Ghana’s banking industry, a year after the reforms

This report discusses developments in, and performance of, the banking sector using the October 2019 prudential data of the twenty-three (23) banks.

The industry’s balance sheet posted a strong performance reflected by robust growth in total assets funded by sustained growth in deposits and increased capital levels relative to last year. Similarly, the industry’s income statement recorded an impressive year-on-year increase in profit-after-tax on the back of stronger growth in revenue lines (net interest income and fee and commission income) compared to operating expenses. Private sector credit growth rebounded during the period under review, enhancing financial intermediation.

The improved performance of the industry’s balance sheet and profitability also reflected in the key financial soundness indicators. Profitability indicators improved amidst efficiency gains. The liquidity and solvency positions of the industry were enhanced by the recapitalisation. A measure of the industry’s solvency, the Capital Adequacy Ratio (CAR) remained well above the regulatory 13 percent buffer under Basel II/III.

This points to a more stable and resilient industry, with the capacity to deepen financial intermediation and also absorb risks. In the same vein, the industry’s main asset quality measure, the Non-Performing Loans (NPL) ratio also improved during the period. Asset quality is expected to further improve as banks intensify loan recovery efforts and strengthen credit risk assessment while expanding their loan books.

In summary, the positive dividends from the clean-up and recapitalisation reforms have remained broadly sustained reflecting in a sound, solvent, profitable and resilient banking sector. The outlook for the industry is positive and there is potential for further credit growth and financial deepening on the back of the higher capital levels and sustained growth in deposits.

BANKING SECTOR DEVELOPMENTS

Banks’ Balance Sheet

Total assets of the banking sector grew by 13.8 percent to GH¢121.03 billion in October 2019. Of this, the stock of domestic assets increased by 16.1 percent to GH¢111.54 billion in October 2019, while foreign assets contracted by 7.7 percent from the reduction in banks’ placements abroad. Domestic assets remained the largest component in total assets with the share increasing to 92.2 percent in October 2019 from 90.3 percent in October 2018, while the share of foreign assets declined to 7.8 percent from 9.7 percent over the same comparative period.

The banking sector’s investments in bills, securities and equity increased by 10.8 percent to GH¢47.47 billion in October 2019. This represents a more normalised growth compared with the 62.9 percent growth recorded for the same period in 2018. The sharp increase in total industry investments as at October 2018 was largely due to the special (long-term) resolution bonds held by Consolidated Bank Ghana (CBG).

Following this development, the growth in long-term investments (securities) slowed to 10.6 percent (GH¢30.99 billion) in October 2019 from 218.3 percent (GH¢28.03 billion) in October 2018. Investments in short-term instruments picked up, increasing by 11.2 percent year-on- year to GH¢16.47 billion as at end-October 2019, after recording the 15.3 percent contraction a year earlier.

Industry’s credit portfolio rebounded with a 17.2 percent growth in gross loans and advances to GH¢41.59 billion as at October 2019, from the 7.5 percent contraction recorded a year earlier. Similarly, net advances (gross loans adjusted for provisions and interest in suspense) expanded by 19.4 percent to GH¢36.48 billion after declining by 4.0 percent to GH¢30.55 billion in October 2018. The foreign currency component of net advances recorded a higher growth of 27.4 percent in October 2019, from GH¢9.3 billion (3.5% y/y growth) in October 2018 to GH¢11.79 billion, due in part to the depreciation.

The non-earning assets of banks (comprising both fixed of the Ghana Cedi over the period. Assets and other assets) grew by 15.6 percent in October 2019 compared with a contraction of 8.5 percent a year ago. This was due to the sharp increase in the growth of other assets by 19.1 percent from a contraction of 23.1 percent, while fixed assets moderated in growth by 12.1 percent from 12.6 percent during the period under review. The share of non-earning assets in total assets however did not change significantly.

Deposits, the main source of funding for the banking industry, grew by 17.1 percent in October 2019, marginally lower than the 20.7 percent increase in the previous year. Total banking sector deposits increased to GH¢78.90 billion by GH¢11.51 billion in October 2019 from GH¢67.38 billion in October 2018 pointing to renewed confidence in the banking sector following the reforms.

Domestic deposits grew at the same pace as total deposits to GH¢78.50 billion in October 2019 from GH¢67.04 billion in the previous year, while deposits of non-residents remained small at GH¢397.70 million from GH¢342.10 million.

The foreign currency component (denominated in Ghana Cedis) of total deposits, on the other hand recorded a higher growth of 22.4 percent in October 2019 to GH¢20.79 billion compared with a growth of 13.7 percent a year ago. Total borrowing by banks declined by 5.7 percent from GH¢18.08 billion in October 2018 to GH¢17.05 billion on the back of contraction in domestic borrowings and a slowdown in the growth of foreign borrowings.

Short term domestic borrowings contracted by 13.8 percent while long-term domestic borrowing contracted by 55.1 percent during the period. Growth in short-term and long-term foreign borrowings moderated to 23.4 percent and 7.5 percent respectively during the period under review, compared with 170.3 percent and 48.4 percent growth during the same period last year. The slowdown in borrowings by banks reflect both the increased capitalisation and sustained growth in deposits.

The industry remained well-capitalized with paid-up capital up by 38.4 percent to GH¢9.26 billion in October 2019 from GH¢6.69 billion in October 2018. The industry’s shareholder funds also went up by 24.7 percent in October 2019 to GH¢17.34 billion from GH¢13.90 billion in October 2018, due to the pickup in banks’ reserves following improved industry profitability and the strong growth in paid-up capital. Growth in other liabilities (other than deposits, borrowings and shareholders’ funds) increased by 11.2 percent to GH¢7.75 billion during the period under review compared with 9.1 percent a year earlier.

The industry’s balance sheet performance remained strong during the first ten months of 2019 supported by strong growth in assets and deposits reflecting sustained confidence in the banking sector post-reforms and recapitalization.

Asset and Liability Structure

Broadly, the asset and liability structure of the banks’ balance sheet remains unchanged. Investments dominated the asset mix followed by loans and advances. The share of investments (bills and securities) in banks’ assets however declined marginally from 40.3 percent to 39.2 percent during the period under review, while that of net advances inched up from 28.7 percent to 30.1 percent.

The share of Cash and Due from Banks remained the third largest component of assets at 23.3 percent in October 2019, reflecting a marginal decline from the 23.7 percent share in October 2018. In total, the industry’s earning assets (investments, net advances and Cash and Due from Banks) accounted for 92.3 percent of total assets as at end-October 2019. The share of non-earning assets (fixed assets and other assets) remained broadly unchanged in October 2019 compared with the same period last year, constituting a total of 7.3 percent of total assets.

On the liability side, the funding mix of banks remained dominated by deposits. The share of deposits in banks’ pool of funds increased from 63.4 percent in October 2018 to 65.2 percent in October 2019. Shareholders’ funds replaced total borrowings as the second largest source of funds, its share increasing from 13.1 percent to 14.3 percent while the share of total borrowings declined from 17.0 percent to 14.1 percent reflecting less reliance on borrowings with the equity injection from the recapitalization exercise. The share of other liabilities recorded a marginal decline from 6.6 percent to 6.4 percent.

Share of Banks’ Investments

The composition of investments experienced only minimal changes between the two periods. The share of investments in securities was broadly unchanged at 64.4 percent in October 2019 while the share of short-term bills remained almost flat at 34.7 percent. The size of banks’ investments in shares and other equities remained negligible at less than 1.0 percent as it is a noncore investment activity for banks.

Credit Risk

Asset quality of the banking industry broadly improved evidenced by a decline in the NPL ratio during the review period. Intensified loan recovery, write-offs and credit risk management are some of the on-going measures expected to sustain the gains made in the industry to prevent deterioration and safeguard the quality of the new capital.

Credit Portfolio Analysis

Credit growth rebounded in October 2019 compared to the contraction a year ago. Gross loans and advances (excluding the loans under receivership) increased by 17.2 percent to GH¢41.65 billion in October 2019 from GH¢35.53 billion (-7.6% y/y growth) in October 2018.

Private sector credit also recorded a rebound in growth by 13.1 percent to GH¢37.13 billion during the review period after contracting by 3.1 percent in October 2018 to GH¢32.82 billion. Credit to households however declined from GH¢8.64 billion representing 47.2 percent annual growth to GH¢8.48 billion representing a contraction of 1.8 percent during the period under review, partly reflecting base drift effects.

The share of public sector credit in total credit increased to 10.8 percent in October 2019 from 7.6 percent in October 2018, stepping down the share of loans to the private sector to 89.2 percent from 92.4 percent during the same period.

Of the loans to the private sector, the share to indigenous enterprises was 56.5 percent in October 2019 marginally down from 56.9 percent in October 2018 while that of foreign enterprises increased marginally to 9.6 percent from 9.3 percent during the same review period. Over the same reference period, households’ share in total credit declined to 20.4 percent from 24.3 percent on account of declining stock of loans to households.

The rise in the share of the industry’s credit to the public sector was on the back of increases in all the subcomponents, namely, credit to the government, public institutions and public enterprises. In particular, the share of loans to central government increased to 3.8 percent from 2.6 percent, while that of public enterprises increased to 4.5 percent from 4.2 percent. Lastly, the share of public institutions also increased to 2.5 percent from 0.8 percent during the same comparative period.

The share of loans to the services sector was 22.7 percent in October 2019, closely followed by the commerce and finance sector with a share of 22.3 percent. These compare with 21.0 percent and 24.6 percent for the services and commerce and finance sectors respectively in the same period last year. The manufacturing sector held a share of 11.5 percent of the banking industry’s credit, up from a share of 10.5 percent a year earlier constituting the third largest recipient, while the construction sector’s share was 8.7 percent from 8.0 percent share recorded last year.

The lowest recipient of industry credit remained the mining and quarrying sector although with an increased share of 3.2 percent in October 2019 from 2.6 percent a year ago. The top three recipients of the industry’s credit (services, commerce and finance, manufacturing sectors) accounted for 56.5 percent share in bank credit in October 2019 while the lowest three recipients (mining & quarrying, agriculture, forestry & fishing, transport, storage & communication sectors) held a combined share of 16.5 percent of the industry’s credit during the same period.

Off-Balance Sheet Activities

Banks’ off-balance sheet transactions (largely comprising trade finance and guarantees) increased in October 2019, compared with the same period last year. The industry recorded contingent liabilities amounting to GH¢10.62 billion as at end-October 2019 compared with GH¢9.35 billion in October 2018, representing a higher year-on year growth of 11.9 percent compared with the prior year’s 6.1 percent. The ratio of banks’ contingent liabilities to total liabilities also recorded a marginal increase to 10.2 percent from 10.1 percent during the period under review.