Foreign Banks and the Invasion of the Ugandan Banking Sector

I am looking at the Ugandan Banking Sector in 2009, with cautious pessimism, if at all there is such a thing.

Performance for 2008
The rankings below are based on the bank profits according to annual financial statements for 2008*.

1. Stanbic Bank Uganda Limited: Ushs 78bn

2. Standard Chartered Bank Limited: Ushs 60.1bn

3. Citi Bank Limited: Ushs26.7bn

4. Crane Bank Limited: Ushs25.8bn

5. Centenary Bank : Ushs20.4bn

6. Bank of Baroda: Ushs13.4bn

7. Dfcu: Ushs13.1bn

8. Housing Finance Bank: Ushs6.9bn

9. Tropical African Bank: Ushs6.2bn

10. Kenya Commercial Bank: Ushs5.6bn

11. Bank of Africa : Ushs3.7bn

12. Diamond Trust Bank: Ushs1.9bn

13. Cairo International Bank: Ushs1.1bn

14. Fina bank: (Ushs 1.4bn) loss

15. United Bank of Africa: (Ushs 5bn) loss

16. Barclays Bank of Uganda: (Ushs 14bn) loss

*excludes the results of Equity Bank which I couldn't source at the time of blogging.

With the sporadic entry of foreign banks, the Ugandan banking landscape makes for an interesting review. I must admit that I would love to glean the strategic plans of Equity bank (in relation to its acquisition of Pride), or of United Bank of Africa, KCB my intention being to understand the principal source of generating value over the next few years.

Uganda Stock Exchange Annual Results Special

Its been the results reporting season in Uganda and I took some time to obtain and review the financial results for 5 of the companies listed on the Uganda Stock Exchange (USE). Not the easiest process though we did get there in the end.

My only wish if for the Uganda Stock Exchange to post the financial results of each listed entity in their entirety as lots of information that is important to investors is lost or hoarded. Case in point, one has to look at the announcement provided by the USE for BATU results. (See http://www.use.or.ug/inner.php?cat=news&sid=306).

STANBIC BANK UGANDA LIMITED (SBUL)
Date of release : March 2009
· Customer deposits have increased by 20% to UGX.1,289,674B (2007 = UGX.1,072,857B)
· Loans and advances also increased by 6% to UGX.108,722B (2007 = UGX102,335B)
· Profit after tax at UGX.78,550B rose by 48% (2007 = UGX 53,017BN)
· Earnings per share up by 48% and growth in shareholders funds by 40%.
· A Dividend pay out of UGX.5.86 per share (2007 = UGX 6.64 per share).

The key question for Stanbic was really why the dividend was reduced by 20% despite the 45% increase in Earnings per share. The MD suggested this was a precautionary measure which would possibly be re-reviewed at interim to assess the impact of the credit crunch on the Ugandan Banking landscape. There should be an interim dividend declared by Stanbic soon. Lets get ready to rumble.

Investor information quality

+ Excellent with respect to shareholder communications. For more o this, see Bankelele’s post here (http://bankelele.blogspot.com/2009/04/ugandan-envy.html)

DFCU LIMITED (DFCU)
Date of release : March 15 2009
· Customer deposits have increased by 56.45% to UGX.254.7B (2007 = UGX.163B)
· Loans and advances also increased by 23.19% to UGX.282.8B (2007 = UGX 229.5B)
· Profit after tax at UGX.13.1B rose by 54.17% (2007 = UGX 8.52BN)
· Earnings per share up by 49% and growth in shareholders funds by 19%.
· A Dividend pay out of UGX.21.13 per share (2007 = UGX 13.09 per share).
· Cost to Income ratio down by 20.55% from 73% to 58%

Investor information quality

+ Investor information section on the group’s website provides the required information. However should consider taking the Stanbic Uganda approach of email communication with shareholders

- Unlike in prior year’s the company did not post annual reports and relevant proxy forms. Wonder whether this had something to do with cost cutting?

BANK OF BARODA UGANDA LIMITED (BOBU)
Date of release : April 27 2009
· Customer deposits have increased by 23.43% to UGX.214,132M (2007 = UGX.173,477M)
· Loans and advances also increased by 31.03% to UGX.112,715M (2007 = UGX. 86,022M)
· Profit after tax increased by 24.73% to UGX.13,474M and earnings per share grew by 24.73%.
· A Dividend pay out of UGX.8.00 per share (2007 = UGX 7 per share)

Investor information

- No positives to report in this respect for this company.

- I find it difficult to understand this bank’s reporting. The outgoing MD KK Shukla provided unaudited figures for the bank’s performance as early as January 2009 to all the local press in separate interviews.

- Companies that release their results on the last day allowed by the Capital Markets Authority are always fishy. There is always lots of haggling, adjustments, changes and errors that are being exchanged between the auditors and management and ultimately the financial statements are always a product of forced consensus by both the auditors and management to avoid breach of CMA reporting rules. My advice: STAY AWAY FROM THEM UNTIL THEY GET THEIR ACT TOGETHER. The financial year ends on 31 December 2008 for goodness sake. You do not need 4 months to complete an external audit.


- BOBU has no website. Local investors are always referred to the Baroda India (parent company) website is irrelevant for investors on the Uganda Stock Exchange. Infact there is hardly any mention of Bank of Baroda Uganda on that website. I guess this is the same with all of those big banks Barclays, Standard Chartered etc Management should style up with respect to this.

BAT UUGANDA LIMITED (BATU)
Date of release : April 15 2009

· Sales have increased by 16% to UGX.185,865M (2007 = UGX.184,555M)
· Profit after tax decreased by 2% to UGX.3,244M (2007 = 6,140M).
· No dividend payout declared.
· EPS decreased by 11% from UGX125 to UGX 66.
· Total equity increased by 57% to UGX600M (2007=UGX -2,291M)
· Current liabilities increased by 80% to UGX 112,213M (2007 = UGX 90,841M)

Current PE is approximately 5 which is high given the recurring losses that BATU has been making over the year. It is worth noting that current year profitability was materially affected by foreign exchange fluctuations i.e appreciation of the dollar relative to the U shilling resulting in over UGX10bn worth of exchange losses. I would have liked to question the FD about the possibility of hedging but I won’t attend the AGM.

Investor information quality

+ BATU is the only USE listed company which provides minutes of the previous annual general meeting as part of the annual report pack sent to shareholders before the meeting which I feel is a big plus especially if one did not attend the prior AGM.

- Between last year’s (2007) and this year’s (2008) annual report, the company MD Serhat Eroglu, who we felt had done a great job somehow left the company. A new MD Ricardo Fonseca joined the company. However there is no mention of when Serhat Eroglu left and why throughout the entire annual report....Not even in the Corporate Information, Chairman’s report....NADA. Is this a slip????? So I ask myself whether he was fired, promoted, transferred. Not even in the local press was anything been mentioned over this.

- The BATU website is CRAP. This appears as www.batuganda.com on the back cover of the annual report. Management should style up with respect to this.


UGANDA CLAYS LIMITED (UCL)
Date of release : April 30 2009

The main business is the production and sale of building clay products in housing and construction, including; roofing tiles, bricks, blocks, decorative gilles, ventilators, floor tiles, pipes and cable covers.

UCL released an interesting set of results for the financial year ending 31 December 2008
· Sales have increased by 16% to UGX.13,548M (2007 = UGX.11,699M)
· Profit after tax increased by 2% to UGX.2,152M (2007 = 2,108M).
· No dividend payout declared.
· EPS decreased by 11% from UGX3.05 to UGX 2.7.
· Non current liabilities increased by 57% to UGX2.,351M (2007=UGX 12,993M)
· Net Current liabilities decreased by 80% to UGX 2,166M (2007 = UGX 10,657M)

Current PE is way in excess of 45 and I’m still reluctant to delve into this company.

It is clear that financing costs and loan repayments for the massive debt issued to fund the construction of a new factory in Kamonkoli have taken their toll on a once debt free company. While the debt itself is not bad, it remains to be seen if the debt has been put to good use . Only time will tell.

Investor information quality

+ Uganda Clays advised its shareholders that; Annual reports and audited financial statements would be posted to the shareholders on or before 30 June 2009 together with notice of the Annual general meeting to be held on Friday 24 July 2009 at Kamonkoli Mbale at 11.00am. This is a good chance for current shareholders to have a look around the new factory which is responsible for introducing mammoth levels of debt to the balance sheet of a once pristine company and gem in the formerly unknown rough of the Uganda Stock Exchange. I suppose such efforts are to be commended.

- However, the company needs to understand that only a few shareholders have the ability to travel from Kampala (or Entebbe for that matter- where the head offices of the company are situate – in the name of attending an annual general meeting.

- Naturally, the shareholders of the company, given the nascent stage of the bourse, will be grumbling about the lack of a dividend especially given that Uganda Clays has traditionally been one of the companies with the highest dividend yield 9before the splits and rights issues). In my view an AGM 5 districts away is a recipe for disaster but I will endeavour to attend if only to make heads or tail out of it.

- As an investor, I still have a problem with the company’s website. There is no investor information for the website. Someone needs to raise this at the AGM.

- Companies that release their results on the last day allowed by the Capital Markets Authority are always fishy. There is always lots of haggling, adjustments, changes and errors that are being exchanged between the auditors and management and the financial statements are always a product of forced consensus by both the auditors and management to avoid breach of CMA reporting rules. My advice: STAY AWAY FROM THEM UNTIL THEY GET THEIR ACT TOGETHER. The financial year ends on 31 December 2008 for goodness sake. You do not need 4 months to complete an external audit.


Elsewhere, I have now given up hope of participating in the NIC IPO (if it ever happens of course). I have negative affinity for melodrama associated with listings especially since Safaricom debacle. Investors end up paying top dollar for mediocre companies and valuations are never reasonable due to lots of hype.

Also Reuters reported that Uganda expects to sell its 49 percent stake in Kinyara Sugar Works in two years time, its 40 percent stake in the National Insurance Corporation (NIC) this year, its 31 percent in Uganda Telecom (UTL) in three to four years and its majority stake in the Sheraton Hotel within four years.