Bank of Ghana (BoG) Governor Dr. Ernest Addison has described as encouraging the banking sector’s performance in the first eight months of 2023 – citing that it remained stable in the first eight months, with profitability improving and key financial soundness indicators broadly stable.
Total banking sector assets increased to GH¢244.7billion in August 2023 from GH¢204.6billion in August 2022. The growth in banks’ assets was funded by deposits, which grew sharply by 38.9 percent to GH¢189.9billion. Total borrowings by banks however contracted 41.0 percent to GH¢13.9billion in August 2023.
Banks’ profitability remained strong during the period under consideration, as they recorded a broad post-tax profit of GH¢5.7billion representing 41.4 percent annual growth. Specifically, net interest income increased sharply by 37.9 percent to GH¢13.5billion, while net fees and commissions went up by 27.3 percent to GH¢2.9billion.
The key financial soundness indicators remained broadly stable. Profitability indicators improved, with Return-on-Equity (ROE) at 36.9 percent in August 2023 from 23.0 percent in August 2022 while Return-on-Assets (ROA) increased to 5.4 percent from 4.7 percent in the same comparative period. Also, liquidity indicators for the industry improved during the period under review.
When adjusted for the regulatory reliefs, the industry’s Capital Adequacy Ratio (CAR) was 14.2 percent in August 2023 – higher than the revised prudential minimum of 10 percent.
The industry’s NPL ratio however increased to 20 percent in August 2023 from 14.3 percent in August 2022. Dr. Addison attributed this to the elevated credit risk associated with lagged effects of the macroeconomic crisis in 2022.
However, BoG is monitoring the situation closely – particularly the NPL ratio, and will take all necessary steps to ensure the banking system’s safety and soundness, the Governor noted.
This comes after the profitability of banks experienced a notable downturn in 2022, primarily attributed to macroeconomic challenges. The banking sector witnessed a decline in profitability levels throughout the year, primarily driven by mark-to-market losses on investments, an increase in impairments on loans and the rising burden of operating costs.
This decline was reflected in key financial metrics, as Return on Equity (ROE) decreased from 20.9 percent in December 2021 to 14.6 percent by December 2022. Additionally, Return on Assets (ROA) also registered a decrease by falling from 4.6 percent to 3.1 percent over the same period.
Additionally, the banking industry last year saw a decrease in capital at risk related to potential loan losses, although its capacity to absorb non-performing loan (NPL) losses also slightly decreased. Specifically, the ratio of NPLs net of provisions to capital decreased from 6.2 percent at end-December 2021 to 4.9 percent by end-December 2022.
Conversely, operational costs increased and the interest margin declined during this period, with the interest margin as a percentage of gross income dropping to 50.1 percent from 54.5 percent the previous year. Non-interest expenses as a percentage of gross income also rose year-on-year, reaching 51.8 percent by the end of December 2022 – up from 42.2 percent in December 2021.
Despite a decline in the Banking Sector Soundness Index (BSSI) during the year, it remained above its long-term trend – indicating overall stability in the banking sector as of December 2022. This sustained stability can be attributed to prudent measures taken in previous years, particularly in response to the COVID-19 pandemic. These measures were part of a comprehensive set of reforms initiated by the Bank in 2017/2018 to reposition the banking sector, support economic activities and ensure financial stability.
While the industry’s performance in the year’s first eight months has allayed concerns over a crumbling of the broader financial sector, stakeholders await attentively for operationalisation of the GH¢15billion Financial Stability Fund.