Ghanaian Banks Well-Positioned for Higher Asset Quality Risk
Fitch Ratings-London-01 March 2021: Ghanaian banks are well-positioned to absorb the increased asset quality risk from borrowers pressured by the economic effects of the coronavirus pandemic, Fitch Ratings says. The sector entered the crisis strengthened by recent initiatives led by the government and the Bank of Ghana (BoG) that addressed energy sector asset quality issues, raised minimum capital requirements and resulted in consolidation. Pandemic-induced defaults will add to legacy asset quality issues but strong pre-impairment operating profitability and improved capitalisation mean that banks are on a sound footing to absorb the risks.
Ghana’s real GDP growth shrank to 2% in 2020 from 6.5% in 2019 as a result of lockdown measures and the global shock on trade and financial flows, with the oil and gas and manufacturing sectors experiencing the steepest contractions. The slowdown has weakened the repayment capacity of households and businesses, although debt-relief measures provided to customers have limited the impact on asset quality. The banking sector’s non-performing loans (NPL) ratio increased only modestly to 14.8% at end-2020 (end-2019: 14.3%).
The BoG recently disclosed that 9% of banking sector loans had been restructured at end-2020. This is much lower than in other Sub-Saharan African markets under Fitch’s coverage. Moreover, loans are only a small proportion of the sector’s overall assets. Loans benefitting from debt relief are largely classified as performing but we expect to see NPLs increase moderately as these measures unwind in 2021.
Pandemic-induced defaults will add to legacy asset-quality issues linked to loss-making state-owned energy companies and bulk oil distribution companies that suffered from currency depreciation and delays in government subsidy payments. The banking sector’s double-digit NPL ratio has been reduced in recent years, including through government initiatives to address the energy sector debt problem, although the ratio remains high. Excluding fully provisioned loans, the sector’s NPL ratio was a more moderate 6.5% at end-2020, indicating that a material NPL reduction could be achieved through write-offs.
Profitability has been resilient to the weakened operating environment, helped by debt relief measures, which have limited new NPL generation and loan impairment charges. Ghana’s high interest rates underpin wide net interest margins and strong pre-impairment operating profits. The sector’s annualised pre-impairment operating profit was 17% of average gross loans in 8M20, providing a large buffer to absorb an increase in loan impairment charges as debt relief measures expire. We expect high interest rates to continue supporting strong profitability despite increased loan impairment charges.
The introduction of new regulatory requirements in recent years strengthened capitalisation and ensured that Ghanaian banks entered the pandemic on a sound footing. The banking sector’s regulatory capital adequacy ratio was 19.8% at end-2020, comfortably above the minimum regulatory requirement of 11.5%, which was reduced from 13% at the onset of the pandemic in an effort by the BoG to stimulate lending. Strong capitalisation, combined with strong pre-impairment operating profit and current BoG guidance against dividend payments, gives banks significant headroom to absorb pressure on asset quality, as well as space to expand credit to support the economic recovery. Nevertheless, Ghanaian banks’ credit profiles remain highly constrained by Ghana’s volatile operating environment and by their high exposure to the sovereign (B/Stable) relative to capital.