Fitch Ratings projects upbeat 2024 outlook for Ghanaian banks post domestic debt exchange
Global rating agency Fitch Ratings has predicted a promising outlook for banks operating in Ghana in the year 2024. This encouraging forecast comes on the heels of the successful conclusion of a domestic debt exchange, which initially cast a shadow of uncertainty over the financial institutions in the country.
Fitch asserts that the external debt restructuring is poised to exert minimal influence on the Ghanaian banking sector. However, the agency has sounded a cautious note, raising concerns about elevated risks pertaining to loan quality.
Tim Slater, Director of Europe, Middle East, and Africa Banks Ratings at Fitch Ratings, shared these insights at a Sub-Saharan Africa Sovereign program. According to Mr. Slater, conditions within the Ghanaian banking sector are anticipated to witness improvement this year after a particularly challenging 2023.
The unforeseen default of both foreign and local currency debt during that period, coupled with the repercussions of the domestic debt exchange initiated in December 2022, led to substantial losses in the banking sector, significantly impacting its capital.
Highlighting the nuances of the situation, Mr. Slater emphasized, “The banking sector actually took most of these losses in 2022, given the initial terms of the restructuring were proposed in December of that year. We still believe the accounting treatment of the exchange and regulatory forbearance will continue to mask the real effect on the banking sector capital.”
While acknowledging the risks associated with the ongoing sovereign external debt restructuring, Mr. Slater noted that these concerns are mitigated by the relatively modest exposure of the banking sector to sovereign Eurobonds.
The banking sector demonstrated robust profitability in 2023, marked by exceptionally high yields on treasury bills. Although yields have experienced a decline, they remain notably elevated, providing a foundation for strong profitability expected to contribute to the capital of the banking sector in the current year.
The November 2023 Monetary Policy Report of the Bank of Ghana indicates that total assets of the banking sector witnessed a year-on-year growth of 3.2%, reaching GH¢257.9 billion as of October 2023. Notably, investments constituted the largest component of total assets, registering a 22% year-on-year increase to GH¢103.7 billion in October 2023, in contrast to a mere 1.9% growth in October 2022.
In summary, Fitch’s positive outlook for Ghanaian banks in 2024 is underpinned by expectations of improved conditions, notwithstanding the lingering effects of the domestic debt exchange and the broader challenges posed by external debt restructuring. While risks, particularly in loan quality, persist, the resilience of the banking sector’s profitability and its modest exposure to sovereign Eurobonds provide a foundation for cautious optimism.
