Banks readiness for GH?400m capital under test ...as NPLs increase and net income tumbles by 5.2%
The July 2017 Bank of Ghana Banking Sector report has shown that profitability of the industry has declined by 5.2 percent, igniting the debate on whether banks are liquid enough to meet the new GH?400 million minimum capital requirement.
The BoG report indicates that profitability in the banking sector declined for the period ending June 2017 compared with the same period last year with profitability indicators such as the banks’ return on assets (ROA) and return on equity (ROE) declining.
The industry’s income before tax of GH¢1.53 billion contracted by 0.4 percent year-on-year in June 2017 compared to a 3 percent annual growth in June 2016.
The decline, according to the bank, was due to factors such as, modest growth in loans and advances, increasing non-performing loans, lower yield on investments and net interest income.
Growth in operational costs also led to further declines in income before tax for the industry. The industry’s net income of GH¢1billion contracted by 5.2 percent year-on-year in June 2017.
Again, the two key profitability indicators, namely, after-tax return on equity (ROE) and pre-tax return on assets (ROA) recorded declines during the period under review. The industry’s ROA decreased from 4.9 percent in June 2016 to 3.7 percent in June 2017, while the ROE declined from 22.9 percent to 17.7 percent over the same review period.
Also, by the end of June 2017, the stock of NPLs in the banking industry had risen to GH¢7.96 billion from GH¢6.09 billion in June 2016, translating into an NPL ratio of 21.2 percent in June 2017 compared with 18.8 percent in June 2016. When adjusted for the fully provisioned loan loss category, the NPL ratio showed an increase from 10.9 percent in June 2016 to 11.3 percent in June 2017.
The above situations have raised doubts among industry players and experts about the readiness of the banks to meet the new capital requirement of GH?400 million.
Commenting on this development, a corporate governance expert and lecturer at the Ghana Banking College, Dr. Richmond Atuahene, argues that banks will suffer under the new capital requirement if urgent steps are not taken by government to pay debts owed them for the Non-Performing Loans (NPLs) to reduce.
“Bank of Ghana is saying that, in computing impaired paid capital, the losses shall not be set-off against the credit risk reserves. What it means is that, the Bank of Ghana is saying you should write it off, and not set it off. So the banks have to write it off against profit before you talk about fresh capitalization
So government must take urgent steps to pay the various debts it owes that banks so that they can have enough money for the capitalization.
This is because the non-performing assets have been created by government. So if government pays the debt it owes banks, at least the interest income will go up, more profit will be made and the net NPL will come down. If government does not pay those debts, even when the banks recapitalize, is going to affect them,” Dr. Atauhene said.
His view is supported by another lecturer of the same college and a Fellow of the Chartered Institute of Bankers, Francis Owusu-Acheampong, who posits that, until government settles its debts to companies, the recapitalisation of banks will be needless.
“The important point for us to understand is: What caused the NPLs? Have we dealt with the root causes so that the effect will not erode this additional capital? If we cannot find reasons to believe that we are not going to have more NPLs, then there is no point bringing additional capital because it is going to be eroded in no time.
The government itself is a culprit to the rising NPLs. If we have a situation where the biggest borrower in the market is not paying, then is going to run through all establishments. All the NPLs we are taking about are mainly from the public institutions,” he said.
Aside from government debt that has led to surge in NPLs, Dr. Atuahene opines that regulatory failure on the part of the Bank of Ghana, and poor corporate governance structures, have all contributed to the distressing situations banks find themselves, hence, his call for the central bank to get tough on its regulations.
“The situation we find ourselves is a clear indication of regulatory failure and corporate governance issues. The Bank of Ghana must be tough about regulatory policies and stand on its feet on the new Act and hold Board of Directors responsible,” he said.