Story by : Elorm Desewu

In the wake of the scary COVID 19, universal banks operating in the country continue to record significant profits.

For the first two months of 2020, the 23 banks recorded a profit growth of 38.8 percent. This was higher than the 31.5 percent growth in the same period last year, because of significant increases in banks’ income, which outpaced the growth in operating expenses, revealed by the latest banking sector report from Bank of Ghana.  

The banks’ net interest income grew by 25.9 percent on the back of a 22.0 percent growth in interest income, higher than the 14.0 percent increase in interest expenses. With declining interest rates over the period, growth in interest income and interest expense was mainly on the back of increased business volumes.

The strong growth in credit as well as the high level of investments contributed to the interest income growth, while the increased deposits and borrowings accounted for the increase in interest expense. Net fees and commissions and other income picked up strongly on the back of increased banking activities both core and off-balance sheet as observed earlier.

Total operating expenses also grew by 18.6 percent in February 2020 compared with 8.6 percent in February 2020, due to increased staff costs and other operating expenses.  Similarly, total provisions that is loan loss provisions and depreciation recorded a higher growth of 6.5 percent in February 2020 than the 2.2 percent recorded in February 2019. However, operational costs remained the highest expenditure item for banks, followed by interest expenses.

The stronger profit outturn boosted the reserves position of banks, and led to an increase in the industry’s shareholders’ funds by 14.6 percent to GH¢18.28 billion in February 2020. The previous year’s growth of 18.0 percent was because of the marked increases in the industry’s paid-up capital due to the recapitalisation exercise. 

The strong capital and shareholders’ funds positions strengthen the stability and resilience of the banking sector. Overall, the banking sector’s strong financial performance during the first two months of the year reflects continued positive dividends from the regulatory reforms. Although this strong performance  could continue, the ramifications of the on-going COVID19 pandemic poses a major risk to the industry’s operations and performance.

Banks recorded a stronger annual growth in total assets in February 2020 compared with a year earlier. Total assets of the banking sector amounted to GH¢128.33 billion in February 2020 representing a year-on-year growth of 17.8 percent compared to 14.5 percent recorded in February 2019.

The strong growth in total assets reflected in both domestic and foreign assets. The more pronounced growth of 18.7 percent in domestic assets compared to the 8.2 percent increase in foreign assets resulted in the share of domestic assets in total assets inching up from 91.5 percent to 92.2 percent over the period.

The strong growth in total assets was on the back of a rebound in credit growth. Gross loans and advances rose by 26.0 percent to GH¢45.91 billion in February 2020, following a subdued growth of 1.9 percent a year earlier.

Similarly, net loans and advances that is, after adjusting gross loans for provisions and interest in suspense, grew by 27.2 percent to GH¢40.47 billion against a marginal pick-up of 4.8 percent in February 2019.

Investments remain the largest component of banks’ assets but its contribution to growth in assets has waned. Growth in investments, consisting of bills, securities, and equity slowed to 7.2 percent in February 2020 from 33.3 percent a year earlier. The slower growth in total investments is partly a reflection of the base effects of the special (long-term) resolution bonds issued to Consolidated Bank Ghana (CBG), which increased the investment balance in February 2019. In spite of these developments, total investments of GH¢46.57 billion remains the largest component of total assets at end- February 2020 but its share in total assets dipped from 39.9 percent to 36.3 percent during the period. 

 The industry continues to record strong and sustained growth in deposits. Total deposits grew by 15.6 percent to GH¢83.10 billion as at end-February 2020 suggesting sustained confidence in the sector. This compares with the 20.0 percent deposit growth recorded a year earlier. It is worth noting that deposits continue to be mobilised mainly from the domestic economy, with a share of 99.6 percent, while the share of deposits from non-residents remains negligible at 0.4 percent. 

Following the developments in credit and deposits, the industry’s loan-to-deposit ratio (gross loans to total deposits), a key measure of financial intermediation, increased from 51 percent to 55 percent over the two comparative periods.   

In line with the rebound in credit, and with credit growth outstripping growth in deposits, banks had to rely on additional borrowings to support credit expansion. Accordingly, total borrowings increased by 30.7 percent compared with the decline of 6.3 percent in the prior year. The growth in borrowings, however, came mainly from the short-term end, with short-term domestic and short-term foreign borrowings accounting for about 98 percent of the increase.

The asset structure of the banking industry’s balance sheet did not change substantially over the period. Investments continued to dominate although its share in total assets declined to 36.3 percent in February 2020 from 39.9 percent in February 2019.

Loans and advances (net) represent the second largest component with its share moving up to 31.5 percent from 29.3 percent over the period on account of the strong growth in credit.  Cash and Due from Banks followed with a marginal increase in its share to almost a quarter of total assets. The share of fixed and ‘other’ assets, which constitute the non-earning assets of banks, remained virtually unchanged at 8 percent. 

The high share of investments in total assets in Feb-2019 was largely due to the special (long-term) resolution bonds issued to Consolidated Bank Ghana (CBG), with the loan book transferred to the Receiver. The gradual pickup in the share of net advances was on the back of the strong rebound in credit post-recapitalization.

Solvency remains strong with a Capital Adequacy Ratio (CAR) of 20.2 percent as at end-February 2020 well above the prudential limit of 13.0 percent under the Basel II/III framework.

The strong solvency position enhances the ability of banks to deepen intermediation and strengthen capacity to absorb potential losses from the credit, operational, and market risks, underscoring stronger banking sector stability.

As part of the policy response to minimise the risks associated with the COVID-19 pandemic, the Bank of Ghana lowered the prudential limit from 13.0 percent to 11.5 percent. This policy’s intention is to remove constraints that the high prudential CAR could pose in extending credit to the critical sectors of the economy, to support efforts at containing the COVID-19 pandemic.

Total Non-Performing Loans (NPLs) contracted further by 4.5 percent to GH¢6.33 billion in February 2020, following a decline of 14.4 percent a year earlier.  The positive effect of the decline in the stock of NPLs on the NPL ratio underpinned by the rebound in gross credit. This resulted in a decline in the NPL ratio to 13.8 percent February 2020 from 18.2 percent in February 2019. Consequently, the industry’s NPL ratio adjusted for fully provisioned loan loss category also declined from 9.4 percent to 5.2 percent. 

The distribution of NPLs among borrower groups reflected both the share of credits and the risk dynamics of these groups. Accordingly, the higher share of private sector loans translated to a larger share of NPLs due to the generally higher risk profile of the private sector. This also reflected in the sub-components of the private sector.

NPLs of indigenous enterprises accounted for almost three-quarters of total NPLs although banks halved credit to this segment due to their relatively higher credit risk. Foreign enterprises, households or individuals, and government accounted for relatively lower respective shares of 9.2 per cent, 7.9 per cent, and 2.7 per cent due to their lower credit allocation and better credit risk profiles.

There was a broad improvement in the NPL ratios across most of the sectors, except for the mining & quarrying and the transportation, storage & communication sectors. In particular, sectors with the highest NPL ratios in the industry recorded significant improvements in asset quality within the review period.

The NPL ratio declined from 42.3 per cent to 23.8 per cent for the electricity, water & gas sector and from 34.1 per cent to 23.6 per cent for the agricultural, forestry & fishing sector.  were by the Transport, storage & communication, services and the mining & quarrying sectors recorded the lowest NPL ratios of 8.8 per cent, 9.2 per cent, and 12.0 per cent respectively.