Ratings Agency Moody’s has described as a ‘positive’ the central bank’s new Capital Requirement Directive (CRD), which seeks to enhance the quality of banks’ capital by increasing the cushion that absorbs losses in times of stress.
The new Capital Requirement Directive clearly stipulates the different level of capital and imposes a capital conservation buffer of 3 percent of risk-weighted assets and introduces a countercyclical buffer, although it is currently set at zero.
The new directive, which is already in line with global banking practices including the International Financial Reporting Standards and Basel II and III, sets the requirement by which banks will calculate the Capital Adequacy Ratio (CAR) under the Banks and Special Deposit-Taking Institutions (BSDI) Act.
“The requirements herein require banks to hold appropriate capital commensurate for unexpected losses that may arise from business through capital transactions, credit, operational and market risks,” the new directive stated.
It added that the board of a bank is responsible under requirements of the CRD to determine both the availability of eligible capital and measurement of risks to capital in the Basel II framework, in line with minimum risk management standards for the risks herein.
The BoG requires banks to maintain a minimum Common Equity Tier-1 (CET1) capital ratio of 6.5 percent, and banks will satisfy the conservation capital buffer using CET1 capital. This will increase banks’ CET1 to 9.5 percent and the regulatory minimum capital adequacy ratio to 13 percent.
In its analysis of the new directive, Moody’s noted that high capital buffers will strengthen system resilience by providing the banks room to clean up their balance sheets.
A CET1 ratio of 9.5 percent enhances the quality of banks’ capital by increasing the cushion that absorbs losses in times of stress because this is the first capital tier to absorb losses, it added.
“Higher capital buffers will support depositors’ confidence, which was damaged by recent bank failures. In March this year, the BoG placed uniBank Ghana Limited – the third-largest bank by assets – under administration after it failed to restore its capital adequacy ratio to the minimum requirement of 10 percent.
“This followed cancelation of the licences of two smaller banks in 2017. These failures damaged depositors’ confidence and heightened liquidity risks, especially for midsize and small banks, although larger banks such as GCB Bank Limited (B3 stable, b31) benefited, with its deposits growing by 63 percent in 2017,” it noted.
Banks are burdened by high non-performing loans (NPLs), which stood at 23.4 percent of gross loans as of April 2018. NPLs in 2017 increased by 33.4 percent to GH¢8.2billion, while gross loans increased by only 6.8 percent as banks’ asset quality remained strained by loans extended during the 2015-16 economic slowdown.
Provisions for these NPLs covered only about 47 percent, exposing bank capital to the risk of erosion if banks realise unexpected losses.
Banks such as Ecobank Ghana Limited and Access Bank Ghana Limited have modest cushions over the 13 percent requirement, and may have to curtail dividend payouts, reduce risk-weighted assets or raise additional capital, Moody’s noted.
However, the majority of large banks reported high capital ratios of more than 20 percent although this capital is exposed to potential losses from the high stock of NPLs, with the majority of NPLs not covered by provisions.
A glance at the financials of banks shows that as at March 2018, UBA Ghana’s reported NPL ratio was 52.6 percent versus a capital adequacy ratio of 27.9 percent. As at December 2017, Standard Chartered Bank Ghana Limited reported an NPL ratio of 35 percent against a capital adequacy ratio of 26 percent.
“Additionally, as is the case with the new GH¢400million capital requirement, banks have a short span of time to meet these new requirements – which creates implementation risks,” Moody’s pointed out.