Adnan Adams Mohammed
The International Monetary Fund (IMF) says commercial banks are expected to submit their credible time-bound plans to rebuild capital buffers on a phased basis.
The banks are to raise some GH¢400 million to remain in business as most banks reported significant losses on the back of the mark-to-market valuation on their respective holdings in Government of Ghana bonds following the implementation of the DDEP. Other losses were due to higher impairments on loans and rising operating costs.
The governor of the Bank of Ghana, last week, confirmed initial figures predicted by financial analysts as the value of losses suffered by the 23 banks that participated in the DDEP as GH 6.6 billion. The industry posted before-tax losses of GH¢8.0 billion in 2022 compared with a profit of GH¢7.4 billion recorded in 2021. This has prompted the second recapitalisation of banks in a period of less than five (5) years. However, the central bank says any government support from Financial Stabilisation Fund to the banks will be purposefully base on a condition.
“Any government support for recapitalization will be designed to incentivize private capital injection and will be conditional on reforms to improve long-term profitability”, Dr. Ernest Addison said while answering questions during the 112th Monetary Policy Committee (MPC) press conference in Accra.
“…further incentives to banks to expedite the process will include the prohibition of distributing dividends, restrictions in risk exposures, and enhanced monitoring for those that do not meet minimum CAR, and support for early recapitalization from the GFSF [Ghana Financial Stability Fund]”, he explained.
The banking sector has up to September this year to provide a recapitalisation plan. This is in line with timelines set out in the financial sector strategy. According to the IMF Staff Report, the plans will be reviewed by the Bank of Ghana and finalised by the banks for BoG approval by end-September 2023 (structural benchmark). As part of this process, it said, regulatory forbearance, including capital requirements, will be lifted as soon as possible.
“The BoG will monitor the expected capital shortfalls stemming from the ongoing recognition of debt restructuring losses in CAR [Capital Adequacy Ratio] calculations and ensure the plans on rebuilding capital buffers are implemented based on periodic milestones”.
“Most banks are working towards that, and they have been given a period I think up to September 2023 to submit to us [BoG] as to what their recapitalizations are, and we will be following up on that. To ensure that instead of banks distributing profits that they have started making, use those resources to rebuild their capital buffers,” Governor of the Central Bank, Dr. Ernest Addison noted.
Meanwhile, the Ghana Association of Banks has described the Bank of Ghana’s end-of-September timeline for banks to provide their recapitalisation plans as a prudent decision.
The Chief Executive Officer, John Awuah, in an interview last week noted that, the directive is in the best interest of the banks to further aid in improving the banking sector. According to him, this would also position the banks to support economic growth.
“We all heard from the Governor [Dr. Ernest Addison] just around the time we signed the debt exchange documentation that with the banks they had given us some reliefs on capital and when are we supposed to build up capital”.
“What the Governor is saying is within that period they want to know when capitalization will be coming in so that they have good visibility of the plans of the banks in terms of capital accumulation and the capital to build capital buffers. I think it’s in the spirit of building a base to support the economic recovery”, he explained
Mr Awuah expressed optimism about the further recovery of the banking sector in the second and third quarters of 2023.
He added that the various reforms done by the sector and positive economic indicators in recent times will boost more confidence within the sector.
“It will not be a day or night event, but a situation when we will witness gradual improvement within the sector. We are seeing certain positive trajectories within the economic variables.”
“We have seen inflation coming down and the cedi also appreciating against other major foreign currencies so I will say the banking sector is gradually taking shape but we all have a role to play”, he continued.
He however indicated that government and the regulator would have to put in more effort to improve the banking sector.
Consequently, the International Monetary Fund (IMF) Staff Report on Ghana has revealed that Ghana’s financial sector was relatively robust before the debt restructuring, but the sector’s cleanup were yet to be fully implemented.
According to the Fund, the aggregate Non-Performing Loans (NPLs) had declined from 17% in 2019 to about 15% at end-2022, and the sector had been well-capitalised except for a few institutions.
However, several steps under the financial sector cleanup were yet to be implemented.
The main profitability indicators, namely, return-on assets and return-on-equity all turned negative in 2022 because of the industry’s loss position.
The 2022 audited financial statements of banks also pointed to some impairments in capital levels, although most banks posted Capital Adequacy Ratios (CAR) above the 10 percent regulatory minimum at end-December 2022.
This was attributed to the effect of the roll-out of the temporary regulatory reliefs extended to the banks to cushion them against the impact of the DDEP as was done at the onset of the pandemic.
However, in the first four months of this year, prudential data show some turnaround in the banking sector’s performance following the conclusion of the DDEP, and following consensus reached among stakeholders on the treatment of losses arising from same.
Banks continue to rebalance their portfolios in response to the impact of the DDEP on their balance sheet shifting away from medium-to-long term investments to short term investments and increases in new loans.
In general, the banks have returned to making profits in the first four months of 2023, broadly reflecting higher operating income.
Loan loss provisions also increased relative to a year ago, due to the pickup in credit growth and elevated credit risks.
These developments culminated in a 47.0 percent increase in profit-before-tax in April 2023 compared with 26.3 percent growth recorded during the same period a year ago.
Similarly, the industry’s net income or profit-after-tax increased to GH¢2.8 billion from GH¢1.9 billion, representing 45.8 percent increase in April 2023.
The industry’s return-on-assets increased to 5.5 percent from 4.7 percent, while return-on-equity rose to 36.3 percent from 22.3 percent.
Key financial soundness indicators remained strong on the back of the impact of the regulatory reliefs.
Also, the industry’s Capital Adequacy Ratio, adjusted for the regulatory reliefs, was 14.8 percent in April 2023, higher than the revised prudential minimum of 10 percent, but lower than the 21.3 percent recorded in April 2022.
The decline in the ratio highlights the increase in risk-weighted assets of banks from the impact of exchange rate changes and some losses on mark-to-market investments.
Non-Performing Loans (NPL) ratio deteriorated to 18.0 percent in April 2023 from 14.3 percent in April 2022, reflecting higher loan impairments and elevated credit risks.
While, liquidity indicators have also improved following the implementation of the revised Cash Reserve Requirement.
Performance of the banking sector broadly reflected the general macroeconomic operating environment as well as the impact of the DDEP as indicated in the 2022 audited financial statements.
However, prudential returns for the first four months of 2023 have shown signs of recovery in the profitability of banks and a gradual improvement in the solvency positions, supported by the regulatory reliefs issued to safeguard stability of the financial sector.
