Banks will deal with bad loans, stay competitive—Moody’s

Banks are expected to ‘slowly’ tackle the non-performing loans on their books and remain competitive in the coming year, Moody’s Investor Service’s outlook for banks for 2019 has shown.

Moody’s African Banking Outlook for next year (stable) indicates its forward-looking assessment of fundamental credit conditions that will affect the creditworthiness of African banks over the next 12-18 months.

As such, the outlook provides the investor service’s view of how the operating environment – including macroeconomic, competitive and regulatory trends – will affect, among other things, asset quality, capital, funding, liquidity and profitability.

The report noted that for Ghanaian banks, “robust economic growth will allow banks to slowly address their high problem loans, which was partly the result of stricter loan classifications”.

The government, in the 2019 budget, is aiming to narrow its budget deficit to 4.2 percent of Gross Domestic Product (GDP) in 2019, and forecasts GDP growth of 7.6 percent including oil.

Additionally, an expected inflation rate of 8 percent by the end of next year has been targetted – the same as the 2018 target. Non-oil growth is seen at 6.2 percent. 

According to the rating agency, non-performing loans as a percentage of banks’ gross loans in the country are currently about 23 percent. This is one of the highest on the continent alongside that of Angola (26%).

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This contrasts with non-performing loans as a percentage of gross loans of banks in Nigeria (12 percent) and under 5 percent in both Egypt and South Africa.

This notwithstanding, Moody’s noted that African banks’ average equity-to-assets stand at around 10%, higher than the global average of 7.7%; and the average capital adequacy ratio stands at 16%, suggesting that they can absorb some unexpected losses.

“For 2019, we expect capital to increase slightly, driven by internal capital generation and modest dividend payments. The quality of capital will also remain strong (primarily Common Equity Tier-1).

“Regulatory initiatives, such as higher minimum capital requirements in Ghana and Angola and the introduction of Basel II/III, enhanced capital standards in WAEMU.”

 Consolidation in the wings

The report predicts more banking sector consolidation in 2019, brought on by the increase in minimum capital requirement from GH¢12million to GH¢400million, with a December 31, 2018 deadline for all universal banks.

“Higher minimum capital requirements will fuel sector consolidation,” the report noted.

While some banks have met the new minimum capital requirement of GH¢400million, other relatively smaller universal banks are in talks to merge.

The government, however, has indicated its preparedness to support well-governed local banks to meet the new capital requirement.

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The BoG Governor, at a recent luncheon of the Ghana Association of Bankers (GAB), disclosed that government will support ‘well-governed and managed’ local banks to meet the new minimum capital requirement.

“Such support will be limited to indigenous banks that are solvent, well-governed and managed in full compliance with the Bank of Ghana’s regulatory requirements – and able to demonstrate that they have been unable to access private sector solutions for recapitalisation due to market conditions,” he said.

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