Banks reduce loan books as investment overtake loans in income generation

With Non Performing Loans (NPLs) still considerably high, banks have reduced their loan books in order to take advantage of less risky income sources, such as short-term Treasury bills and longer-term bonds issued by government.

Even though interest on government securities, short- and long-term, has reduced over time, banks still prefer to take refuge in them instead of giving out more loans which could go bad.

The stock of non-performing loans stood at GH¢8.74 billion by the end of second-quarter 2018. Even though the NPL ratio fell to 22.6 percent in June 2018 from the last reported position of 23.5 percent in April 2018, the comparative position for June 2017 was 21.2 percent.

Of the banking industry’s total assets stock, 35.7 percent was allocated to investments while 32.6 percent was allocated to net advances. “Unlike previous years, investments were most prominent on the banks’ balance sheet in June 2018,” the Bank of Ghana’s July Banking Sector Report noted.

“The declining share of loans and increasing share of investments in total assets are indications that banks are gradually reallocating their portfolios in favour of less risky assets,” the report added.

The report said that income from investments formed the major source of earning for the banks, with the share in earnings increasing to 43.2 percent in June 2018 from 40.3 percent in June 2017.

Interest income from loans however slowed, with its share in total income declining to 36.2 percent from 44.1 percent over the same review period. To make up for the reduction in earnings from loans advanced, banks relied on other income-generating sources as well.

The percentage share of fees and commissions in total income increased to 12.7 percent from 10 percent within the period under review, while the share of banks’ other income sources went up to 7.9 percent from 5.7 percent.

More than half of the banking industry’s investments were in short-term investments; however, the share of bills in total investments declined in favour of longer-dated instruments as inflation expectations continued to ease.

The share of bills in total investments declined to 54.1 percent in June 2018 from 69.6 percent a year earlier, while the share of longer-dated securities increased from 28.8 to 44.7 percent over the same comparative period. The proportion of banks’ investment in shares and other equities remained low at 1.2 percent in June 2018 – down from 1.7 percent a year ago.

Credit condition survey

The Bank of Ghana conducted a Credit Conditions Survey in June 2018, and the results pointed to a net tightening on loans to Small, Medium Enterprises (SMEs) and large enterprises, as well as on short-term and long-term enterprise loans.

But households saw an increment in loans for house purchases and consumer credit. Banks cited high NPLs as well as balance sheet constraints as reasons for the tight credit stance on loans to corporates.

Overall demand for credit by both households and enterprises declined during the June 2018 survey round, and was reflected mainly by low demand for loans by SMEs and large enterprises as well as for short-term enterprises. Similarly, demand for house purchases and consumer credit loans dipped during the June 2018 survey round.

NPLs

In spite of the increase in the NPL ratio over the one-year period, growth in non-performing loans slowed down considerably to 9.7percent as at end June 2018, compared with an annual growth of 30.7 percent in June 2017.