Banking industry survives debt restructuring


Financial results of Ghana’s banking industry for 2022 and the 1st quarter of 2023 indicate that banks have survived the inevitable challenges imposed by government’s domestic debt exchange programme. TOMA IMIRHE uses two biggest banks’ performance to assess the situation.

It appears that Ghana’s banking industry has turned the corner after suffering the worst hit on their profitability in the past nearly four decades.  Financial performance results for the first quarter of 2023 indicate that the industry is returning to profitability – or at least is on the verge of doing so – after impairment charges on their investments in government medium- and long-term debt securities imposed on them because of terms in the recently concluded Domestic Debt Exchange Programme (DDEP), which wiped away the net incomes of major banks for 2022.

The latest financial performance results, covering the first three months of this year, are good news indeed as they indicate that the worst fears of industry analysts – that the DDEP could send the industry into a tailspin – are proving unfounded. Those fears had been premised on the spectre of sustained losses due to the impairment charges on their respective investments in government debt securities, wiping away banks’ capital even as they were buffeted with a liquidity crunch – as terms of the DDEP snatched away a large chunk of their investment incomes at a time that cash-needy and nervous depositors demanded their monies, leading to a possible run on bank deposits.

But the losses incurred for 2022 due to a massive increase in impairment charges have already been absorbed by most banks, and their liquidity has remained basically intact as depositors have increased their bank deposits rather than reduce them since investment in government securities has lost much of its lustre.

Ghana’s two biggest banks – Ecobank Ghana and GCB Bank – illustrate how the industry is navigating the perils thrown up by the DDEP.

Ecobank Ghana declared a record pre-tax loss of GH¢27.218million for 2022, a complete reversal of its pre-tax profit of GH¢893.732million made in 2021. The cause of this dip in fortunes was clear: net impairment charges rose to a record level of GH¢1,705.126million last year, about seven times the GH¢¢277.754million incurred in the previous year. Instructively, the bank had achieved its usual growth in all aspects of its operations last year. Net interest income had risen to GH¢2,521.988million, up from GH¢1,545.00million in 2021 while income from net fees and commissions had similarly climbed to GH¢355.984million, up from GH¢317.571million. This had resulted in total net income rising to GH¢2,968.058million for 2022, up from GH¢2,115.181million in 2021.

Even though personnel expenses, depreciation and amortisation had risen along with financial charges on leased assets – in line with surging inflation and consequently interest rates, this would have been enough to increase pre-tax profits for the bank if not for the huge impairment charges it had to make as a result of the DDEP’s terms.

But there are early indications that the worst is over for Ghana’s biggest bank. Net impairment charges for the first quarter of 2023 amounted to GH¢346.592million as the bank not only wiped off the rest of its DDEP-imposed income losses, but also some other impairment charges which had inconveniently arisen at the same time. This still meant a pre-tax loss of GH¢11.963million for the first three months of the year, but this was reduced by the tax implications to just GH¢7.989million after tax losses.

Importantly, though, the bank’s revenues are still on the increase; which means the spike in impairment charges has not dampened its income generating capacities – and so with the impairment charges now behind it, the bank stands to be even more profitable than hitherto. For the first quarter of 2023 its net interest income nearly doubled to GH¢714.252million, up from GH¢370.674million during the corresponding period of last year. A dip in fees and commission income, and GH¢71.867million in losses from trading – another fallout of the DDEP – meant that net income rose more slowly to GH¢752.234million, up from GH¢538.400million for the first three months of last year; but the overall results indicate an improvement.

GCB Bank has also done very well, already back to profitability for the first quarter of 2023 with GH¢297.933million in pre-tax profits – which is even better than the GH¢237,212million it made during the corresponding period of 2022. Indeed, this means that during the first three months of 2023, GCB Bank clawed back nearly half of the GH¢¢706.252million pre-tax loss it made for the whole of 2022. Like every other bank, GCB’s loss for 2022 was the result of impairment charges incurred from the DDEP – which amounted to GH¢1,814.474million and took away nearly two-thirds of the bank’s GH¢2,971.441million operating income for the year.

For the first quarter of 2023, impairment losses fell to GH¢111.309million – although this was still much higher than the GH¢68.180million incurred during the corresponding period of last year.

Indeed, with impairment charges resulting from the DDEP’s implementation now behind them, Ghana’s banks are now back on the road to recovery. But even before that journey is completed, certain positives are already emerging for the industry. At the same time, it appears that the worst fears arising for the banks out of the DDEP are not coming to pass after all.

Those fears relate to liquidity in the banking system, which most industry analysts – as well as the industry regulators themselves – fretted would become insufficient with both principal investments and interest streams locked up by the terms of the new bonds issued by government to replace the old ones.

However, trends have emerged to prove those fears also largely unfounded. Firstly, the sharp increase in interest income on short-term Treasury bills – which still account for at least half of their investments in government securities, and which were unaffected by the DDEP – has largely made up for the foregone interest on the medium- to short-term investments in government bonds. Coupled with government’s continued meeting of its amortisation obligations on maturing short-term Treasury bills, this has helped to keep the banks liquid as evidenced by their continuously adequate liquidity ratios.

But the other factor working in favour of the banks with respect to liquidity has been the strong growth in customer deposits. This is where the analysts got it wrong. They had anticipated a decline in deposits as panicked customers sought to flee illiquid banks which might not be able to honour their obligations.

However, the opposite has happened. With declining confidence in government as a repository for their investments, the banking public has instead stepped-up their investments with the banks themselves – providing them with an unexpected major source of renewed liquidity.

For instance, customer deposits with Ecobank Ghana grew by about half; from GH¢13,228.449million at the end of 2021 to GH¢20,423.861million by the end of 2022. While Ecobank is used to annual growth in deposits of about 20% due to its innovative deposit product suite and the sheer convenience of its digital platforms, a 50% increase is most unusual and can be traced back largely to the shift by investors from government securities to the banks. And this trend is still continuing. Ecobank’s deposits grew further to GH¢22,968.961million by end of the first quarter 2023.

While GCB Bank’s deposits have not grown quite as fast, their increase from GH¢15,154.527million as at the end of 2022 to GH¢19,408.623million by the end of March 2023 has helped, crucially, to keep the bank liquid.

But the biggest potential gain for the Ghanaian economy from the DDEP is its impact on bank lending to the private sector. Prior to the DDEP banks regarded investing in government securities as a riskless but highly profitable strategy, to the detriment of needy and deserving private enterprise borrowers.  Now, with much of the market for government securitised debt closed, and with doubts still hanging over the other half – short-term Treasury bills – banks are being forced to extend lending to private borrowers as an outlet for their deposits and shareholders’ funds.

Actually, some banks had seen the meltdown that prompted the DDEP coming, and had cut back on their investments in government securities ahead of it.

Ecobank, for instance, was not thoroughly enticed by the high and supposedly risk-free returns on government securities. The bank has palpably turned further toward private sector lending as a result of government’s fiscal meltdown. As at the end of 2021, its investment portfolio was worth GH¢6,229.493million, marginally more than its loan book of GH¢5,693.754million. But by the end of 2022, with the DDEP having been introduced, Ecobank had reversed its situation with a loan book of GH¢8,866.042million; easily outstripping its investment portfolio of GH¢6,743.075million.

Other banks have been so deeply imbedded in investment securities that they cannot reverse the structure of their asset portfolios so easily. Nevertheless, the shift from government securities to private sector lending has also extended to them.

For example GCB Bank, the biggest investor in government securities, cut the value of its investment portfolio from GH¢9,765.840million to GH¢8,673.601million during 2022 – while increasing its loan portfolio from GH¢4,306.380million to GH¢5,482.215million. While GCB Bank will be required to increase the size of its investment portfolio again to take up the slack created by the withdrawal of privately-owned banks from such investments, most private banks will get used to lending to private enterprises and households going forward.

This means better support for productive enterprise, and less financing for government’s imprudent expenditure desires.

The DDEP has taken its toll in several ways, but there are also some promising signs on the horizon. But for the banks and their customers, the biggest relief is that banks have retained adequate liquidity levels to meet their obligations to depositors.

Some banks, such as Prudential, have seen their shareholders funds fall slightly below the required minimum of GH¢400million because impairment charges for 2022 depleted their income surplus accounts, turning it into negative. But under the circumstances, regulators must turn a blind eye; and if liquidity challenges do arise for banks, they will be small enough to be covered by either government’s financial liquidity fund or the Bank of Ghana’s Emergency Liquidity Assistance.

The bottom line, then, is that Ghana’s banking industry looks set to survive its biggest liquidity challenge since the 1980s.  That their survival is the result of the increased strength given them by the recent financial sector reforms should be a reason to applaud the nation’s central bank for its foresight back in 2017-2018.

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