Aggregate capital adequacy ratios for the Total assets Volumes (USh. trillion) Annual growth (percent) Government securities Volumes (USh. trillion) Annual growth (percent) Loans Volumes (USh. trillion) Annual growth (percent) BOU securities & REPO Volumes (USh. trillion) Annual growth (percent) Source: Bank of Uganda Dec 2014 Dec 2015 Dec 2016 Dec 2017 19.6 13.1 21.7 10.9 23.7 9.1 26.5 12.0 4.5 22.3 4.1 -8.9 5.1 25.6 5.6 9.1 9.4 14.0 10.8 14.9 11.5 6.1 11.7 1.5 banking (the industry non-risk consolidated based capital banking sector (percent) Total capital adequacy ratio Tier 1 capital adequacy ratio Leverage ratio Dec 2014 Dec 2015 Dec 2016 Dec 2017 22.2 21.0 19.8 23.2 19.7 18.6 17.3 20.9 11.0 11.1 9.6 11.2 Source: Bank of Uganda Total shareholders’ equity in the banking system 0.23 -58.1 0 -100 0.8 0.0 2.5 204.1 grew by 27.6 percent from USh 3.7 trillion to USh 4.7 trillion in 2017. This was far higher than the 1.9 percent growth registered in the previous year and was largely attributed to the increase in retained 10 Annual Supervision Report December 2017 | Bank Of Uganda
  17. earnings . However, paid-up capital reduced by 6.2 Figure 2: Annual growth in customer deposits (percent) percent from USh.1.4 trillion in 2016 to USh.1.3 trillion in 2017, on account of the resolution process % for Crane Bank. 60 Figure 1: Composition of banks’ capital 40 USh. trillion Profit Other Reserves Retained Reserves Share Premium Paid-up-Capital Total deposits Shilling deposits Foreign currency deposits 20 0 4 -20 Dec-13 2 Dec-14 Dec-15 Dec-16 Dec-17 Source: Bank of Uganda Activity in the interbank market 0 In response to the easing of the monetary policy Dec-14 Dec-15 Dec-16 Dec-17 Source: Bank of Uganda 3.3. Funding and liquidity rate, the central bank rate (CBR), the 7-day weighted average and the overnight interbank rates progressively declined to 9.3 percent and 7.8 percent, respectively by end of December 2017, As at end of December 2017, customer deposits down from 12.6 percent and 10.4 percent, accounted for 83.2 percent of the total liabilities of respectively as at end of 2016. There was more the banking sector. Customer deposits grew by 12.0 stability in the interbank rates, around the CBR. percent to close at USh.18.2 trillion in 2017, compared to the 9.5 percent growth registered in 2016. Specifically, shilling deposits increased by 17.8 percent to USh.11.6 trillion during the year, while foreign currency deposits grew by 3.1 percent over the same period. The latter constituted 36.5 The activity in the interbank market decreased during 2017, with a total of USh.21.7 trillion traded, down from USh.24.3 trillion in 2016. This could be attributed to better funding conditions in the sector as banks benefited from increased deposits. percent of total deposits at end of 2017, down from Figure 3: Interest rates in the domestic interbank market 39.6 percent in 2016. (percent) % Overnight rate 7-day rate CBR 20 10 0 Dec-13 Annual Supervision Report December 2017 | Bank Of Uganda Dec-14 Dec-15 Dec-16 Dec-17 11
  18. Source : Bank of Uganda 3.4. Liquidity Performance of credit Lending activity Banks held liquidity buffers well above the minimum requirement in 2017. The ratio of liquid Overall, the growth in bank loans and advances was assets to total deposits increased from 42.5 percent subdued despite the easing of monetary policy as at end of 2016 to 54.6 percent as at end of 2017, during the year. In 2017, bank credit to the private well above the regulatory minimum of 20.0 sector increased by 1.5 percent to USh.11.5 trillion, percent. Commercial banks held USh.9.9 trillion in lower than 6.1 percent growth registered in 2016. liquid assets at the end of December 2017, and this was 18.6 percent more than the level held at end of 2016. With the increase in funding noted above, banks’ liquid assets increased as the banks opted for more investment Government of Uganda and BOU securities, which increased by USh.2,175.0 billion, while only increasing their lending to the Shilling denominated loans expanded by 8.3 percent in 2017 to USh. 6.9 trillion, which was higher than the 7.5 percent growth registered in the previous year. However, foreign currency denominated loans fell by 7.1 percent in 2017, down from the 4.4 percent growth registered in 2016. Foreign currency denominated loans constituted private sector by a meagre USh.168.4 billion. 40.7 percent of total loans as at end of December 2017, down from 44.4 percent as at end of Table 4: Key indicators of bank liquidity (percent) Liquid assets to total deposits Liquid assets to total assets Total loans to total deposits Interbank borrowing to total deposits Dec 2014 Dec 2015 Dec 2016 Dec 2017 43.9 46.4 51.5 54.6 December 2016. Banks continued to exercise caution in lending due the high default rates suffered in 2016, even though 29.7 31.7 35.3 37.4 71.4 73.1 70.8 64.1 2.6 2.7 2.0 1.5 Source: Bank of Uganda 2017 registered significant improvement in loan performance. Figure 4: Annual changes in the stock of bank loans (percent) % Total loans Shilling loans Foreign currency loans The Liquidity Coverage Ratio (LCR) assesses whether, in the event of a 30-day liquidity stress 40 scenario, a bank holds sufficient high quality liquid assets to meet its projected net cash outflows over 20 this period. Banks are required to maintain a minimum LCR of 100 percent. Measured by the LCR, the banking industry’s liquidity improved in 2017, as the average monthly industry LCR over this period stood at 313.6 0 -20 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Source: Bank of Uganda percent, compared to an average of 251.3 percent Following the reduction in the CBR from 12.0 in 2016. percent in December 2016 to 9.5 percent in 12 Annual Supervision Report December 2017 | Bank Of Uganda
  19. December 2017 , interest rates on shilling loans % % % Share of Total 9.5 9.8 12.4 YoY growth 15.8 9.3 28.1 Share of Total 14.8 13.7 12.6 YoY growth 19.9 -2.2 -6.9 Share of Total 18.7 18.6 18.7 same period. Trade & commerce YoY growth 9.1 5.3 2.4 Real estate & construction Share of Total 24.1 23.4 20.5 Figure 5: Commercial banks’ weighted average lending YoY growth 19.2 3.0 -11.0 Personal & household loans Share of Total 15.2 16.5 18.6 YoY growth 18.7 14.9 14.7 Share of Total YoY growth 17.6 18.7 18 8.9 17.2 -3.5 eased. The weighted average lending rate for shilling loans reduced from 22.7 percent in December 2016 to 20.3 percent in December 2017, while the lending rate for foreign currency loans reduced from 9.2 percent to 7.6 percent over the rates and the CBR (percent) % CBR Shillings Lending Rate Foreign Currency Lending Rate Agriculture Manufacturing All other sectors 25 Source: Bank of Uganda Loan quality and non-performing loans The aggregate industry NPL ratio (non-performing 15 loans to total gross loans) improved from 10.5 percent as at December 2016 to 5.6 percent as at 5 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Source: Bank of Uganda December 2017. The aggregate NPLs dropped by 45.8 percent from USh.1.2 trillion in December 2016 to USh.652.1 billion in December 2017. Sectoral analysis of bank lending indicates that the real estate and construction; trade and commerce; and household sectors claimed the largest shares of bank lending as at December 2017. Notable was the growth in the share of personal and household loans, supported in part by BOU’s accommodative monetary policy stance and the expectation of By currency, there was improvement in credit quality in the industry’s NPL ratio for both foreign currency denominated loans and shilling loans, from 12.6 percent and 8.8 percent respectively at end December 2016, to 6.5 percent and 5.0 percent respectively at the end of December 2017. improvement in macroeconomic conditions (BOU Lending Survey reports, 2017). In terms of annual sectoral credit growth, the agriculture sector registered the highest growth, of 28.1 percent in 2017. On the other hand, lending to the real estate and construction sector decreased by 11.0 percent over the same period. Table 6: Sector allocation of bank loans Sector Percent Dec. 2015 Dec. 2016 Dec. 2017 Annual Supervision Report December 2017 | Bank Of Uganda 13
  20. Figure 7 : Banks’ NPLs USh. billion 1,200 3.5. Earnings and profitability % Shilling NPLs Foreign Currency NPLs NPL Ratio (RHS) The banking sector’s profitability improved significantly during 2017. The net after-tax profits 8 more than doubled from Ush.302.1 billion for the year 2016 to Ush.672.9 billion for the year 2017. The 800 aggregate return on equity (ROE) and return on 4 400 assets (ROA) improved from 8.3 percent and 1.3 percent to respectively, 0 Dec-13 Dec-14 Dec-15 Dec-16 0 Dec-17 16.4 percent over the and same 2.7 percent period. The improvement was largely attributed to a reduction in provisions for bad debts. While aggregate profitability improved, six banks were loss-making Source: Bank of Uganda in 2017, one less than the seven banks that By sector, agriculture (USh.158.2 billion), and Trade and Commerce (USh.137.2 billion) accounted for most of the banking industry NPLs, as illustrated in the figure below. registered losses for 2016. Figure 9: Banks’ Annual Profitability (percent) Notable also is that the proportion of NPLs attributed to the Real estate, Building and Construction sector decreased by USh.166.9 billion, over the year ended RoE (%) 18.0 RoA (%) 3.0 2017. 2.5 15.0 Figure 8: Sectoral composition of banks' NPLs (USh. trillion) 2.0 12.0 1.5 USh. Billion 1,400 Others (Electricity, Services, 1,200 800 600 1.0 RoA Mining, Community, Staff) Transport & Communication 6.0 0.5 2013 Personal & Household Loans 1,000 RoE 9.0 2014 2015 2016 2017 Real Estate, Building & Construction Trade & Commerce Source: Bank of Uganda Manufacturing While interest earned on loans and advances still Agriculture accounted for most of the banks’ income, the contribution from non-interest sources – charges, 400 fees and commissions – increased significantly in 200 2017. Noteworthy is that due to the decrease in interest rates in 2017, interest income from 0 2013 2014 2015 2016 NPLs, as at year-end Source: Bank of Uganda 14 2017 government securities and loans and advances decreased, relative to 2016, even though the stock of both asset classes had increased by end of 2017. Annual Supervision Report December 2017 | Bank Of Uganda
  21. percent to 36 .5 percent between December 2016 and December 2017. Figure 10: Composition of banks' gross income (USh. trillion) Table 5: Banks' foreign currency exposure (percent) USh. trillion 3 Forex exposure/ core capital 2 1 0 2014 2015 2016 2017 Other Income Forex assets/ forex liabilities Forex loans/ forex deposits Forex assets/ total assets Dec-13 -3.0 96.8 81.7 30.8 Dec-14 -6.9 97.1 85.1 31.8 Dec-15 -5.9 101.8 77.6 37.5 Dec-16 -8.5 99.2 79.3 35.6 -5.4 92.4 71.5 29.6 Dec-17 Source: Bank of Uganda Off Balance Sheet Foreign Exchange Income Charges, Fees and Commissions Deposits Abroad Interest Income – Govt Securities Interest Income-Loans and advances Source: Bank of Uganda 3.7. Conclusion In 2017, Uganda’s banking sector registered an improvement in performance, relative to 2016. The banking system was sound and resilient, with capital and liquidity buffers well above the minimum requirements. NPLs, which eroded banks’ profitability in 2016, fell during 2017 supported by 3.6. Sensitivity to market risk the easing of monetary policy and the pickup in economic performance. However, lending to the The banking sector’s exposure to market risk private sector grew sluggishly, by 1.5 percent in remained low, as at end of December 2017. The 2017. The very low credit growth is largely ratio of foreign currency exposure to regulatory attributed to banks’ risk aversion given high default core capital stood at 5.4 percent at the end of rates from the private sector obligors in the recent December 2017, well within the regulatory past, with banks instead opting to invest in requirement of +/-25 percent. The ratio of foreign government securities. currency loans to foreign currency deposits was 71.5 percent as at the end of December 2017, which was still within the statutory limit of 80 percent. The proportion of the banks’ foreign currency assets to total assets reduced from 35.6 percent to 29.6 percent, while the share of foreign currency deposits to total deposits declined from 39.6 Annual Supervision Report December 2017 | Bank Of Uganda 15
  22. Chapter 4 : Performance of Non-Bank Financial Institutions and Oversight of Payment Systems 4.1. Credit institutions Total assets of the credit institutions (CIs) grew by Figure 11: Capital adequacy ratios for CIs (percent) % Core capital/RWA 17.2 percent, from USh.463.1 billion as at endDecember 2016 to USh.542.8billion as at end- Total capital/RWA 30 December 2017. The increase was largely due to increased lending activity as net loans and 20 advances increased by 20.3 percent from USh.259.5 to USh.312.3 billion during the same period. Total deposits rose by 23.5 percent, from USh.303.9 10 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 billion to USh.375.3 billion over the same period. Source: Bank of Uganda Overall, all CIs were well capitalised, liquid and The CIs’ key liquidity indicators were satisfactory. generally financially sound during 2017. The ratios of liquid assets to total deposits and loans to deposits were 45.2 percent and 83.2 Capital adequacy and liquidity percent, respectively. All CIs maintained their respective paid-up capital above the statutory minimum of USh.1 billion. The Asset quality consolidated CIs core and total regulatory capital to During 2017, credit institutions’ asset quality risk-weighted assets ratios stood at 21.7 percent deteriorated, with non-performing loans increasing and 23.3 percent respectively, at end of 2017. This by 2.9 percent from USh.10.5 billion as at the end was a decrease from 23.1 percent and 24.9 percent of December 2016 to USh.10.8 billion as at the end respectively as at end of December 2016, mainly on of December 2017. Two of the four CIs accounted account of the rising NPLs and loss making trend of for the majority of the rise in NPLs and by sector; newly licenced institutions. The aggregate core the largest increase in NPLs was recorded in the capital of the CIs stood at USh.86.5 billion while trade and commerce sector. total regulatory capital amounted to USh.92.8 billion. Earnings and profitability The CIs sector registered net after-tax profits of USh.2.7 billion during 2017. This represented a substantial increase, as compared to a net profit of USh.0.5 billion that was incurred during 2016. Consequently, the ROA and ROE ratios stood at 0.5 percent and 2.7 percent, respectively. Interest income continued to be the major source of income for the CIs, contributing USh.90.3 billion during the year 2017. 16 Annual Supervision Report December 2017 | Bank Of Uganda
  23. Figure 12 : Profitability for CIs (percent) reduced by 1.8 percent following the decrease in 10 % 8 gross loans as noted above. Return on Assets Return on Equity 6 Figure 13: Capital adequacy ratios for MDIs (percent) % 4 35 2 0 2013 2014 2015 2016 2017 Source: Bank of Uganda Core capital/RWA 25 Total capital/RWA 15 Dec-11 4.2. Microfinance deposit-taking institutions Dec-13 Dec-15 Dec-17 Source: Bank of Uganda Asset quality Asset quality improved albeit marginally, as As at the end of 2017, the overall financial condition manifested by a decrease in NPLs by 8.8 percent to and performance of the MDIs was rated fair. Four of Ush.14.3 billion. The MDIs generally focused more the five licensed MDIs remained adequately on loan recovery and less on disbursement, which capitalised. One MDI breached the minimum led to the slight improvement in portfolio capital adequacy requirement and is taking steps to performance. The asset quality, represented by the restore its capital. Two MDIs were profitable while ratio of NPLs to total loans, consequently improved three recorded losses. to 5.0 percent from 5.3 percent as at end-December Over the year ended 2017, CIs’ total assets increased marginally by 0.03 percent to USh.469.7 billion; customer deposits increased by USh.10.6 billion or 5.2 percent to USh.214.7 billion; while gross loans decreased by USh.14.4 billion or 4.8 percent to USh.283.0 billion. Capital adequacy All MDIs maintained their respective paid-up capital above the statutory minimum requirement of 2016. Figure 14: Asset quality of MDIs USh. billion 16 % Non-Performing Loans (NPLs) NPLs/Total Loans (RHS) 4 12 8 2 4 USh.500 million. The sub-sector’s core and total regulatory capital to risk-weighted assets ratios stood at 38.5 percent and 41.9 percent respectively, 0 0 Dec-11 Dec-13 Dec-15 Dec-17 up from 34.8 percent and 37.9 percent, as at end Source: Bank of Uganda December 2016. The aggregate core capital and By sector, Trade and Commerce, and agriculture still accounted for the largest proportions of NPLs, with USh.6.6 billion and USh.4.3 billion, respectively. total capital grew by 8.6 percent and 8.8 percent respectively, while total risk weighted assets Annual Supervision Report December 2017 | Bank Of Uganda 17
  24. 4 .3. Figure 15: Sectoral Composition of NPLs (USh. Billions) 20.0 15.0 remittance outlets Manufacturing Foreign exchange bureaus and money remitters Trade & Commerce continued to be financially sound, profitable and Transport & Utilities adequately capitalised as at end-December 2017. Building & Construction By end of 2017, the sub-sector comprised 188 Other Services 10.0 Foreign exchange bureaus and money foreign exchange bureaus with a total of 260 #REF! branches/outlets and 67 money remitters with a 5.0 total of 241 branches/outlets. The money remitters were comprised of foreign exchange bureaus, MDIs, and credit institutions. 0.0 2013 2014 2015 2016 2017 NPLs, as at Year-end Earnings and profitability The MDIs’ aggregate after-tax profit was USh.13.8 billion in 2017, a decline as compared to USh.14.2 Total assets held by the sub-sector stood at USh.117.8 billion as at December 2017, reflecting a 5.7 percent growth from the USh.111.4 billion reported in 2016. billion earned in the previous year. Operating Solvency of the sub-sector expenses increased by 1.8 percent, while interest Total capital and reserves held by the sub-sector as income from advances dropped by 0.1 percent. at end of 2017 stood at USh.62.8 billion, Consequently, the ROA and ROE ratios declined representing a marginal increase of 0.4 percent marginally from 3.1 percent and 10.5 percent from the USh.62.5 billion held in December 2016. respectively in 2016, to 2.9 percent and 9.41 percent respectively in 2017. There was an increase in profitability of the subsector, with profit-before-tax increasing by 5.0 Liquidity percent from USh.9.2 billion in 2016 to USh.9.6 All MDIs maintained liquid assets well above the billion in 2017. statutory minimum requirement of 15 percent of total deposit liabilities. Liquid assets as a Money remittances proportion of deposits increased to 59.3 percent as Total inflows increased by 44.5 percent from USD at December 2017, from 55.7 percent as at 397.2 million during 2016 to USD 573.89 million December 2016. Total liquid assets held increased during 2017. The outflows also increased by USD by 11.9 percent to USh.127.4 billion. This was 50.5 million or 17.0 percent from USD 296.6 million largely due to the growth in balances with financial in 2016 to USD 347.2 million during 2017. institutions in Uganda, by 8.6 percent. 18 Annual Supervision Report December 2017 | Bank Of Uganda
  25. Figure 16 : Money remittances (USD millions) Figure 17: UNISS annual transactions by volume and value USD million 500 Inflows Value (USh. trillion) Outflows 400 Volume ('000s) Value Volume 700 250 300 500 200 100 150 300 0 2013 2014 2015 2016 2017 Source: Bank of Uganda 50 100 2012 2013 2014 2015 2016 2017 4.4. Payment systems Payment systems are essential for the circulation of money in the economy, hence an integral part of the financial system, and its stability. This section provides an analysis of the performance of payment systems overseen by BOU that is; the Uganda National Interbank Settlement System (UNISS), the Electronic Clearing System (ECS), and mobile money services. UNISS performance in Ugandan shillings Source: Bank of Uganda UNISS performance in foreign denominated currencies Transactions in United States dollars (USD) registered the highest activity in terms of both value and volumes settled in foreign denominated currencies. A total of USD 7.9 billion was settled in 124,021 transactions as compared to USD 7.1 billion settled in 115,021 transactions in the previous year, 2016. The Kenyan shilling (KES) recorded the second highest volume and value of transactions with an equivalent of USD 415.8 million settled in During 2017, the volume of transactions grew by 6,637 transactions. 9.0 percent from 727,522 in 2016 to 793,230. The value of these transactions increased by 12.8 Table 8: UNISS volume and values transacted in foreign percent from USh.264.9 trillion in 2016 to currencies USh.298.9 trillion in 2017. Total value settled in all foreign currencies (USD equivalent; millions) 2016 2017 7,836 8,643 Proportion (percent) by currency (value) 91.5 USD 91.1 2.9 GBP 3.0 0.9 KES 4.8 4.8 TZS 0.0 0.1 RWF 0.2 0.0 EUR Annual Supervision Report December 2017 | Bank Of Uganda 0.7 19
  26. 2016 Total volume settled 123 ,867 2017 134,163 Proportion (percent) by currency (volume) 92.9 92.4 USD EUR 1.7 1.8 GBP 0.6 0.6 KES 4.6 4.9 TZS 0.2 0.1 RWF 0.0 0.0 Source: Bank of Uganda Performance of the Electronic Clearing System The Electronic Clearing System (ECS) automates the processing of cheque clearing and electronic Figure 18: Performance of the ECS in Uganda shillings Value (USh. trillion) 20 Volume (million) 1.0 15 0.6 10 5 0.2 2012 2013 2014 2015 2016 2017 Cheque Values EFT Value EFT Volume Cheque Volume Source: Bank of Uganda funds transfer (EFT) transactions, both in Uganda A total of 71,233 EFTs denominated in foreign Shillings (UGX) and the widely used foreign currencies, equivalent to USD 835.7 million, were currencies, namely: USD, EUR, GBP and KES. cleared through the ECS during 2017. This was an In 2017, 1.1 million cheques, valued at USh.5.6 trillion, were cleared in the ECS. This was a slight decline from 1.14 million cheque transactions, equivalent to a value of USh.5.7 trillion, processed through the ECS in 2016. On the other hand, the total volume of EFT (credits and debits) transactions increased significantly by 6.3 percent to 8.4 million in the year as compared to the 7.9 million transactions recorded in 2016. Similarly, the value of these EFT transactions increased by 12.1 percent from USh.17.2 trillion to USh.19.3 trillion over the same period. increase from the activity registered in 2016, of 65,122 EFT transactions, equivalent to USD 792.7 million. The US dollar transactions accounted for 96.9 percent and 93.7 percent of these EFTs volumes and values respectively. On the other hand, the value of foreign currency denominated cheques cleared through the ECS declined by 4.7 percent from USD 260.4 million in 2016 to USD 248.2 million in 2017, as also the volume of cheques reduced by 6.3 percent to 70,276 in 2017. USD cheques accounted for the highest share of foreign currency denominated cheques transactions, with 99.4 percent and 99.6 percent of the volumes and values, respectively. Mobile money services As at end-December 2017, there were seven mobile money service providers and these included; MTN, 20 Annual Supervision Report December 2017 | Bank Of Uganda
  27. 2011 87 ,481 3.75 2,878.0 of 2012 241,728 11.6 8,870.9 networks 2013 399,461 18.64 14,243.4 increased by 8.4 percent, from 21.6 million as at 2014 496,269 24.05 18,800.4 2015 693,574 32.7 21,102.9 2016 974,746 43.8 21,585.5 2017 1,206,845 63.1 23,391.7 Airtel, Uganda Telecom, EzeeMoney and Micropay. registered customers Africell, The across M-Cash, number the December 2016 to 23.4 million as at December 2017. Mobile money activity continued its growth, during 2017. Transaction values increased by 44.0 percent to USh.63.1 trillion in 2017, up from USh.43.8 trillion recorded in 2016. The number of transactions rose by 23.8 percent over the same period. Source: Bank of Uganda There were incidents of operational risk in mobile money payments, with several fraud cases reported, some of which were perpetrated by staff of the Mobile Money network operators. Therefore, this calls for proper internal controls at the MNOs to mitigate internally perpetuated fraud. Table 6: Performance of mobile money services Number of Value of Number of transactions transactions registered (‘000’s) (USh. customers trillion) (‘000’s) Annual Supervision Report December 2017 | Bank Of Uganda 21
  28. Chapter 5 : Systemic Risk Assessment and Outlook 5.1. Summary of risks facing the banking Figure 19: Annual GDP growth (percent) Total GDP Agriculture, forestry and fishing Industry Services Adjustments- Taxes on products % sector 20 Risks from the macroeconomy 16 The slowdown in the domestic economy during last year continued to weigh on the performance of the 12 banking system in the year to December 2017. 8 Uganda’s gross domestic product (GDP) expanded 4 by 4.0 percent in financial year 2016/17 in real terms, lower than 4.8 percent in 2015/16 (Figure 19). The low output represented macroeconomic 0 2009/10 2011/12 2013/14 2015/16 Source: Uganda Bureau of Statistics challenges which were reflected in the increased credit defaults of households and corporations. Figure 20: Evolution of the Composite Index of Economic Activity However, in the second half of 2017, indicators 250 showed that global financial conditions had % 4.0 Quarterly changes (RHS) improved, while domestic economic activity started to pick up. The economy is expected to expand at a Composite Index of Economic Activity 210 2.5 solid pace of 6.5 percent in the financial year2017/18, boosted by accommodative monetary 1.0 170 policy, public investments, increasing growth in consumption and improved -0.5 agricultural productivity. The Composite Index of Economic Activity (Figure 20), which is the BOU’s high frequency indicator of economic activity, points to a 130 Dec-10 Jun-14 -2.0 Dec-17 Source: Bank of Uganda strengthening of economic activity in the first However, despite the generally positive economic quarter of the financial year 2017/18 (BOU State of outlook, the economy still faces a number of risks. the Economy Report, 2017). Hence, the improving Growth has not been even across all sectors and macroeconomic environment growth of private sector credit remains subdued. is expected to enhance the prospects for financial stability in 2018. Credit risk During 2017, there was an improvement in the aggregate industry NPL ratio from 10.5 percent as at December 2016 to 5.6 percent as at December 2017. However, a major challenge facing banks is the slow growth of loans, which rose by only 1.5 percent in 2017, far lower than the 6.1 percent growth recorded in the previous year. The share of 22 Annual Supervision Report December 2017 | Bank Of Uganda
  29. total loans to total deposits , which averaged 74.2 Looking ahead to 2018, bank performance is percent in the four years to December 2016, expected to improve, as economic growth picks up reduced to 64.1 percent at December 2017. In and banks clear the legacy of bad loans. The particular, banks constricted credit to the real improved estate and manufacturing sectors. The risk to banks improving is that slow loan growth may affect bank accommodative monetary policy, which is expected profitability and income in 2018. to enhance the financial position of households and prospects are macroeconomic supported by the environment and corporations. Annual Supervision Report December 2015 | Bank Of Uganda 23
  30. PART III : STATISTICAL APPENDICES 24 Annual Supervision Report December 2017 | Bank Of Uganda
  31. 6 .1 APPENDIX 1: Financial Soundness Indicators for Supervised Financial Institutions Table 1A: Financial soundness indicators for commercial banks (percentage ratios) Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Regulatory capital to risk-weighted assets 21.9 22.9 22.2 21.0 19.8 23.2 Regulatory tier 1 capital to risk-weighted assets 18.8 19.9 19.7 18.6 17.3 20.9 Total qualifying capital to total assets 14.9 14.4 14.7 14.7 13.4 17.6 NPLs to total gross loans 4.2 5.6 4.1 5.3 10.7 5.6 NPLs to total deposits 3.1 4.1 3.0 3.9 7.4 3.6 Specific provisions to NPLs 45.9 47.2 48.9 41.6 60.4 54.6 Earning assets to total assets 71.3 69.7 71.5 69.2 67.3 71.9 Large exposures to gross loans 34.6 36.3 38.3 41.0 42.4 38.0 Large exposures to total capital 104.7 105.2 113.2 123.5 153.6 94.8 Return on assets 3.9 2.5 2.6 2.6 1.3 2.7 Return on equity 24.2 15.2 16.1 16.0 8.3 16.4 Net interest margin 12.8 11.5 11.0 11.3 12.9 11.6 Cost of deposits 4.1 3.7 3.6 3.3 3.5 2.8 Cost to income 70.9 77.2 68.7 69.3 84.9 74.0 Overhead to income 40.1 46.7 40.0 42.0 49.6 48.9 Liquid assets to total deposits 42.0 42.5 44.0 46.4 51.5 54.6 Total loans to total deposits 74.5 74.2 74.2 74.2 70.8 64.1 Foreign currency exposure to regulatory tier 1 capital * -0.6 -3.0 -7.0 -5.9 8.5 -5.4 Foreign currency loans to foreign currency deposits 79.3 62.2 64.5 59.2 57.0 56.2 Foreign currency assets to foreign currency liabilities 105.0 96.8 97.1 101.8 98.8 92.4 Capital adequacy Asset quality Earnings & profitability Liquidity Market sensitivity *Net short open position if negative. Net long open position if positive. Source: Bank of Uganda Annual Supervision Report December 2017 | Bank Of Uganda 25
  32. Table 1B : Financial soundness indicators for credit institutions (percentage ratios) Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Core capital to risk-weighted assets 28.1 23.5 20.9 21.4 23.1 21.7 Total capital to risk-weighted assets 33.6 28.4 25.5 23.4 24.9 23.3 Provisions to core capital 10.2 13.5 11.9 11.1 11.9 9.9 4.2 3.4 4.0 3.6 4.0 3.5 Return on assets 2.4 1.4 1.6 0.5 0.1 0.5 Return on equity 10.5 6.8 8.3 2.8 0.6 2.7 Net interest margin 5.2 5.2 5.2 4.9 4.8 4.6 Cost of deposits 3.6 4.4 4.3 5.4 5.5 5.0 Cost to income 97.5 92.9 99.5 87.8 101.1 90.2 Liquid assets to total deposits 57.8 50.4 42.3 46.3 52.3 45.2 Loans to deposits 58.5 68.9 75.9 82.4 76.3 83.2 71.7 57.3 66.6 47.8 50.7 33.5 143.9 129.0 105.4 117.0 109.2 91.6 Capital adequacy Asset quality NPLs to total gross loans Earnings & profitability Liquidity Market sensitivity Foreign currency loans to foreign currency deposits Foreign currency assets to foreign currency liabilities Source: Bank of Uganda 26 Annual Supervision Report December 2017 | Bank Of Uganda
  33. Table 1C : Financial soundness indicators for microfinance deposit-taking institutions (percentage ratios) Dec- 12 Dec - 13 Dec - 14 Dec -15 Dec- 16 Dec- 17 Core capital to risk-weighted assets 25.4 28.5 33.6 34.6 34.8 38.5 Total capital to risk-weighted assets 32.4 36 37.3 38.2 37.81 41.9 2.7 1.9 2 2.7 5.3 5.0 Return on assets (year-to-date) 4.2 3.5 5.6 3.9 3.09 2.9 Return on equity (year-to-date) 17.2 12 20.3 13 10.47 9.4 Liquid assets to total deposits 58.5 62.4 55.1 43.8 55.75 59.3 Loans to deposits 69.9 78 72.4 83.1 79.17 80.1 Capital adequacy Asset quality Portfolio at risk Earnings & profitability Liquidity Source: Bank of Uganda Annual Supervision Report December 2017 | Bank Of Uganda 27
  34. 6 .2 APPENDIX 2: Aggregated Balance Sheets for Supervised Financial Institutions Table 2A: Commercial banks’ aggregated balance sheet (USh. billion) As at year end 2012 2013 2014 2015 2016 2017 Cash & cash assets 667.4 692.0 786.6 811.3 810.8 1,109.0 Balances with BOU 1,341.6 1,730.1 2,104.81 1,982.6 2,858.7 2,544.5 - - - - 51.0 1,988.8 Due from financial institutions 1,622.2 2,043.7 1,692.8 2,634.8 2,645.5 2,260.8 Government securities 3,053.2 3,648.7 4,463.2 4,064.8 5,105.3 5,570.0 Total gross loans & advances 7,789.7 8,274.6 8,247.3 9,501.8 11,493.3 11,661.6 -187.9 -261.7 -229.3 -285.6 -820.2 -410.5 7,601.8 8,012.9 8,018.0 9,216.2 10,673.0 11,251.1 Net fixed assets 519.3 583.2 821.3 925.9 838.3 819.0 Other assets 660.4 610.3 671.6 691.9 706.4 984.9 15,465.9 17,320.9 19,586.1 21,722.2 23,689.2 26,528.1 10,457.7 11,504.3 13,218.7 14,821.1 16,235.7 18,181.1 Due to financial institutions 513.7 825.9 563.4 630.1 595.5 499.4 Administered funds 359.1 1,033.2 1,187.6 1,255.9 1,063.3 1,283.9 1,558.3 892.9 1,425.7 1,398.1 1,851.3 1,631.3 12,888.8 14,463.8 16,395..4 18,129.1 19,746.3 21,595.7 Paid-up capital 973.6 1,272.3 1,287.4 1,346.8 1,414.6 1,326.5 Share premium 75.7 91.8 102.3 115.4 145.9 347.8 Retained reserves 830.6 914.3 1,174.3 1,446.6 1,578.5 2,053.5 Other reserves 152.7 159.7 139.2 143.2 500.0 531.8 Profit – Loss (current year) 544.5 414.0 487.4 541.1 303.9 672.8 2,577.0 2,857.1 2,857.1 2,857.1 3,942.9 4,932.4 352.0 354.2 354.2 354.2 337.2 348.6 1,046.3 1,157.3 1,157.3 1,157.3 2,548.1 3,176.4 1,023.3 1,092.8 1,092.8 1,092.8 2,079.0 2,407.2 765.1 483.5 483.5 483.5 736.8 252.1 3,186.7 3,087.8 3,582.0 3,829.6 5,701.1 6,184.3 ASSETS Bank of Uganda securities LESS: Provisions Net loans & advances TOTAL ASSETS LIABILITIES Deposits Other liabilities TOTAL LIABILITIES SHAREHOLDERS’ FUNDS TOTAL SHAREHOLDERS' FUNDS OFF BALANCE SHEET ITEMS Letters of Credit Guarantees & performance bonds Unused loans/overdrafts commitment Other off balance sheet items TOTAL OFF BALANCE SHEET ITEMS Source: Bank of Uganda 28 Annual Supervision Report December 2017 | Bank Of Uganda
  35. Table 2B : Aggregated balance sheet for credit institutions (USh. billion) As at year end 2014 2015 2016 2017 2012 2013 7.7 11.5 14.6 16.4 18.6 23.5 55.9 63.1 56.2 70.3 117.3 123.9 0.7 0.5 0.3 1.0 1.5 3.1 12.5 7.9 11.4 29.9 20.2 19.1 12.5 7.9 11.4 29.9 20.2 19.1 115.9 147.6 187.3 225.3 251.0 305.6 - - - - - 0.4 20.2 23.4 28.4 32.3 35.7 41.3 8.1 11.7 12.8 14.4 18.8 26.3 221.1 265.7 311.0 389.6 463.1 542.8 133.0 164.9 195.1 254.3 303.9 375.3 4.3 4.8 4.9 4.9 4.8 5.1 17.2 21.5 21.9 27.3 30.0 24.5 0.6 0.6 0.4 0.3 0.2 - - - - - 4.6 14.5 16.3 22.4 17.5 25.6 26.3 2.0 3.1 5.3 2.4 2.7 3.2 44.3 50.7 56.3 81.9 87.4 100.4 21.9 21.8 21.8 54.1 66.6 84.1 5.2 3.7 5.0 1.0 (0.17) 2.7 221.1 265.7 310.9 389.6 463.1 542.8 ASSETS Cash Balances with institutions in Uganda Balances with commercial banks outside Uganda Investments of which Government securities Loans and advances (Net) of which administered funds Premises and fixed assets (Net) Other assets Total assets LIABILITIES Total deposit liabilities to depositors Loan Insurance Fund Balances due to commercial banks/associated companies/residents/non-residents Borrowings at Bank of Uganda Administered funds Other liabilities Provisions Capital of which paid up capital Profit for current year Total liabilities and capital Source: Bank of Uganda Annual Supervision Report December 2017 | Bank Of Uganda 29
  36. Table 2C : Aggregated balance sheet for microfinance deposit-taking institutions (USh. billion) As at year end 2012 2013 2014 2015 2016 2017 9 5.7 6.2 8.6 10.2 11 48.8 52.2 73.9 74.7 106.8 116 Government securities 0.9 0 0 1.1 2.8 1.5 Net loans outstanding 186.5 173.6 203.1 265.7 286.7 273.8 0 0 0.01 0 0 0 13.7 12.9 15.9 25.2 34.4 36.9 - - - - - 0.1 Other assets 17.6 19.7 24 25.7 28.6 30.5 Total assets 276.5 264.1 323.1 401 469.5 469.8 Deposit liabilities 99.9 92.7 145.3 182.9 204.1 214.7 Loan insurance fund 14.1 16.9 12.1 10.5 7.3 7.9 Borrowings 57.2 46.9 32.3 41.9 70.6 53.8 Other liabilities 18.3 18.9 22.5 27.6 31.2 24.7 7.4 5.5 5.5 6.8 6.3 6.9 - - - - - 0 Other long-term Liabilities 0.6 0.6 0.3 0 0 0 Total liabilities 197 181 218 269.7 319.5 308 Capital 66.8 69.9 98.9 123.6 142.5 153.3 Subordinated debt 12.8 13.1 6 7.7 7.7 8.5 - - - - - 0 276.6 264 323 401 469.7 469.8 ASSETS Notes and coins Balances with institutions in Uganda Inter branch/ due from own offices Net fixed assets Long-term investments LIABILITIES Grants/deferred income Inter branch/ Due to own Offices FINANCED BY: Preference shares Total liabilities & equity Source: Bank of Uganda 30 Annual Supervision Report December 2017 | Bank Of Uganda
  37. 6 .3 APPENDIX 3: Income Statements for Supervised Financial Institutions Table 3A: Commercial banks’ aggregated income statement (USh. billion; annualised) For Year 2012 2013 2014 2015 2016 2017 1,465.3 1,389.5 1,464.1 1,722.0 1,868.8 1,808.0 296.5 349.8 416.1 497.6 689.3 681.9 Deposits abroad 49.3 29.5 8.6 12.0 17.3 22.3 Other 23.6 91.0 132.0 68.8 117.7 151.5 Charges, fees & commissions 326.9 335.3 376.1 419.3 429.9 533.8 Foreign exchange income 250.6 216.4 197.6 257.6 219.7 170.6 Other income 183.3 127.2 153.9 147.9 261.1 323.7 2,595.5 2,538.7 2,802.3 3,196.6 3,603.8 3,691.9 Interest expense on deposits 401.4 406.8 438.5 467.6 539.9 480.3 Other interest expenses 193.3 119.8 154.3 189.8 169.3 157.7 Provisions for bad debts 205.9 247.9 212.2 217.7 638.2 295.4 Salaries, wages, staff costs 437.8 504.4 583.9 646.9 723.9 773.9 Premises, depreciation, transport 198.1 221.7 253.9 296.5 322.2 328.9 Other expenses 405.2 458.3 494.8 612.6 664.6 704.2 1,841.7 1,958.9 1,925.4 2,213.5 3,057.8 2,740.3 0.9 0.1 0.0 0.0 0.0 0.0 Net profit before tax 754.7 579.9 664.7 765.3 546.0 951.6 LESS: Corporation tax 199.9 165.9 179.5 224.1 243.9 278.7 NET PROFIT AFTER TAX 544.8 414.0 485.2 541.2 302.1 672.9 INCOME Interest income Advances Government securities TOTAL INCOME EXPENSES TOTAL EXPENSES Extraordinary credits (charges) Source: Bank of Uganda Annual Supervision Report December 2017 | Bank Of Uganda 31
  38. Table 3B : Aggregated income statement for credit institutions (USh. billion; annualised) For Year 2015 2016 2017 49.8 4.6 1.3 60.1 3.1 5.8 67.6 3.6 10.9 73.5 2.9 2.1 46.9 20.0 66.9 55.7 20.2 75.9 69.0 25.3 94.3 82.0 28.4 110.5 90.3 34.5 124.8 4.6 6.6 7.8 12.2 15.8 16.9 2.8 19.9 21.9 49.2 1.9 6.3 24.3 24.4 61.6 1.6 4.2 28.4 29.3 69.7 1.0 8.0 33.8 36.7 90.7 2.6 6.4 39.3 47.4 108.9 3.7 8.4 33.9 38.3 120.7 2.3 5.2 3.7 5.2 1.0 (0.17) 2.7 2012 2013 INCOME Interest on loans and advances Interest on government securities Other interest income 31.7 2.2 0.3 37.2 1.6 8.1 Total interest income Total non-interest income TOTAL INCOME 41.0 15.4 56.4 EXPENSES Total interest expense Provisions for bad debts Salaries & other staff costs Other non-interest expense TOTAL EXPENSES Taxation NET INCOME 2014 Source: Bank of Uganda 32 Annual Supervision Report December 2017 | Bank Of Uganda
  39. Table 3C : Aggregated income statement for microfinance deposit-taking institutions (USh. billion; annualised) For Year 2012 2013 2014 2015 2016 2017 INCOME Total credit income 99.0 82.5 97.8 110.0 138.6 141.3 Total other income 10.6 11.2 13.8 16.9 22.8 24.3 109.6 93.7 111.6 126.9 161.4 165.6 15.7 12.0 15.8 16.9 31.4 29.9 5.0 3.4 4.6 5.3 12.3 11.5 Net financial income 88.9 78.3 91.3 104.8 117.6 124.1 Total operating expenses on financial services 75.5 66.3 73.3 84.3 100.0 104.9 NET INCOME FROM OPERATIONS 13.4 11.9 17.9 20.3 17.6 19.2 1.1 1.7 2.9 0.8 1.3 0.6 - - - - - 0.2 Income from non-financial services 0.01 0.03 0.005 0.3 0.9 0.0 Total operating expenses on non-financial services 0.09 0.08 0.004 0.8 0.0 0.2 Net operating profit/loss from non-financial services -0.1 -0.05 0.001 -0.5 0.9 0.2 NET PROFIT FOR THE PERIOD 14.4 13.6 20.8 18.3 21.8 20.3 2.7 3.2 3.1 6.1 7.6 6.5 NET PROFIT AFTER TAX 11.6 10.4 17.7 12.2 14.1 13.8 RETAINED EARNINGS 21.9 33.6 46.9 61.8 53.7 61.1 GROSS FINANCIAL INCOME EXPENSES Total financial expenses of lending funds Provision for bad debts Total grant income for financial services Total grant income for non-financial services Corporation tax Source: Bank of Uganda Annual Supervision Report December 2017 | Bank Of Uganda 33
  40. 6 .4 APPENDIX 4: Credit Reference Bureau Activities Dec-2010 Dec-2011 Dec-2012 Dec-2013 Dec-2014 Dec-2015 Dec-2016 Dec-2017 Branches on FCS 505 528 547 590 600 617 616 593 Branches on CRB 503 525 542 579 580 593 603 559 478,568 667,412 802,906 948,936 1,093,107 1,235,845 1,378,329 1,503,324 146,435 536,024 472,231 568,501 611,895 613,829 614,620 596,406 Cumulative Financial Cards Number of Enquiries (During year) Source: Bank of Uganda 34 Annual Supervision Report December 2017 | Bank Of Uganda