As banks swerve merger moves what next?

Ghana is a nation of 26million inhabitants, with a Gross Domestic Product (GDP) of almost US$35billion, and a universal bank tally of 35.

South Africa is a nation of 55million inhabitants, with a GDP of close to US$400billion, but with a universal bank tally of less than 20.

Still, Nigeria is a nation of almost 200million inhabitants, with a GDP in excess of US$500billion, but with a universal bank tally of less than 25.

But Nigeria was just like Ghana, with an overabundance of financial institutions chasing after the same piece of pie, until a little over a decade ago, its Central Bank took the drastic measure of increasing the minimum capital requirement of banks by more than 1000percent, with a very short grace period for the requirement to be met.

Due to the drastic move, the banking sector shrank from a total of 81 banks in 2004 to 25 banks within a short period, and by 2016, Nigeria’s universal banks tally reached 24.

Despite the Bank of Ghana undertaking a similar move by increasing the minimum capital requirement from GH¢10million to GH¢60million in 2009, and four years later directing all banks to have a minimum capital requirement of GH¢120million, Ghana’s economy has actually seen an increase, instead of a decrease, in the number of banks from 28 to 35 currently.

One of the reasons it became easier for the banks to meet the requirement in Ghana was the time period given. A minimum of two years was provided to meet the requirements. Almost all the local banks were able to attract investments. Only a couple of mergers and acquisitions were seen locally: Ecobank took over The Trust Bank; Access Bank acquired Intercontinental Bank, and Bank of Africa came into the market and acquired Amalgamated Bank.

Also, the constant depreciation of the cedi made it easier for newer entrants, who needed less money to meet the requirement in dollar terms, after the latest capital requirement was announced in 2012.

New requirement, cedi depreciation and NPLs

In early 2012, the cedi was valued at GH¢1.98 to US$1 but currently, GH¢4.50 is needed to buy the same US$1. This means that the value of GH¢120million today is less than the value of GH¢60million in 2012. This has made it easier to establish a bank in Ghana currently.

This means, currently, banks in Ghana have seen their capacity reduced in financing major infrastructure projects, which has exposed them to high risks in financing big businesses.Also, no single bank in the country has the capacity to finance major oil deals without supportfrom a parent bank or syndicating.

Also, two major debts have exposed the weaknesses in the banking sector: the Finatrade GH¢1billion debt and the energy or legacy debt which is valued at GH¢4.4billion. These two debts have contributed to a non-performing loans rate of 19percent.

The BoG’s headache

The big question: what should the Bank of Ghana do to make banks stronger and allow them finance big ticket transactions and mega infrastructure projects while making room for dominant local players?

Already, the central bank has categorically stated that increment in stated capital is to strengthen banks and make them ready to compete with global players and not toforce mergers and acquisitions in the industry, although it would welcome such moves.

Emmanuel Boakye, Assistant Director of Banking Supervision at the Central Bank, said in the last quarter of 2016, that re-capitalisation is intended to prepare the banking industry in readiness to offer the needed financial thrust to propel the economy to achieve the desired economy growth.

“The Ghanaian economy is growing and becoming increasingly complex and high valued financial transactions are likely to result in the near future. If we want to grow at an accelerated pace, then we need to build the capacity of our banks for embarking on bigger projects with sound capital base to absorb shocks without losing momentum.

The BoG is of the conviction that the time to inject capital is now, to enable banks meet the challenges of the growth of the economy. It should be possible for banks in Ghana to grant loans to finance projects abroad in competition with other global players,” he said.

He then added that the industry’s regulator will however not discount the possibility of mergers and acquisitions emerging as a result of the intended re-capitalisation exercise. “I believe it will be refreshing to see the industry go through mergers and acquisitions with its inherent advantages directed at the economy,” he added.

In interviews granted the B&FT over a period of time, industry players have concluded that the numbers do have to reduce while the minimum capital requirement also has to go up because an increasing number of banks is not sustainable in an economy of just 26million people.

Increased stated capital and reduction in numbers

Managing Director of Zenith Bank, Henry Oroh, said 35 banks is quite a lot, noting that even in a bigger economy like Nigeria, onlyabout 20 banks are in operation.

“Thirty-five looks too much and a huge capital base is better for any economy. The bigger the banks, the bigger the tickets and transactions they can handle and the better they can handle shocks,” he said.

Even though he is of the view that reducing the number is a good thing, he called for a more evolving and careful process instead of emergency and ad hoc approaches.

“If you put strange bedfellows together it has its own consequences. Consolidation and integration should be done carefully. For this economy, 20 banks will not be bad and a minimum capital requirement of GH¢200million might make some banks struggle but they will raise it,” he added.

Francois Marchal, Deputy Managing Director of SocieteGenerale, also noted that with a growing economy, Ghana needs strong banks, saying the current number of 35 banks is just too high.

“The current number is too much for an economy like this. There are about 26million inhabitants. If you break it down, the potential customer base per bank is less than a million customers. With even one million customers per bank, it is not enough to sustain a bank in a normalised context in the long term,” he said.

Despite noting that the current number is too high he also saw a dilemma which the Bank of Ghana is facing. “The challenge for the Central Bank is to strike the right balance between having very strong banks and still have enough banks to have enough competition between themselves. Both are needed but the only thing is 35 banks as of now is too much,” he said.

In advancing arguments to achieve a balance, Mr. Marchal said the first step is getting the banks, mostly local ones, that are yet to reach the current minimum capital requirement of GH¢120million,to get there.

He is of the view that this economy needs between 15 and 20 banks to maintain a healthy competition. He also noted that some of the banks should be allowed to specialise in niche markets or having stronger focus on some part of the market.

To him, a doubling of the stated capital could do well for the industry, especially, if one considers the rate of cedi depreciation over the period since the last increment.

“To catch up with the impact of the depreciation of the currency against the dollar, the minimum we need is doubling because we are just rebuilding the capacity the Ghanaian financial system used to have at the time and so that is really the minimum requirement,” he said.

Allow competition to flourish

But Frank Adu Jnr., Managing Director of CAL Bank, is of the view that the high number of banks in the industry is not affecting the growth and ability of banks to operate to full capacity and neither will an increased stated capital solve the problem.

“I do not think the numbers increasing affects CAL Bank’s ability to grow. Ever since we opened up the market to the Nigerian banks, we [CAL Bank] have grown from a second-tier bank to first tier. For me, it is not a problem at all,” he said.

He is rather of the view that the stated capital of banks should be determined by the amount of risk inherent in the businesses and transactions they want to undertake.

“It is not about how much is needed in terms of capital. Your capital is determined by how much risk you take. So, if you make the stated capital for banks US$1billion, and I take on foolish risk and write off bad loans upon bad loans, that capital is going to disappear.

But if my stated capital is US$100million but I have a lot of deposits and I book good loans and I grow, my capital is going to be adequate. So, it is relative to the business that you do,” he said. To him, it is a matter of how individual banks are able to grow their liabilities apart from their equity.

“If you do not have to compete with government, and you raise deposits and deploy those deposits, then you become a big bank. Then, you can do whatever you want to do. But if you also agree as a banking sector to collaborate, then for a transaction, for example, oil and gas, you can bring five banks together to take on big projects,” he said.

Making a case for deepened local participation

Kenneth Thompson, Managing Director of Dalex Finance, in sounding a note of caution to the BoG, noted that if the central bank increases the stated capital and does not give opportunities to the local players, the banking sector in the economy will be foreign owned.

“The fear is: if we ambitiously raise it [stated capital requirement] the foreign banks could be the only players left in the market,” he said. Already, Ghana’s banking sector is dominated by the foreign and African owned banks from the United Kingdom, France, South Africa, Nigeria and other parts of the continent, with the local players lagging behind in terms of capacity.

Despite sounding cautious, Mr. Thompson is of the view that banks have to consolidate and the central bank does have a large task ahead in balancing the situation to satisfy local players while increasing the capacity of the industry.

“About 35 banks for an economy largely controlled by government, and where almost all banks are chasing government business, it is not sustainable. The bank would not willingly merge and I think the central bank can force them by raising the minimum capital and make them merge,” he said.

Asked how much is good enough to force mergers and acquisitions, Mr. Thompson said: “I believe GH¢1billion is good enough for this economy so that our banks can be able to finance US$50million projects. And this will take into account future cedi depreciation. The truth is we shouldn’t have more than 10 banks,” he added.

He, therefore, challenged the central bank to strengthen the banks in the country while empowering local players to rub shoulders with the foreign-owned players.