Banks at risk of insolvency due to domestic debt exchange program
Ghana’s banking sector is facing significant challenges as the effects of the Domestic Debt Exchange Programme (DDEP) continue to impact capital and liquidity, according to banking consultant Dr. Richmond Akwasi Atuahene. Even before the DDEP was implemented, the country’s central bank expressed concerns that the current macroeconomic situation was causing declining profitability and other financial indicators, with increasing pressure on banks’ solvency and liquidity.
Dr. Atuahene has warned that the capacity of the banking sector to absorb losses is insufficient. He argued that Ghanaian banks will need recapitalisation from the government if they incur losses, and that the required fiscal consolidation and burden-sharing by other creditors will reduce. The impact of the DDEP on the private sector was the focus of Dr. Atuahene’s comments at an event organised by the Ghana National Chamber of Commerce and Industry (GNCCI) in Accra.
The Ghana Financial Stability Support Fund has been established to address potential liquidity difficulties for banks that have agreed to the debt exchange, with a capitalisation of GH¢15 billion. However, Dr. Atuahene insists that the banking industry’s capacity to manage losses is insufficient, and that some institutions are projected to experience material combined losses from the DDEP transaction. Second‐round shocks could result in capital shortfall below minimum regulatory requirements, leading to insolvency.
Dr. Atuahene estimated losses of GH¢41.3 billion from the DDEP, which could negatively impact the solvency of 23 banks. At least five banks may experience mild losses, which could be due to a combination of coupon or interest rate reduction and maturity extension with below-market coupon rates. Capital shortfalls are more likely to emerge for a group of weak banks and a few others due to their higher share of exposure to government domestic debt relative to their capital.
The impact of any losses on the banking sector could be severe, with negative multiplier effects on solvency, GDP growth, employment, shortage of credit delivery to the private sector, output and poverty. This, in turn, could impact negatively on domestic revenue generation. In December 2022, the performance of Ghana’s banking sector moderated compared to the same period in 2021, with some key Financial Soundness Indicators (FSIs) recording significant declines. The current macroeconomic conditions, with rising cost of credit due to inflationary pressures, and revaluation-driven balance sheet performance, are the likely causes.
Profitability levels in the banking sector have declined, driven by mark-to-market losses on investments, higher impairments on loans, and rising operating costs. Profit-after-tax was GH¢3.9 billion at the end of December 2022, representing an 18.9 percent contraction year-on-year compared to 12.3 percent annual growth recorded in 2021.
Trends in Financial Soundness Indicators were mixed, reflecting heightened risks faced by the industry. The industry’s capital adequacy ratio (CAR) declined to 16.6 percent, but remained above the prudential minimum of 13 percent as at December 2022, from 19.6 percent in December 2021. The CAR was impacted by losses on mark-to-market investments, an increase in risk-weighted assets of banks from the high growth in actual credit, and the price-effect of cedi-depreciation on foreign currency-denominated loans.
The sector’s profitability indicators – namely the return-on-equity and return-on-assets – also declined during the period, in line with declining profit after tax and profit-before-tax respectively. However, the non-performing loans (NPL) ratio improved, to 14.8 percent in December 2022 compared with 15.2 percent in December 2021, on account of high credit growth relative to the increased stock of NPLs between the two periods.
