High asset risks pose the biggest challenges for banks in Ghana, says Moody's Investors Service in a report published today.
"We expect asset risk for banks in Ghana to remain high over the coming quarters," says Akintunde Majekodunmi, Vice President and Senior Analyst at Moody's. "Nonperforming loans rose to 17.4% of total lending in December 2016, from 14.7% in December 2015."
The increase in problem loan levels was driven by large exposures to energy companies, for which unpaid government subsidies prevented scheduled bank loan repayments. Stricter loan reclassifications following the Bank of Ghana's 2015 asset quality review, coupled with the country's general economic slowdown in the past two years, also contributed to the increase in problem loans.
Moody's expects, however, a gradual improvement in the nonperforming loan (NPL) ratio as economic growth accelerates. Moody's forecasts a recovery in economic activity, with GDP growth of 6.5% in 2017F (vs. annual growth of around 4% in 2014-2016). In addition, asset quality should improve as the government addresses large debts at state-owned enterprises, which have generally been subject to weak monitoring, reporting and oversight.
Capital buffers and strong earnings provide some loss-absorbing capacity against weak asset quality but are also under some pressure. Capital buffers with a capital adequacy ratio of 17.6% as of December 2016 and bank capital-to-assets of 14.1% as of June 2016 -- are in line with peers, but are potentially under pressure from the need to increase provisioning levels, the upcoming implementation of Basel II and the risk of further depreciation of the local currency, the cedi.
Profitability is also strong but has been on a declining trend. Moody's expects (pre-tax) return on assets (ROA) and return on equity (ROE) to remain broadly stable at around 4% and 20% in 2017, respectively.
Banks in Ghana continue to benefit from strong and stable deposit inflows, with deposits making up 73% of total liabilities. The sector also maintains good liquidity buffers primarily in local currency, which include 25% of total assets held in cash and with banks, and 24% of total assets held in investments -- mainly government bonds.