Banks muscles weakened

Ghanaian banks’ ability to absorb losses has dropped slightly amid increasing non-performing loans, the Bank of Ghana has reported.

The central bank has issued its second financial stability report for the year, and notes that the banking sectors’ ability to absorb losses as captured by the capital adequacy ratio (CAR) has declined during the first three months of the year.

According to the Bank of Ghana, the capital adequacy ratio of the banks declined from 17.9 percent at the end of December 2014 to 16.9 percent at the end of the first quarter of this year, on account of strong credit delivery and some loan write-offs during the period.

On a year-on-year basis, the capital adequacy ratio went down from 17.7 percent in March 2014 to 16.9 percent in March 2015.

At the same time, the sector’s tier-1 capital adequacy ratio -- a key measure of a bank’s financial strength -- also declined; from 15.3 percent in December last year to 14.6 percent at the end of March this year.

Despite the decline, the industry capital adequacy ratio remained well-above the 10 percent prudential and statutory requirements.

However, the development is of great concern to managers of the economy as it comes at the same time as more banks are having increasing challenges in recovering loans, mirroring the difficult business operating environment in the country.

The central bank has pegged the non-performing loans -- that is, loans that have gone bad -- of banks for the first three months of the year at 11.4 percent, which is a marginal increase over the 11.3 percent recorded at the end of December 2014.

The quality of loans provided by banks is expected to deteriorate further with the hikes in interest rates and inflation, weakening of the currency, and general mismanagement of the economy.

As a result of the macro-financial linkage between the macroeconomy and financial sector, it thus leaves the banking sector exposed to the downswings in the macroeconomy.

“The onus therefore lies with banks to step up their efficiency practices in order to minimise losses and maximise their incomes or profitability. This will stabilise the banking sector to enable it enhance stability of the financial system, which is an important precondition for sustainable economic growth and development,” the Bank of Ghana said.

A couple of weeks ago, some business organisations including the Ghana Chamber of Commerce hinted that more companies would default on their debt obligations, due to the recent floods and fire disaster which destroyed the stocks and business processing of many firms.

The increasing risks in providing consumer and business loans have pushed the banks to prioritise investments in Treasury bills and other securities over interest income, a decision that has received criticism from Vice President Paa Kwesi Amissah-Arthur and other policymakers and business executives.

The Managing Director of Cal Bank, Frank Adu Jnr., has however defended banks trading in money market instruments and indicated that his bank will now concentrate on pushing up its investments in Treasury bills and other secure securities, and cut its lending to consumers and businesses as long as interest paid on short-dated securities remains at or goes above the current 25 percent.

According to the Bank of Ghana, banks have shored-up their investment in Treasury bills from GH¢8.47billion in December last year to GH¢8.73billion in March 2015.