Fitch Solutions foresees deepening loan quality crisis amidst economic strains
In a stark warning, Fitch Solutions has sounded the alarm bells over the deteriorating loan quality within Ghana’s banking sector. Highlighting a troubling trajectory, the sector’s non-performing loans (NPLs) ratio witnessed a steep ascent, surging from 14.0% in October 2022 to a concerning 18.3% by October 2023. The firm further projects this figure to escalate to an alarming 20.0% by August 2023.
The confluence of factors exacerbating this predicament Fitch Solutions notes, includes high interest rates, persistent inflationary pressures, and a tepid economic growth trajectory. Such adverse macroeconomic conditions have constrained consumers’ repayment capacities, precipitating the surge in NPLs.
While the horizon appears bleak for the first half of 2024, characterized by escalating bad debts and loan growth, Fitch Solutions offers a glimmer of optimism for the latter half. Anticipating a recalibration, Fitch foresees an improvement in loan quality as economic conditions potentially rebound. Concurrently, banks are envisaged to undertake concerted measures, recalibrating their portfolios by curtailing exposure to vulnerable sectors.
A comparative lens underscores the severity of the situation, with the banking sector’s NPL ratio markedly higher than that of its counterparts across the African region. Such a divergence underscores unique challenges and vulnerabilities intrinsic to the sector, warranting a nuanced policy response.
According to Fitch Solutions, due to the very strong deposit growth and much weaker loan growth, the already low loan-to-deposit ratio will continue to fall in 2024.
“As a result of very strong deposit growth and much weaker loan growth, the already-low loan-to-deposit ratio will continue to fall in 2024. Ghanaian banks have seen their loan to deposit ratio (LDR) trend downwards since 2008, when banks extended more loans than they received in deposits”.
Since then, banks have favoured investing in safer government bonds rather than engaging in riskier lending. Although we think that the DDEP will make investing in government securities less attractive in the coming months, very poor asset quality will continue to put banks off from extending loans”, it averred.
In summary, the banking sector finds itself ensnared in a quagmire, grappling with escalating NPLs, dwindling loan-to-deposit ratios, and a palpable aversion to risk. Notwithstanding the tentative optimism for a resurgence in the latter part of 2024, the challenges persist, necessitating policy recalibrations and strategic imperatives.
