The financial statements of commercial banks are providing another window into how the Covid-19 pandemic affected the economy. A prominent data point is the sharp rise in allowances for bad debts alongside an increase in problematic loans, largely due to troubled businesses and a deteoriation in economic conditions.
Absa Bank Uganda, one of the country’s largest banks by assets, on Wednesday reported a decline in full-year profits, its second such downward drop in three years, on the back of an increase in loan-loss charges.
Absa set aside Shs60.7bn in charges accounting for expected and anticipated loan losses as the coronavirus trammelled its clients. The charge quintupled from 2019, when it came in at Shs12.2bn.
The bank, which completed its transformation from Barclays Bank of Uganda, said its profit in 2020 fell to Shs40.7bn ($11.3m), declining 47.8 per cent from a year earlier. Its last full-year drop was in 2018.
“The significant increase in impairment was driven by a difficult economic environment in 2020, arising from the adverse impact of the Covid-19 pandemic,” the bank said in its summary statement. “This affected our customers’ ability to service their obligations hence requiring the bank to increase its impairement provisions.
It added that it “instituted several measures, including payment holidays and loan restructuring to support customers navigate the challenges faced in the year.”
Operating profits fell 0.02 per cent from a year earlier to Shs316.2bn led by declines in income from fees and commissions and interest earnings. Fees and commissions income dropped 21.6 per cent while net fees and commissions earnings fell 22.3 per cent. The bank’s managing director, Mumba Kalifungwa, attributed the contraction in fees and commissions revenue to “a drop in transactional activity, especially in the international trade, tourism, and hospitality sectors, arising from the Covid-19 lockdown.”
Absa also highlighted a “growth in gross loans to Shs1.5 trillion, maintaining a three-year compounded annual growth rate of 9.6 per cent,” according to Mr Kalifungwa. Gross loans, in this case, is a catchall term for loans and advances to customers, banks, and group companies; growth came from loans to banks, which rose 90.4 per cent from the past year – despite declining in 2019 and 2018.
Loans and advances to customers, on the other hand, fell 2 per cent year on year to Shs1.3 trillion, a development Mr Kalifungwa and the bank did not mention or explain in the four-page statement. It probably had something to do with the bank’s 113.4 per cent rise in its stock of nonperforming loans to Shs234.5bn. Loss loans –loans considered as uncollectible and written off against shareholders’ equity – increased to Shs13.5bn, 28.6 per cent higher than in 2019.
The rise in loan-loss provisions, decrease in non-interest income, and net profit decline at Absa echoes Stanbic Bank Uganda’s performance. Stanbic, Uganda’s largest bank by assets, posted a 6 per decline in net earnings, a fall in noninterest revenue, and more than doubled its allowance for loan losses.
Interest income, which was close to 60 per cent of Absa’s gross revenue, fell 6.6 per cent propelled by a reduction of 6.8 per cent in interest earned on money lent to customers. Net interest income dropped to Shs122.3bn, down 8.9 per cent from a year earlier. The bank’s trading account was its best performing revenue stream as net trading revenue rose 19 per cent, largely on gains from investment securities.
Operating expenses at the bank rose at a moderate 5.4 per cent rate from the previous year while management fees fell 5.5 per cent. “The tough economic environment caused by Covid-19 provided opportunities for cost optimisations,” Absa said. Still, it noted that costs incurred in its rebranding were not factored into total expenses but did not say why.
Pre-tax profits fell 56.6 per cent to Shs42.4bn.
