Ghana’s banks face leaner time in 2016

The Ghanaian banking sector remained profitable and well capitalised last year, with combined assets rising by 22.3% to reach GHS70.4bn ($17.8bn), according to the Bank of Ghana (BoG).

A repeat performance in 2016 will require some adroit manoeuvring, however, as macroeconomic pressures began to slow activity by the end of last year.

Lending growth by the country’s commercial banks trended downward in 2015, for example, while NPLs increased, although recent interest rate moves by the central bank point towards a more encouraging outlook for the coming months.

Balance sheet best practices

Credit growth slowed significantly in 2015, according to BoG figures, with lending to the private sector expanding by 23.5% year-on-year, compared to 51.6% in 2014.

The ratio of NPLs, meanwhile, recorded an increase over the year. By the end of the third quarter of 2015, NPLs accounted for 13.5% of total loans, up from 12.2% at the end of 2014. According to year-end figures from the BoG, the share of NPLs rose further in the last quarter, reaching 14.1% by the end of December. 

However, a late January announcement from the BoG that benchmark interest rates would remain unchanged signalled positive news for Ghana’s banks and borrowers. According to BoG officials, signs that inflation was beginning to ease had informed the decision.

Analysts had expressed concerns that the BoG’s previous hike, which increased the policy rate by 100 basis points to 26% in November, would trigger an increase in NPLs, due to the higher potential for borrower default.

While inflation reached 17.7% in 2015, due in large part to the slide of the Ghanaian cedi, prices began to flatten out somewhat in the last quarter of the year, suggesting the central bank’s latest interest rate hike was yielding the desired results.

Announcing the monetary policy committee’s decision, Kofi Wampah, governor of the BoG, said more moderate inflation was in line with the country’s tight monetary policy stance and ongoing fiscal consolidation.

“Going forward, the committee expects the slower pace of price changes to continue and steer inflation down towards the medium target band of 8% plus or minus 2%,” Wampah told local media.

Other pressures

The BoG’s decision to leave interest rates unchanged should help to ease pressure on commercial lenders, though they still face the challenge of a weak local currency, which has driven up international borrowing costs.

The cedi fell by 3.6% against the US dollar in January 2016, after having declined by 15.6% over the course of 2015.

In a January report the IMF did, however, note an improvement in Ghanaian banks’ capital adequacy ratios (CARs) late in the year, from 13.3% to 14.3% between June and October, suggesting Ghanaian banks are taking higher NPL ratios seriously.

Regulatory recourse

While the sector remains profitable and well capitalised overall, there is significant variation across banks, which the BoG will be looking to address in the year ahead through a series of regulatory measures.

“Prompt implementation of the new banking laws currently under review by parliament is also essential to safeguard financial sector stability,” the IMF said in mid-January.

Planned legislation includes the Deposit Insurance Law, which is aimed at protecting client accounts and increasing confidence in the banking system. Additional measures aimed at increasing the BoG’s regulatory authority, strengthening oversight and giving it greater powers to mandate risk management practices are also being considered.

To ensure greater compliance with the 13% CAR target, for example, the BoG has mandated that banks with CARs between 10% and 13% may only issue half dividends to shareholders until the threshold is met, while those with a CAR below 10% have been barred from issuing dividends altogether.

Banks are also likely to be affected by controversial new taxes that came into effect at the beginning of 2016. The regulations include the introduction of a capital gains tax for local and foreign investors – of 15% and 20%, respectively – and a 1% income tax on dividends from all banking and financial transactions.

Concerns have been raised that the new taxes could further reduce liquidity in the banking sector; higher interest rates had driven equity investment towards alternative investments such as fixed deposits.

According to Sam Mensah, chairman of the Ghana Stock Exchange, this is also likely to have an adverse effect on the competitiveness of the country’s bourse.

“The imposition of a capital gains tax makes Ghana the only market in the region that has a capital gains tax on listed securities… We are about to see foreign investors flee Ghana’s equity markets,” he told local media in mid-January.

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