From Loans to Bonds: Analyzing the Investment Trends of Dfcu, Stanbic, and Bank of Baroda
Yesterday, we discussed Dfcu Bank as the first known bank in the recent past , where its financial statements indicated a preference for government securities over private sector loans.
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In today's segment, we will look into the three Listed banks in Uganda: Dfcu Bank, Stanbic Bank, and Bank of Baroda. We aim to understand their strategies and what this means for customers and those interested in maintaining private capital in the economy.
I want to preface this analysis by stating that this assessment serves an educational purpose. For those contemplating investing in treasury bonds, the banks' current strategies may provide valuable insights. If these banks are increasing their investments in treasury bonds, perhaps you and I should consider doing the same with our deposits.
Dfcu Bank
Looking back nearly a decade, we start with Dfcu Bank. In 2015, before acquiring Crane Bank's portfolio, Dfcu had a total loan portfolio of UGX 800 billion, while its investments in government securities stood at UGX 419 Billion. This trend continued into 2016 and 2017, with Dfcu's loan portfolio growing from UGX 800 million to approximately UGX 1.3 trillion by 2018 and then to UGX 1.8 Trillion in 2020.
By 2020, Dfcu's loan portfolio had reached UGX 1.8 trillion, while investments in government securities were around UGX 700 billion and fast forward to 2024, Loans are UGX 1.1 trillion while Government securities are over 1.3 trillion.
This indicates that over the past four years, Dfcu has increased its investments in government securities by over UGX 600 billion while reducing its private sector loan portfolio by approximately UGX 700 billion.
Bank of Baroda.
Similarly, Bank of Baroda, as of December 2024, has a loan portfolio of UGX 1.4 trillion compared to UGX 971 billion in government securities. Notably, ten years ago, lending to government securities was less than half of what was lent to the private sector. In 2015, lending to the private sector was UGX 612 billion, while lending to the government was UGX 278 billion. Over the past decade, lending to the government has tripled, indicating a significant shift in strategy.
Stanbic Bank Uganda.
Now, let's consider Stanbic Bank. In 2015, Stanbic had a loan portfolio of UGX 1.9 trillion over UGX 684 billion in government securities, meaning they had nearly three times the loans compared to government securities.
Fast forward to 2024, and this ratio has changed to less than two times, indicating that investments in government securities are increasing at a higher rate than loans to the private sector. In 2024, Stanbic's loan book reached UGX 4.3 trillion, while their investments in government securities have also seen a significant rise UGX 2.6 trillion.
This trend across all three banks suggests a growing preference for lending to the government through treasury bonds and bills. For instance, Stanbic Bank reported nearly UGX 300 billion in trading income, with a substantial portion derived from trading government securities. This indicates that banks are capitalizing on the profitability of government securities, which has become a significant revenue stream.
The overarching theme here is that as the economy faces challenges, banks are shifting their focus towards government securities to mitigate risks. This strategy allows them to protect customer deposits while ensuring profitability at a lower cost compared to lending to the private sector, which often involves higher risks and complexities.
For investors and individuals considering their options, this trend serves as a valuable lesson. If banks are increasingly investing in government securities, it may be wise for individuals to explore similar avenues. The data suggests that treasury bonds are becoming a more attractive investment, and this could provide the confidence needed for individuals to consider investing in government securities.
Nice article, Alex. But isn't it interesting that the government is taking on too much debt from selling Treasury securities of recent? What has changed? Is it because they are not getting much from taxes? I understand that banks are leaning into it but don't you think that this increases the government's debt burden? Remember, our interest rates are high for Ugandan bonds so it means the government has to pay back quite a lot in interest over the years. Or have the bank analysts decided that foreign entities like the IMF and World Bank has higher interest than that offered on BOU's Treasury securities, and thus lending the government is somewhat safe. Do you think in our current state as a country there is an assurance that the governemnt will not default? Remember our bonds are B-rated. These are valid questions for an investor to ask. Some insight from you will be appreciated.
Thanks for sharing with us… l found myself motivated by your articles.