Bank lending rebounds at last

After more than two continuous years of contraction in bank credit to the economy Ghana’s banking industry has resumed growing its collective loan book, data released by the Bank of Ghana yesterday has revealed. The latest Banking Sector Survey from the central bank, dated September, shows that gross advances by the banking industry over the 12 months up to August 2019 grew by 15 percent to reach GHc38,852.0 million. This compares with flat growth (0 percent) over the 12 months up to June and a 9.4 percent contraction year on year up to August 2018.

Growth in net advances was even faster at 18.2 percent year on year up to August 2019, reaching GH¢34,086.3 million, compared with 4.0 percent growth over the 12 months up to June and a contraction of 7.5 percent year on year up to August 2018.

Just as predicted by the BoG at the end of its recent recapitalization exercise by the turn of this year, the resumption of credit growth was financed primarily by the new core capital that exercise made available to the industry, whose paid-up capital increased by 39.5 percent year on year (y/y) up to August, reaching GHc9,257.5 million, on the back of even faster growth of 58.4 percent over the previous one year period.

But while growth in paid-up capital slowed over the latter one year period, since most banks had completed their recapitalization by August last year and there were two complete exits during the subsequent few months, growth in total shareholders funds – which includes reserves as well – accelerated further to 22.8 percent y/y to August 2019 (hitting GHc16,718.2 million) from 21.3 percent growth over the previous one year period.

However, the latest data suggests that a combination of liquidity constraints and still fragile confidence in the financial intermediation industry as a safe haven for deposits persists. Total deposits only grew by 12.2 percent y/y up to August 2019, reaching GHc76,023.0 million, reflecting slower growth than the 26.2 percent achieved over the previous one year period. The data suggests that depositors confidence and liquidity took a further hit from the recent mass liquidations of microfinance and savings and loans companies with total deposits only growing by GH¢451.3 million over the two months from June to August this year.

Encouragingly, growth in lending outpaced growth in investments for the first time in several years; it rose by just 13.2 percent y/y up to August 2019, down from 21.5 percent y/y up to June and 65 percent y/y up to August 2018 although the latter was extraordinary because of investment into resolution bonds issued by government to defray the capital deficits of the nine consolidated banks.

Importantly, banks are shifting from short term to longer term investments in order to benefit from the steepening of the yield curve over the past year or so. The proportion of short term bills in total investments declined from 39.21 percent in August 2018 to 32.8 percent as at August 2019.

Nevertheless, investments still account for a larger proportion of the industry’s total assets at 39.9 percent (GH¢45,922.0 million) as at August 2019 than gross advances with 33.7 percent of total assets.

Improved asset quality is partly responsible for banks increased lending alongside bigger core capital. Non-performing loans contracted by 4.2 percent to GHc6.91 billion by August 2019 from GHc7.21 billion a year earlier, and this was accompanied by substantial loan recoveries. Thus the NPL ratio fell to 17.8 percent by August 2019 down from 21.3 percent a year earlier. When adjusted for fully provisioned loan losses the NPL ratio fell even further to 8.9 percent from 11.7 percent a year earlier, signaling improved loan quality due to intensified loan write offs and improved loan recoveries.

With industry capital adequacy at an average of 18.9 percent, well above the 13 percent prudential minimum, the data indicates that Ghana’s recent banking reforms have indeed created a significantly stronger banking industry which is resulting in improving financial support for the economy.