By Elorm Desewu
The profitability growth of Universal Banks operating in the country for the first two months of 2021 has dropped significantly compared to the profit growth recorded during the same period in 2020.
The growth in profit after tax slowed to 5.9 percent from a high record of 38.8 percent during the prior year. This was attributed to declines in growth in revenue lines and higher loan provisions.
Interest income growth declined to 9.5 percent in February 2021 from 22.0 percent February 2020 due to the relatively low growth in credits while net fees and commissions increased by 13.7 percent, lower than the 18.4 percent recorded in the previous year.
Slower growth in credits, trade-financing and other off-balance sheet transactions contributed to the decline in growth of fees and commissions during the review period. Similarly, net interest income growth declined from 25.9 percent in February 2020 to 10.9 percent in February 2021, notwithstanding the dip in growth in interest expenses from the contraction in borrowings.
Cost control measures continue to impact positively on the sector with operational costs declining marginally by 0.3 percent, as against a growth of 18.6 percent over the same period in 2020. The marginal gain in operating cost was however offset by higher loan provisions.
Total provisions increased by 62.2 percent in February 2021, compared to 6.5 percent in February 2020, due to the rising NPLs partly from the general pandemic-induced repayment challenges as well as some bank specific loan recovery challenges.
Due to the slower growth in profits, profitability indicators declined, yet remained strong as at February 2021. Return on Equity (ROE) declined from 25.1 percent to 22.1 percent, while Return on Assets (ROA) dipped from 4.9 percent to 4.4 percent over the same comparative period Banks’ interest spreads narrowed marginally from 2.1 percent to 1.9 percent between February 2020 and February 2021, reflecting lower interest rates between the periods.
Accordingly, the industry’s gross yield declined from 3.1 percent to 2.8 percent while banks’ interest payable declined from 1.0 percent to 0.9 percent during the period. The sector’s interest margin to total assets also recorded a marginal decline from 1.4 percent to 1.3 percent over the period. The interest margin to gross income ratio however increased to 56.6 percent from 55.2 percent, reflecting the slower growth in gross income during the period.
The composition of banks’ income in February 2021 reflected the structure of the balance sheet. In line with the increase in banks’ investment holdings, interest income from investments remained the largest source of banks’ income, with its share increasing to 51.1 percent in February 2021 from 42.5 percent in the previous year.
Interest income from loans was the second largest source of banks’ income but its share declined to 31.1 percent from 38.7 percent, reflecting the slowdown in credit growth. The share of fees and commissions however increased marginally to 12.3 percent from 11.7 percent over the same comparative period while the share of other income sources declined to 5.5 percent from 7.2 percent.
Total banking sector assets as at end-February, 2021 increased by 18.5 percent year-on-year to GH¢152.0 billion, marginally higher than the annual growth of 17.8 percent as at end-February 2020.
The higher growth in total assets reflected similar stronger growth in domestic and foreign assets of 19.1 percent and 11.1 percent; compared to the respective rates of 18.7 percent and 8.2 percent a year earlier.
Growth in banks’ investment holdings outpaced other asset classes due to the higher propensity of banks to invest more in less risky government instruments as a result of the pandemic-induced elevated credit risks and slowdown in credit demand. Investments shot up by 45.9 percent to GH¢67.9 billion, compared to the growth of 7.2 percent in the prior year. Accordingly, the share of investments in total assets scaled up further from 36.3 percent to 44.7 percent over the review period.
Gross loans and advances continued to experience a subdued growth, at 3.6 percent, a sharp decline from the 26.0 percent growth in the corresponding period last year. This is attributable to weak credit demand, higher repayments and banks’ increasing appetite for less risky assets.
Adjusting gross loans for provisions and interest in suspense, net loans and advances grew by 2.2 percent to GH¢41.4 billion, down from 27.2 percent over the same comparative periods. New loans and advances for the first two months of 2021 of GH¢4.7 billion also reflected the sluggish credit market condition with a 24.6 percent decline from the pre-pandemic level of GH¢6.2 billion for the first two months of 2020.
The expanded assets size of the industry was largely funded by deposits. Total deposits grew by 25.1 percent (year-on-year) to GH¢104.0 billion as at end-February 2021, compared to 15.6 percent a year earlier. Liquidity flows within the domestic economy from the COVID-19 fiscal stimulus as well as payments to contractors, SDI depositors, and clients of SEC-licensed fund managers provided additional funding to the banking sector to support asset growth.
Additionally, increased savings by individuals and firms against the pandemic-related slowdown in consumer and investment spending in some sectors also contributed to the strong observed deposit growth.
Growth in shareholders’ funds was stronger and is indicative of adequate capital buffers within the banking sector to withstand shocks. Shareholders’ funds grew by 21.2 percent to GH¢22.2 billion as at end-February 2021, compared with a 14.6 percent growth a year earlier, reinforcing the stability and resilience of the banking sector. The sustained growth in banks’ total net worth was driven by strong profit retention.
Banks continued to cut back on borrowings as they relied on relatively cheaper sources of funding from deposits and shareholders’ funds to fund assets’ growth. Total borrowings at end-February 2021 therefore contracted by 23.4 percent to GH¢14.3 billion, in sharp contrast to growth of 30.7 percent a year earlier. The decline in borrowings reflected mainly in short-term borrowings while long-term borrowings increased during the year.