Ghanaian banks to suffer considerably in 2023 – Fitch Solutions
Banks in Ghana, according to research agency, Fitch Solutions, will suffer considerably this year in areas of loan growth and quality as well as profitability.
In a recent report on the Ghanaian economy with emphasis on the country’s banking sector, Fitch Solutions noted that banks’ client loan growth will ease from 30.2% y-o-y in 2022 to 18.0% in 2023. This is because of the weak macro backdrop, fallout from the domestic debt restructuring and base effects.
Also, banks will be more selective with the sectors they lend to especially as loan quality is expected to deteriorate amid the challenging economic backdrop.
The domestic debt restructuring programme, the research arm of Fitch Ratings noted, will significantly weaken capital levels and weigh on banks’ profitability in 2023.
Read details of the report below:
At Fitch Solutions we think that Ghana’s client loan growth will ease from 30.2% y-o-y in 2022 to 18.0% in 2023. This is a result of the challenging macroeconomic backdrop, banks remaining uncertain about the possible fallout from the domestic debt restructuring, as well as base effects from very strong loan growth in 2022 (see chart below).
Whilst our nominal client loans growth forecast will still be in double digits in 2023, skewed by still elevated inflation, our real client loan growth forecast will be much weaker at -7.7% by year-end. On top of inflation, further interest rate hikes, a weakening currency and a slowdown in economic momentum will continue to act as headwinds to loans growth in 2023.
Real Loan Growth To Remain Negative In 2023
Ghana – Client Loan Growth, % y-o-y
On the liabilities side, we forecast deposit growth of 30.0% y-o-y in 2023, down marginally from 30.5% in 2022. A key driver of this strong growth is the expected depreciation of the cedi in 2023 which will inflate the value of deposits in foreign currency, which account for 28.4% of total deposits, as of December 2022.
Another factor is higher interest rates – the Bank of Ghana (BoG) has hiked the policy rate by a cumulative 1,450 basis points (bps) since late 2021. However, growth in deposits will be held back by the worsening economic environment, as locals will likely have to tap into their savings to compensate for the loss in income.
The domestic debt restructuring will weigh considerably on banks. The domestic debt exchange programme (DDEP) will affect the banking sector in two main ways. First, it will significantly weaken banks’ capital levels, with expected capital shortfalls at some banks. The charts below show the banks that are the most exposed to government securities (those at the bottom), and their corresponding capital adequacy ratios. Banks are entering this phase with a mixed capital picture, with some banks very close to the minimum regulatory capital level of 13.0%.
Looking at an industry level, capital buffers have fallen considerably in 2022, despite a sudden rise in December (see chart below). The fall was largely driven by mark-to-market losses on investments and increases in risk weighted assets of banks, due to the depreciation of the cedi and growth in loans and advances. However, capital levels narrowly avoided falling below the minimum requirement in December, likely as a result of banks retaining more of their earnings, in preparation for expected losses in profits and capital in 2023. The debt restructuring and fall in capital could lead to higher funding costs for banks if they become less creditworthy, and could significantly impact the banking sector’s solvency and stability.
CAR Falling Closer To Minimum Requirement
Ghana – Capital Adequacy Ratio, %
Second, banking sector profits will be hit in 2023. In 2022, profit after tax contracted by 18.9% y-o-y, totalling GHS3.9bn for the sector. This contraction in profit was largely a result of higher costs and loan provisions, despite strong net interest income and net fees and commissions. For instance, provisions increased significantly by 184.2% y-o-y in December 2022, as a result of a pickup in credit growth and elevated credit risks. We expect the restructuring, along with higher provisions because of deteriorating loan quality, to weigh on the sector’s profits.
Saying this, we do expect the bank of Ghana and the government to implement regulatory forbearance to mitigate some of the impacts to creditors. For instance, the Ministry of Finance announced that financial sector regulators will temporarily reduce regulatory capital and liquidity requirements, in order for banks to still meet minimum capital ratios in 2023. We also expect the authorities to allow some form of flexibility with accounting treatments to minimise losses and ensure banks remain compliant. The Ghana Financial Stability Fund worth GHS15.0bn will also provide liquidity to any participants that need it.
