Banking: East Africa versus West Africa

Koborer · 2014-06-14T11:11:38+00:00

Uganda is the battleground for foreign banks seeking to profit from oil investment and regional trade. But while Kenya's banks have made huge gains those from Nigeria are facing difficulties. Kenyan successes have galvanised local banks to look to expansion. This was not the plan. When West African banks charged into Uganda's financial services industry from 2007 onwards, most expected that profitability was just around the corner. Ugandan banks themselves were looking to a profitable new dawn. Today, both the West African banks and domestic banks see Kenyan banks cleaning up and have been left rueing what might have been. Back in 2007, Uganda had just discovered commercial hydrocarbon deposits, supposedly laying the stage for huge investment, with the government promising that oil production would begin in 2011. That was not all. East Africa was gradually turning into one economic bloc as traders and goods crossed borders with greater speed and ease. A single market of more than 120 million people was slowly being created, spurred by the signing of trade pacts like the customs union and the common market protocol. For several foreign banks, flush with cash from recent stock market listings, this was too at- tractive an opportunity to ignore. When Nigeria's United Bank for Africa started operating in Uganda in 2008, analysts predicted that it would use its financial strength to take over a local bank. It instead chose the greenfield route, setting up from scratch. Global Trust Bank, which is part owned by Nigeria's Industrial and General Insurance, had also just come into the market and snapped up a lesser-known credit institution called Commercial Microfinance Limited for an undisclosed fee. Togo's Ecobank launched its services in Uganda in early 2009, promising a large inter-linked service network across its 34 African operations. Bigger banks like Standard Bank-owned Stanbic, Uganda's financial bellwether, worried about the new competition. Big feet, small profits West African banks have now widened their footprints across Uganda, but hardly any of them have shown that they can turn that presence into profit. Banks released their annual financial statements in April for the year ending 2013. They show that Global Trust Bank, Ecobank and United Bank for Africa yet again recorded losses, further stretching the time they will need to make it to sustained profitability. The June 2013 supervision report from Uganda's central bank explains why some of these new banks continue to struggle and sounds a word of caution about non-performing loans (NPLs). "The performance of new banks licensed since 2007 continues to be mixed. Many of the small and new banks, in a bid to increase market share, have increased their lending, but loan quality among these banks remains a concern," the report noted. It adds: "Over- all, most of the new banks are still loss-making, and their NPL ratios have increased as they strive to attain market share." The number of NPLs across the sector has been rising. Local bank Centenary reported that its write-offs for bad debt rose by 66% to USh7.8bn in 2013. Write-offs for the Uganda branch of Kenya's Equity Bank increased by 163% to USh2.9bn last year. The lack of profitability in the banking sector is creating knock-on effects. Uganda Revenue Authority (URA) reports that it is recording substantial shortfalls in predicted revenue collection due to poor performance in the banking sector. In May, it reported a USh51bn deficit in what it expected to receive from banks in the 2013/2014 fiscal year. Other West African banks that have been in Uganda for more than a decade have also been recording losses. Orient Bank Uganda, which is owned by Nigeria's Keystone Bank, and Bank of Africa Uganda – from Mali – made profits in 2012 but recorded net losses for 2013. But where the West Africans failed, the top players from neighbouring Kenya – Equity Bank and Kenya Commercial Bank (KCB) – have thrived. While Global Trust Bank and KCB launched their services in Uganda at around the same time, their fortunes have varied greatly. KCB makes a Killing KCB's profit for the year 2013 went up to USh6.7bn ($2.6m) from USh1.1bn in 2012, an increase of close to 510%. Albert Odongo, the chief executive of KCB Uganda, says the bank's "robust performance" was due to its loan port- folio, improved interest income and increased earnings from its foreign exchange business. "The performance was further bolstered by significant forex income due to increasing currency trade volume among Uganda, Kenya and South Sudan," Odongo explains. Other Kenyan banks are performing well. The total assets of Kenya's Equity Bank shot up 21% to USh370bn in the year ending 2013. Even Kenya's ABC Capital, which merged with the Capital Finance Company in late 2008, managed to record a net profit of USh892m in 2013, although this was lower than last year's figure of USh1.1bn. Other foreign-owned banks have not fared this well. Stanbic Bank and Standard Chartered Bank, the two biggest banks in Uganda, recorded drops in their profits for 2013 of more than 20%. Both institutions blamed the tough times on donor cuts that weakened the economy, coupled with high interest rates that dampened borrowers' appetites to take on more credit. The central bank, the Bank of Uganda (BOU), has been calling for banks to lower the rates of interest on loans and to extend more finance to the private sector. A BOU report in May said that credit to the private sector had risen by 8% between June and December 2013. The Kenyan advantage The finance ministry says it will work on reforms to reduce the cost of lending. This year does not look much better for the performance of Uganda's commercial banks. There have been warnings that the war in South Sudan, Uganda's main export market, will hurt the local economy. So how did the Kenyan banks manage to succeed where others fell flat? For KCB Uganda's Odongo, the less successful banks relied on interest income to make their money: "We don't rely entirely on interest income like most other banks. If you look at other banks, close to 80% of their revenue is from interest income, with the rest coming from commission fees." The regional network of KCB gives it the upper hand in winning foreign exchange and trade finance business in Uganda. But there is also the issue of overheads discipline. "We kept our costs flat," explains Odongo. "There are maybe just two other banks that did that. The costs in most other banks went up by 10-20%." At least two local commercial banks – Crane and Centenary – continue to give the larger international banks a run for their money. After Stanbic, Standard Chartered Bank and Barclays, these two have the largest asset bases. A.R. Kalan, the managing director of Crane Bank, says it plans to keep competitive when it comes to pricing. "We intend to have some of the best-priced products in the market and lower charges. We have proved that we can do this with some of the best products, like 5% interest on the savings account, which I believe is the best in the market," he says. Crane's expansion Kalan adds that Crane is seeking to "cut down on the bureaucracy" when dealing with customers and will open up more branches to add to its network of 41 locations. Crane is the largest local bank, with assets of USh1.4trn. It spent around $40m on expansion in each of the past two years. As a result, Crane Bank saw its profit slump for the first time in recent history, dropping to USh47.2bn in 2013 from USh80.3bn in 2012, a 41% drop. The Catholic Church-owned Centenary Bank is almost as big as Crane in terms of assets. It had a much better year than Crane and recorded profits of USh58bn in 2013, up from USh54.9bn, an increase of 5.6%. Uganda's banks are also emulating the regional shift to keep up with the Nairobi crowd. Crane Bank is set to open up operations in neighbouring Rwanda. "Rwanda is almost ready. We are only awaiting approval from the central bank of Rwanda," Kalan says. Centenary Bank managing director Fabian Kasi says the bank has "a belief in the power of partner- ships" in order to make banking affordable for its customers. In 2012, Centenary Bank signed a memorandum of understanding with Ivory Bank of South Sudan, where the two institutions will share banking services and support clients moving across the borders between Uganda and South Sudan. It might be just the beginning, but Ugandan banks appear to have been galvanised by the performance of financial institutions from Kenya. Read the original article on Theafricareport.com : Banking: East Africa versus West Africa | East & Horn Africa Follow us: @theafricareport on Twitter | theafricareport on Facebook

Thread starter Koborer
Start date Jun 14, 2014

Koborer

JF-Expert Member

Jun 14, 2014

MK254

JF-Expert Member

Jun 14, 2014

Bavaria

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