Business News of 2014-05-31

Banks warn shareholders of difficult times ahead

As the country’s economic crisis continue to linger on, some businesses in certain sectors that were doing well amidst the challenges have started feeling the heat and have begun warning their shareholders to brace themselves for the worst.

One of such sectors is the banking industry which for some time now has been recording tremendous profits despite the challenges. But with a drop in deposits and profits propelled by the current economic challenges, the banks are now warning shareholders to expect the worst this year.

Economic crisis

The Ghanaian economy for about two years now has seen some critical ailing conditions amidst rising inflation, a depreciating currency, high budget deficit amongst others. Inflation currently stands at 14 .7 percent for April, the highest rate since February 2010.

The local currency, the cedi since the beginning of the year has depreciated by over 24 percent against major foreign currencies like the US dollar, British Pound and the Euro. The cedi’s fast depreciation against the dollar in the first quarter of the year pushed the Bank of Ghana to introduce new and revised Forex rules in February to save it from further fall.

Despite slowing down marginally, the cedi is still struggling to compete against the other major currencies. Some economists have attributed the rapid depreciation of the cedi to import dependence and the dollarization of the economy.

Early this year, President Mahama said government will initiate moves to deal with the country’s high dependence on imports. Meanwhile, the country’s high fiscal deficit continues to stifle growth of the economy.

The Executive Board of the International Monetary Fund (IMF) earlier warned that Ghana’s high fiscal and current account deficits poses significant risk to the growth of the economy. The IMF adds that the situation makes Ghana vulnerable to worsening external conditions and will create pressure on interest rates and the exchange rate.

New turn for banking industry

In the central bank’s latest financial stability report released in March this year, the Bank of Ghana said though the banking sector remains sound and solvent as evidenced by the financial soundness indicators of earnings, portfolio quality, liquidity, and capital adequacy, the continued decline in the performance of major macroeconomic indicators has resulted in marginal declines in banks’ profitability.

A look at highlights from Banks Income Statement showed some slowdown in their earnings performance for the period ended February 2014. The banking industry’s net interest income for example registered a growth of 40.4 percent in February this year as compared with 60.2 percent growth recorded in the same period last year.

The industry’s income before tax grew, in year-on-year terms also went up by 32 percent in February this year compared with the 76 percent growth it recorded in February 2013. Similarly, the industry’s net profit after tax also grew by 28.3 percent in February 2014 compared with 70.9 percent growth in February 2013.

Bankers worried

According to the Banks, the development is worrying. Standard Charted bank which posted an impressive profit last year says the same story may not be told this year if current economic continue. The bank says while its long term view of Ghana remains positive and upbeat, current difficulties exposes the vulnerability of Ghana’s current economic structure to global volatility and domestic inefficiencies.

Its board chairman, Ishmeal Yamson in his address to shareholders of the bank said they “must expect a bumpy ride at this stage of the business cycle while government tries to address balance of payment challenges, energy short falls and an unsustainable fiscal deficit.”

The bank’s profit before tax for last year rose to 60 percent to 273 million cedis, while total income increased by 49 percent to 420 million cedis. In 2012, Standard Charted bank contributed 3.3 billion cedis of value to the economy an equivalent of 3.4 percent of the country’s GDP with almost 300,000 jobs in the country related to the bank’s activities making up 2.7 percent of Ghana’s labour force.

Ishmeal Yamson believes the development can obviously affect the performance of most business and Standard Charted bank is no exception.

Way forward

But Standard Charted bank while assuring its shareholders that it will exercise the right judgment under these tough circumstances to deliver shareholder value, has also called on government, financial institutions, employers and organized labour to adopt strategies that ensure optimal allocation of scarce resources.

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