The banking sector: After the storm

Last year was a very torrid time for the banking sector. The regulator, Bank of Ghana (BoG), set a December 2018 deadline for the all banks to beef-up their minimum capital by as much as 70 percent (from GH¢120 million to GH¢400million). The rationale behind this, the BoG said, was to boost banks’ capacity so as to enable them support the country’s economy as they should.

Before the deadline expired, precisely in August 2018, five local banks—Unibank, Beige, The Royal Bank, Construction and Sovereign— were declared insolvent, collapsed and merged into the Consolidated Bank Ghana Ltd. (CBG). That move alone cost the taxpayer some GH¢10.2billion.

This didn’t only cost government money but also inspired fear among depositors. The industry was hit with a massive panic withdrawal like never before. Banks’ deposits growth started declining.

The Summary of Macroeconomic and Financial Data published by the Bank of Ghana in January 2019 showed that annual deposits growth of banks saw a continuous drop in the last three months of 2018, ending the year with 17.4 percent.

The data adds that banks’ deposits dropped from 26.2 percent in September to 20.7 percent in October, and further dropped to 18.4 and 17.4 in November and December respectively—a clear sign that confidence in the industry was lost.

Total assets growth also declined in the same period, hitting 14.7 percent in December from 26.2 in September 2018. In fact, there were many indicators which showed the banking sector was in crisis.

To climax it all, when the December 2018 deadline for the new minimum capital finally arrived, the total number of banks in the country that survived was 23 from a previous number of 36. Nine local banks in all collapsed since 2017. Some had to merge and remain in business, and one of them – GN Bank – was downgraded to a Savings and Loans company for failure to meet the new minimum capital.

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The stage was now set for an adequately and strongly capitalised banking sector to run the show. Let us see how the industry has performed since then.

 

What the facts say

After confidence was smashed due to the reforms which took place last year, figures show that some gains have been made this year; thereby restoring some confidence in the industry.

The Banking Sector Report for March 2019 shows the industry is rebounding in many areas. The report indicates that profitability for the banking industry improved during the first two months of 2019 compared with the same period last year. The industry recorded an after-tax profit of GH¢549.7million, representing a year-on-year growth of 31.5 percent – higher than the 14 percent growth recorded for the same period last year.

Deposits growth, which slowed in the last quarter of 2018, has also rebounded—the best indication that confidence in the sector is back. It increased to 20 percent in February 2019 with GH¢71.86 billion, from 12.6 percent growth at GH¢59.9billion in February 2018.

Domestic deposits formed the largest component of total deposits, growing from GH¢59.55billion (12.7 percent y/y growth) to GH¢71.39billion (19.9 percent y/y growth) during the review period, indicating that locals still have confidence in the industry.

Lending also saw its fair share of the growth, as gross advances inched up by 1.9 percentage points to GH¢36.44billion in February 2019 from GH¢35.76billion after contracting by 0.6 percent a year ago.

Again, the industry’s stock of Non-Performing Loans (NPLs) declined to GH¢6.63billion in February 2019 from GH¢7.74 billion in February 2018, representing a slower growth of 14.4 percent compared with the 21.1 percent growth recorded a year earlier – meaning banks’ books are seeing a clean-up.

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Yes, these are a few indications from the industry’s report which show that the banking sector has quickly picked up after the regulator embarked on reforms.

This is corroborated by a professor of economics at the University of Ghana, Prof. Peter Quartey, in an earlier interview with the B&FT.

“Given the reform that banks have to recapitalise; given the reform that a director on the board of a bank has to be screened; given the reform of how loans should be advanced and several other directives from the central bank, we see depositors rebuilding confidence in the existing banking institutions.

“Some have even moved their funds from microfinance and other financial institutions to formalised banking institutions. So yes, confidence has increased – but it has increased more in the banking sector than other financial institutions, especially microfinance institutions,” he said.

 

Conclusion

From the analysis, it can rightly be concluded that the banking sector has come out stronger in the wake of a heavy storm that hit the industry in 2018. The Banking Sector report itself indicates strongly that there is a brighter future for the sector going forward.

“An assessment of the banking sector’s performance during the first two months of 2019 showed a well-capitalised, profitable, liquid and stable sector with strong prospects for increased financial intermediation. The key financial soundness indicators were broadly positive during the period and are projected to improve further as banks continue adhering to the prudential and regulatory standards of the industry…The outlook for the banking industry therefore remains positive,” the report said.

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