Moody's downgrades GCB Bank to B2 from B1

Moody's Investors Service on Wednesday lowered Ghana Commercial Bank (GCB), global local-currency long-term deposit ratings to B2, from B1, and the foreign-currency deposit ratings to B3, from B2, saying outlook is negative.

“The outlook on these ratings remains negative. Concurrently, the E+ standalone bank financial strength rating, which is equivalent to a B2 baseline credit assessment was affirmed with a stable outlook,” said Moody’s report released to the Ghana News Agency on Wednesday.


The rating actions follow the downgrade of Ghana's government bond ratings to B2, from B1, with a negative outlook on June 27 2014. It said the sovereign rating action reflects Ghana's deteriorating fiscal strength, as reflected in the rising debt level and worsening debt affordability amid persistently high fiscal deficits.


The rating also shows the increase in Ghana's vulnerability to shocks given its large debt-refinancing needs and wide external imbalances. According to the reports the Wednesday’s downgrade reflects the Ghanaian government's weakening capacity to support GCB Bank in case of need, as reflected by the downgrade of Ghana's government bond ratings to B2, from B1.


Accordingly, Moody's no longer imputes any systemic support uplift within the bank's B2 local currency deposit ratings, despite the bank's systemic importance, given its 11per cent market share of banking sector deposits. The downgrade of the foreign-currency deposit rating to B3, is in line with the lowering of Ghana's country ceiling for such deposits to B3. The country ceilings reflect foreign-currency transfer and convertibility risks.


Moody noted that the negative rating outlook is driven by the extensive links between GCB Bank's balance sheet and sovereign credit risk, owing to the banks' high direct exposures to government securities.


According to the bank's audited financial statements and Moody's estimates, the bank's exposure to government credit risk, that is investments in government securities, central bank balances and public-sector loans, stood at around 60 percent of total assets at year ending 2013.

These high exposures to government securities link the bank's credit profile to the sovereign creditworthiness, and render the bank vulnerable to potential event risk at the sovereign level. In addition to the direct linkages, the negative outlook on GCB Bank's ratings also reflects Moody's view that the weakening operating environment will likely exert renewed pressure on the bank's asset quality profile.


The affirmation of GCB Bank's standalone ratings also reflects the material improvements in the bank's capitalisation and profitability metrics since 2011, with the shareholder equity-to-assets ratio at 14per cent as of March 2014, and a return on equity of 62.6per cent as at year-end 2013.


The higher capital buffers and earnings generating capacity have strengthened the bank's ability to withstand a significant deterioration in the quality of its loan book.


Negative pressure could be exerted on GCB Bank's ratings if the Ghanaian sovereign's creditworthiness weakens further, leading to an increase in the credit risks embedded in the bank's loan and securities portfolios that could, in turn, potentially affect the bank's asset quality, exerted on the bank's ratings, if there is a weakening in the bank's standalone fundamentals stemming from a weaker operating environment.


Although upward pressure on GCB Bank's ratings is currently limited, improvements in the domestic operating environment and sovereign's credit risk profile could prompt Moody's to change the outlook on the bank's deposit ratings to stable. The principal methodology used in this rating was Global Banks published.