Despite the aggressive banking reforms implemented by the Bank of Ghana, challenges exist that may impact future performance, international ratings agency Moody’s has warned.
The central bank’s actions have led to a significant reduction in the number of universal banks – from 34 to 23, increased their capital base, and led to the creation of relatively bigger banks capable of supporting growth of the economy.
However, Moody’s predicts that: “Ghanaian banks still face challenges, and consolidation of the banking system does not guarantee strong future performance for all remaining banks”.
Moody’s believes that with non-performing loans still as high as 20.1 percent as of October 2018, banking assets are still at high risk. Also, with interest rates falling at the same time –monetary policy rate currently at 17 percent, the lowest policy rate since 2013 – banks’ income from government securities are severally curtailed.
Despite the warning, the report described the sector’s consolidation and current status as ‘credit positive’ because it supports financial stability by removing weaker banks and gives remaining banks pricing power, enhancing their efficiency and profitability.
“The consolidation has removed weaker, undercapitalised banks that posed a risk to financial stability. It has also led to higher capital for the system, improving banks’ capacity to absorb loan losses. The remaining 23 banks have recapitalised their operations either organically or through capital injections and mergers,” the report added.
As a result of the sector’s reforms, Moody’s noted that the system’s capital adequacy ratio increased to 20 percent in October 2018 from 17 percent in October 2016; and currently it expects this to be higher following completion of the recapitalisation efforts and further liquidations.
“We expect surviving banks to be better capitalised, and therefore better positioned to resolve their high non-performing loans (NPLs),” Moody’s added.
Apart from better capitalised banks, the consolidation, according to Moody’s, will also lead to better economies of scale for the remaining banks, which will likely result in better pricing power – particularly for deposits, which would help alleviate negative pressure on interest margins.
“Competition for deposits intensified as weaker banks bid up interest yields offered depositors to attract deposits. Consolidation will also improve banks’ ability to underwrite larger corporate loans, because they will be able to increase their single-name borrower limits. Consequently, banks’ franchises will improve – benefitting their business opportunities and profitability,” it added.
BoG to focus on smaller pool and tighten regulation
To Moody’s, another beneficiary of the consolidation is the central bank which now has fewer banks to regulate; and this will likely enhance the regulators’ capacity to rigorously monitor and improve the sector’s overall supervisory framework.
“The BoG has already started to tighten the regulatory framework by issuing a corporate governance directive that will enhance banks’ corporate governance practices. Completing the recapitalisation exercise within the planned timeframe also shows BoG’s willingness to strictly enforce prudential regulations. Improved supervision quality and corporate governance will gradually boost confidence in the banking system,” it added.
Of the 34 banks at the beginning of 2018, five (5) were consolidated into a single bank; six (6) banks merged to create three (3) larger banks; two (2) had their licences revoked; one bank closed shop; and one also had its licence converted into a Savings and Loans.