The Stanbic Purchase Managers Index (PMI) for October indicates a general improvement in the business environment in Uganda.

The survey sponsored by Stanbic Bank and produced by IHS Markit, posted 56.3 in October, up slightly from 55.7 in September and above the series average. The headline PMI shows that Ugandan companies continued to secure greater volumes of new business in October, expanding production with the help of increased staffing levels in response.

The report which contains the latest analysis of data collected from the monthly survey of business conditions in the Ugandan private sector shows that purchasing activity increased for the twentieth successive month in October amid higher new orders, with inventories also expanding.

Growth of both output and new orders was recorded across each of the five broad sectors covered by the survey.

Benoni Okwenje, Stanbic Bank Uganda’s fixed income manager while commenting on the findings said new orders expanded for the thirty-third month running, with panellists linking the rise to increased customer numbers, marketing and competitive pricing.

“Companies responded to higher new orders by increasing their business activity, aided by a further expansion in staffing levels. The rise in employment helped firms keep on top of workloads, with backlogs of work declining again,” he explains.

Meanwhile, input costs rose again, leading to ongoing output price inflation.

Input costs increased in October, amid rises in purchase prices, staff costs and utility rates. According to respondents, inflation of purchase costs reflected higher prices for items including foodstuffs, cement, fuel and iron bars.

Okwenje explains that with input costs rising, companies in Uganda increased their output prices accordingly.

Some panellists reported that improving customer demand enabled them to raise their selling prices. Charge inflation was recorded in all monitored sectors, except for agriculture which saw no change in output prices.

According to the report findings, further improvements in demand are expected over the coming year, contributing to confidence among companies regarding the 12-month outlook for business activity.

Jibran Qureishi, Regional Economist E.A., Global Markets at Stanbic Bank commented: “The short rains seem to have started early this season which should thus bode well for agricultural productivity in H1:2020. In fact, we still expect the government continue investing in oil related infrastructure which will probably continue to anchor GDP growth to remain more or less around the 5.8-6.0 percent level over the coming year.

PMI provides an early indication of operating conditions in Uganda. The PMI is a composite index, calculated as a weighted average of five individual sub-components: New Orders (30 percent), Output (25 percent), Employment (20 percent), Suppliers’ Delivery Times (15 percent) and Stocks of Purchases (10 percent).

Stanbic Bank Uganda is a member of the Standard Bank Group, Africa’s largest bank by assets. Standard Bank Group reported total assets of R2.1 trillion ($148 billion) as at 31 December 2018, while its market capitalization was at R289 billion ($20 billion).

The group has direct, on-the-ground representation in 20 African countries. Standard Bank Group has 1,221 branches and 8,815 ATMs in Africa, making it one of the largest banking networks on the continent. It provides global connections backed by deep insights into the countries where it operates.

Stanbic Bank Uganda provides the full spectrum of financial services. Its Corporate & Investment Banking division serves a wide range of requirements for banking, finance, trading, investment, risk management and advisory services. Corporate & Investment Banking delivers this comprehensive range of products and services relating to: investment banking; global markets; and global transactional products and services.

Stanbic Bank Uganda personal and business banking unit offers banking and other financial services to individuals and small-to-medium enterprises. This unit serves the increasing need among Africa’s small business and individual customers for banking products that can meet their shifting expectations and growing wealth.

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As at end June 2019, commercial banks in the country accounted for 95.2 percent of the banking sector total assets of Shs31.8 trillion as the banking industry aggregate assets increased by 10.5 percent to Shs30.3 trillion from Shs 27.4 trillion in June 2018, according to the latest financial stability report for June 2019 as released by the Bank of Uganda (BOU).

According to the report released Tuesday, loans and advances, investment in government securities, balances with Bank of Uganda (BOU), and placements with non-resident banks respectively accounted for the largest proportions of the industry total assets.

Gross loans and advances increased by 11.2 percent, which was higher than the 11.0 percent increase in the year ended June 2018. As banks sought to diversify risk exposure associated with private sector credit, they increased investment in government securities more rapidly, by 14.7 percent, up from 12.2 percent growth in the year to June 2018.

As the shilling remained stable against the major foreign currencies, banks’ deposits with non-resident banks reduced by Shs439.0 billion to Shs.2, 243.3 billion, which had increased by Shs1, 017.9 billion in the year, ended June 2018; hence minimizing the banks’ assets exposure to foreign shocks, the report says.

Meanwhile, the foreign currency denominated proportion of total assets reduced from 33.1 percent to 29.4 percent over the year ended June 2019, reducing susceptibility of the balance sheet to foreign exchange rate risk, in spite of the concurrent marginal increase in proportion of foreign currency denominated liabilities to total liabilities, from 39.9 percent to 40.2 percent.

The commercial banking industry remains highly concentrated in spite of continued growth

The five largest banks out of 24 banks that comprise the commercial banking domain, accounted for 60.4 percent of the aggregate assets as at end June 2019, up from 60.3 percent in June 2018. The individual market share of the other 19 banks ranged from 0.2 percent to 5.9 percent. “Indeed, the Herfindhal-Hirschman index (HHI) also exhibited increased concentration (Chart 25). However, the trend in the HHI for assets (and loans, as a sub-category) moved in tandem with the HHI for deposits, the main funding source, suggesting matched concentration on both the assets and liabilities side of the balance sheets,” the report says.

Credit growth, risk, and sectoral allocation

According to the report, credit continued to expand, but generally remained below its historical average growth rate of 16 percent during the last ten years. However, a pickup in exposure to foreign currency denominated loans was noted which raises potential credit risk in the event of subsequent depreciation of the shilling. Over the year ended June 2019, total loans grew by 11.2 percent to USh.13.6 trillion, up from 11.0 percent growth over the year ended June 2018.

Foreign currency loans rise 6.3 percent

The report says foreign currency loans increased by 6.3 percent to the equivalent of Shs.4,949.2 billion, over the year, up from 0.5 percent growth in the year ended June 2018. Discounting foreign exchange valuation effects, foreign currency denominated loans increased by 11.6 percent over the year, significantly reversing a 7.0 percent drop over the earlier year. On the other hand, shilling loans increased at a slower rate, 14.2 percent, as compared to the 18.6 percent increase in the year ended June 2018.

However, in terms of composition, the proportion of foreign currency denominated loans to total loans reduced from 38.1 percent (June 2018) to 36.4 percent (June 2019), consequently reducing exposure of banks’ balance sheets to credit and market risk that can potentially be propagated by foreign exchange rate risk.

Credit risk reduces

BoU reports that credit risk in the banking sector reduced, with asset quality improving further. Credit risk within the banking sector eased, as measured by the two core financial soundness indicators (FSIs) – ratio of non-performing loans to gross loans and sectoral distribution of loans to total loans – as detailed below.

In addition, banks considerably provided for non-performing loans, with the ratio of specific provisions to non-performing loans closing at 49.4 percent.

Sectoral concentration of loans eased marginally

Sectoral allocation of credit remained consistent with past trends, with no extraordinary shift in the sectoral distribution of banks’ stock of loans over the year to June 2019. The three largest sectors – building, construction & real estate; trade & commerce; and personal & household – jointly accounted for 57.5 percent of banks’ gross loans and advances, down from 58.2 percent as at end June 2018. “Given that the 10-year quarterly average share of the largest three sectors in gross loans was 58.4 percent, the sectoral distribution of credit remained largely consistent with the recently observed distribution, allaying financial stability concerns of extraordinary growth or concentration in particular sectors,” the report says.

Lending to building, mortgages, construction and real estate sector, which accounted for the largest proportion (20.1 percent) of banks’ lending, increased by 11.0 percent (USh.270.5 billion), a more rapid growth compared to 8.7 percent growth in the prior year ended June 2018; with shilling denominated loans accounting for 99.4 percent of the increase. Over the year ended June 2019, credit expansion to this sector was in line with the observed improvement in property prices.

For instance, the report says, the Residential Property Price Index (RPPI) indicates that property prices in the Greater Kampala Metropolitan Area generally increased by 2.5 percent over the year ended June 2019. In terms of currency composition, the proportion of foreign currency denominated loans to building, mortgages, construction and real estate reduced further from 50.2 percent to 45.2 percent over the year ended June 2019, partly a consequence of the macro-prudential policy intervention that set a ceiling for the loan to value ratio (LTV).

While the loans extended for land purchase account for a mere 0.6 percent of gross banks’ loans, the macro-prudential policy, of a 70 percent cap on LTV for foreign currency denominated lending for land purchase, has been effective. The proportion of foreign currency denominated loans in total loans for land purchase has reduced to 18.7 percent as at end June 2019, from 43.0 percent as at end of April 2016 – prior to the policy coming into effect.

Trade and commerce sector, which accounted for 20.1 percent of gross loans, grew at 10.7 percent, a slower pace relative to 12.5 percent growth registered in FY2017/18. Similarly, growth in personal and household loans slowed to just 7.7 percent, slower than the 13.8 percent rise in FY2017/18.

Analysis of the sectoral distribution of foreign currency lending shows that the major tradable sectors – manufacturing, trade and commerce – accounted for 43.8 percent of the industry foreign currency loans, up from 39.3 percent share as at end of June 2018; with the largest proportion of the increase in foreign currency lending associated with these sectors.

Conversely, the share of the building, mortgages, construction and real estate sector in foreign currency lending dropped from 26.5 percent to 24.9 percent over the same period. Also consistent with prudential regulation, the stock of foreign currency denominated loans to households reduced by 4.3 percent, and accounted for only 2.7 percent of the gross lending to households.

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The banking sector in the EAC region registered strong growth as at end March 2019 where total assets for commercial banks had grown by 9.7 percent to US$70.6 billion, compared to an increase of 5.4 percent in the year to March 2018, according to the Bank of Uganda Financial Stability Report for June 2019 which quotes EAC Monetary Affairs Committee as the source of the data.

The report released on Tuesday attributes the growth in assets to improved macroeconomic performance and accommodative monetary policy in the region.

The regional banking sector was profitable on the whole, owing mostly to increased lending activity. The average return-on-assets ratio rose from 2.1 percent to 2.5 percent between March 2018 and March 2019.

In addition to boosting profit buffers, the sector remained well capitalised during this period, supported by robust Macroprudential regulation and supervision. As at end March 2019, the average core capital adequacy ratio for the region stood at 18.6 percent, which is well above the regulatory minimum requirement of 10 percent.

Credit growth improves

Credit growth improved across the region, mainly on account of eased supply-side constraints and increased aggregate demand. On average, credit to the private sector grew by 11.3 percent in the year to March 2019, compared to 6.2 percent in the previous year.

Credit risk, as measured by the ratio of non-performing loans to gross loans (NPL ratio), was moderate in the region during the period under review. Changes in the sector’s asset quality were mainly attributable to delayed government payments to suppliers and inadequate credit underwriting.

NPLs decline

The average NPL ratio for the region reduced from 10.3 percent in March 2018 to 8.6 percent in March 2019. However, Kenya’s banking system registered a significant rise in credit risk as the NPL ratio increased from 11.8 percent to 12.8 percent, despite the low interest rate environment and recovery in lending activity.

Credit risk, as measured by the ratio of non-performing loans to gross loans (NPL ratio), was moderate in the region during the period under review.

Changes in the sector’s asset quality were mainly attributable to delayed government payments to suppliers and inadequate credit underwriting. The average NPL ratio for the region reduced from 10.3 percent in March 2018 to 8.6 percent in March 2019.

However, Kenya’s banking system registered a significant rise in credit risk as the NPL ratio increased from 11.8 percent to 12.8 percent, despite the low interest rate environment and recovery in lending activity.

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