- NPL ratio to reduce
- Interest rates to drop
- Private sector to be biggest beneficiary
The government’s roadshow to raise a bond to clear the much talked about energy sector debt, which is in excess of US$2.5billion, has excited bankers.
The roadshow for the long-awaited bond issuance saw some delays due to bureaucratic procedures and blockages from international partners.
According B&FT sources, one of the blockages came from the International Monetary Fund (IMF) on how the debt should be raised.
While the Bretton Wood institution wanted the bond to be issued as a sovereign debt, which would reflect directly on government’s account, government wanted to put the debt on the books of energy companies – which would then be pegged to the Energy Sector Levy Account (ESLA).
But the recent announcement and subsequent roadshow indicates that the money is closer to home than ever. Banks and energy sector players such as the Volta River Authority (VRA), Electricity Company of Ghana (ECG), Ghana Grid Company (GRIDCo), the Bulk Oil Distribution Companies (BDCs) and several thermal plants are heaving big sighs of relief in their respective corporate boardrooms.
“We think that any effort by government to reduce the debt overhang, which currently sits on the books of banks and corporations, is brilliant,” Alhassan Andani, President of the Ghana Association of Bankers (GAB), told the B&FT in an interview.
The banking industry’s Non-Performing Loans (NPLs) has been high for the past three years, and without issuance of the deb, it could stay high for quite some time.
According to the Bank of Ghana’s latest Monetary Policy Summary report, the banking industry’s asset quality measure – the NPL ratio – increased from 17.3 percent in December 2016 to 20.9 percent in July 2017 due to the downgrade of some loan facilities after the asset quality review exercise.
The adjusted NPL ratio, which excludes the fully provisioned loss category, also rose to 11.1 percent from 9.8 percent over the same period.
The industry’s Return on Equity (ROE) and Return on Assets (ROA) declined in July 2017 compared with July 2016, an indication of declining profitability within the industry.
Should the government successfully raise the expected US$2.5billion in either one, two or three tranches, at least half of that will go straight to banks to fill up holes in their books: and for those who have already taken a hit, they will declare bumper profits in their next financial statements.
A successful issuance of the bond and payment of debts owed banks will mean more money to move around in the system, sound and stronger banks, and a revival of debt-stricken energy companies and BDCs.
With more liquidity comes the urge to provide more products and services to customers, and bankers prefer excess liquidity to tightening their systems.
“The debt of about GH¢4billion to be taken off will be significant, because it will introduce liquidity into those banks and get the companies, private sector companies including BDCs, back on track.
“These companies were providing fuel to grow this economy and others and were on a growth trajectory with building storage tanks and developing infrastructure, but all of these have come to a halt.
“Once we get the monies to them and get them into business, all of these will expand and continue their development – and Ghana will become the focal point for energy infrastructure to service the West African market, which will generate jobs and increase economic activity,” added Mr. Andani, who is also the CEO of Stanbic Bank.
High lending rates
But the biggest challenge facing bankers and financial sector regulators is the high rates on lending to individuals and businesses.
Since turn of the year, several indicators that are factored into the cost of lending to clients have seen significant declines and improvements in some cases.
Already, the average interest offered by banks on customer deposits dropped between August and September. According to the latest Annual Percentage Rates (APR) and Average Interest (AI) report by the Bank of Ghana, the figure declined from 10.8 percent to 10.4 percent within the one-month period.
The local currency has been fairly stable after coming under marginal demand pressures from the corporate and energy sectors, as well as offshore investors seeking to repatriate their profits. The BoG’s Monetary Policy Summary report noted that in the year to August 2017 the cedi cumulatively depreciated by 4.5 percent, compared to a depreciation of 4.4 percent during the same period in 2016.
Inflation, which was as high as 19.2 percent as at March 2016, significantly dropped to 11.9 percent in July before inching up marginally to 12.2 percent as at September 2017.
The BoG benchmark lending rate, otherwise called Policy Rate, has also seen significant drops. At the four meetings held so far in 2017, the Monetary Policy Committee (MPC) cumulatively lowered the Monetary Policy Rate (MPR) by 450 basis points to 21 percent in July 2017.
In line with the declining MPR, money market interest rates also broadly declined. In the year to August, interest equivalent on the 91-day T-bill rate steadily declined to 12.8 percent from 16.8 percent in December 2016. Similarly, the rate on the 182-day bill declined to 13.5 percent from 18.5 percent, while the 1-year note also fell to 15 percent from 21 percent over the same comparative period.
On the interbank market, the weighted average interest rate declined to 20.99 percent in August 2017 from 25.26 percent in December 2016.
Despite the significant declines in all indicators, average lending rates of banks could only manage a marginal decline to 29.75 percent in August from 31.68 percent in December 2016.
The Association of Ghana Industries (AGI) – the umbrella-body of businesses in the country – has for the past decade called on the government and banks to find a common ground to tackling the stubbornly high lending rates.
Even though some bankers agree that the energy bond could trigger a drop in lending rates, because it would significantly drop the NPL ratio, the general assumption is that it is much easier said than done.
Edward Botchway, Chief Financial Officer of Ecobank, told the B&FT in an interview, earlier this year that since the energy sector and BDCs related debt contribute significantly to high NPLs, banks have taken these risks factors which have led to high lending rates.
“In an economy where the industry’s NPL is 20.9 percent, it basically means that for every GH¢100 loan a bank gives GH¢20.9 is not paid back. In pricing these loans, one has to find a way to deal with this and all that feeds into it.
“There is also a part of this that is linked to debts which need to be paid by the BDCs and energy firms. Once all of these are resolved, it will go into reducing NPLs and subsequently cost of credit. Given more time and space, we will see reductions in lending rates,” he noted.
Frank Adu Jnr., Managing Director of CalBank, asserted that what it [energy bonds] will do to banks is clean up their books and provide enough liquidity for them to continue lending.
He added that the reason banks are not able to react immediately when the policy rate drops is because there is a process that must be followed. “The thing is you cannot operate out of the market, but as interest [policy] rates trend down we are going to trend down; so far, the rates at which banks lend are falling – albeit, marginally,” he said.