Ghana banks weather macro storm
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BANKING

Ghana banks weather macro storm

Despite Ghana’s deteriorating economic landscape, domestic lenders, for now, remain surprisingly robust, say analysts.



ghana currency cedi-envelope


Previously the poster boy of economic management in sub-Saharan Africa, Ghana is enduring a prolonged bout of fiscal stress and a cost of living crisis.

Inflation is 15.9%. The country is suffering from a twin deficit – a fiscal deficit equivalent to 10.9% of GDP and a current-account deficit of 13% of GDP. And the cedi has continued its decline, depreciating 40% against the dollar in the first six months of 2014, making it the worst-performing currency this year.

In June, Moody’s downgraded Ghana’s sovereign ratingone notch from B1 to B2 with a negative outlook. The Ghana administration is locked in talks with the IMF for a bailout.

There have been no visible strains on the banking sector, even though the economic situation has been difficult
Kobla Nyaletey

Economic weakness in Ghana has exacted a heavy toll on the real economy, including the manufacturing and downstream petroleum sectors. Unilever, for example, posted a loss of $2 million in the first half of 2014, compared with a profit of $6.8 million for 2013 full-year.

Surprisingly, amid the macro volatility, banks in Ghana have been able to weather the storm. The banking system is on a structural bull-run: assets in the sector have grown at a five-year compound annual growth rate of 20.1%, reaching C35.4 billion ($16.4 billion) at the end of 2013, and earnings have grown by 49%. Credit and deposits have increased by 19.5% and 19.7% respectively within the same period.

The banks’ success can be put down to strong GDP growth boosted by the onset of oil production in 2010, the recapitalization of the banking sector between 2009 and 2012, and high yields as the central bank has hiked rates to defend the currency and battle inflation.

Banking penetration

In other words, Ghana’s weakness – lack of banking penetration – has served as a strength, since the lack of access to credit for the retail sector and SMEs has served to cap the fallout for domestic lenders.

“In general, there have been no visible strains on the banking sector, even though the economic situation in Ghana has been difficult,” says Kobla Nyaletey, head of trading and treasury execution at Barclays.

“Over the past decade, Ghana has been in a similar situation a few times, a time of high inflation and high fiscal and current-account deficits. The banks have learnt to deal with such cyclical pressure.”

Ghana Commercial Bank, Ecobank Ghana and Standard Chartered Bank stand out in particular and are “relatively insulated from the domestic cyclical economic slowdown, which should keep asset quality robust, while maintaining healthy earnings and dividend growth”, says Derrick Mensah, senior analyst at African Alliance based in Ghana.

“Although macroeconomic challenges have persisted much longer than the usual cycle, we hold the view that it’s only cyclical and will elapse. We expect near-term measures, such as the IMF bailout, the cocoa syndicated loan and a third Eurobond, would plug the gaping budget deficit, ease the foreign-exchange supply constraints and stabilize the cedi while providing budgetary support for development.”

 Derrick Mensah
Derrick Mensah 

On September 11, Ghana sold a $1 billion Eurobond at a rate of 8.125%, which was lower than some had expected, given the fiscal conditions of the country, and was oversubscribed by $3 billion. A day later, the Ghana Cocoa Board signed a $1.7 billion syndicated loan with a consortium of international banks which was oversubscribed by 15%.

The challenging operating environment could prompt an increase in non-performing loans (NPLs) across the sector.

“So far, we haven’t seen an increase in NPL ratios for the banks, but there could be a lag,” says Barclays’ Nyaletey. “We might see some strains appear in banks’ results for the second half of the year but not at levels that will begin to threaten capital liquidity.”

Mensah adds: “Although this is an industry-wide phenomenon, we believe that UT Bank, Société Générale and CAL Bank are most at risk here due to their links with the construction, oil and gas companies experiencing payment delays from government.”

All what it seems?

While bank’s earnings in local currency look good, taking into account the foreign-exchange impact highlights some vulnerability, explains Kato Mukuru, senior financial analyst and head of equity research at Exotix.

“Growth in net profits for the first half of 2014 looks very strong in local currency,” he says. “Ecobank has seen 91% growth, Ghana Commercial Bank has experienced 30% growth and Standard Chartered 38% growth.

“But second-quarter results only increased 14% quarter on quarter: only 14% and 1% quarter on quarter for Ecobank and Ghana Commercial Bank respectively, and for Standard Chartered net profits were down 29% quarter on quarter.”

US dollar trends should actually be the focus, explains Mukuru: “Since the second quarter of 2013, the cedi is down 57% year on year, so factoring in a weak currency, net profit growth for the first half of this year is far less flattering.

“Year-on-year profit growth for the first half of 2014 in US dollars for Ecobank, Ghana Commercial Bank and Standard Chartered was 40% year on year, -5% year on year and 2% year on year respectively.”

Ghana banks net profit trends 1Q13-2Q14 (millions)
Ghana banks net profit trends 
Source: Exotix

He adds: “Banks are making a lot in local currency because current yields are high, but this is not sustainable. With IMF intervention, new fiscal and monetary measures will have to be introduced. These will form the basis of a structural adjustment, which will see government spending and the import bill reduced.

“This adjustment will eventually put pressure on bank asset quality and significantly reduce asset yields. As NPLs rise, bank provisions will also have to rise and this combined with a lower-asset-yield environment will put significant pressure on bank profits over the near-to-mid term.”

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