The banking sector’s ability to withstand losses is still low due to effects of the Domestic Debt Exchange Programme (DDEP) on capital and liquidity, banking consultant Dr Richmond Akwasi Atuahene has said.
The central bank had raised concerns that the current macroeconomic situation is affecting the banking sector with declining profitability and other financial indicators, and increased pressure on banks’ solvency and liquidity even before the DDEP is implemented.
To address potential liquidity difficulties for banks that have agreed to the debt exchange, the Ghana Financial Stability Support Fund has been established with GHC15 billion capitalisation. However, Dr. Atuahene insists that the banking industry’s capacity to manage losses is insufficient.
“The capacity of the banking sector to absorb losses is lower – not where it is well-capitalised to absorb estimated losses from the debt exchange programme,” he said.
Dr. Atuahene made this known while sharing his thoughts on the DDEP’s impact on the private sector at an engagement organised by the Ghana National Chamber of Commerce and Industry (GNCCI) in Accra.
He said domestic banks will need recapitalisation from government if they incur losses, and that the required fiscal consolidation and burden-sharing by other creditors will reduce.
“Ghanaian banks will not be able to absorb losses without having to resort to recapitalisation from government; the fiscal consolidation and/or burden-sharing by other creditors required to restore debt sustainability will be smaller,” Dr Atuahene emphasised.
Banks are expected to hold onto their government exposures for an extended period with reduced coupon rates, thus limiting the banks’ ability to lend to the real economy as a result of estimated losses in the DDEP.
Against this backdrop, some institutions are projected to experience material combined losses from the DDEP transaction – and second‐round shocks with potential for capital shortfall below minimum regulatory requirements inclusive of insolvency.
Dr. Atuahene noted that based on the discount rate of 19.3% which averages at a coupon rate of 9% on outstanding bonds, analysis of the data estimates losses using Net present value of GHC41.3 billion, which he said will negatively impact the solvency of 23 banks.
Citing some examples without disclosing the specific banks, the banking consultant explained: “Bank B with bond holdings of GHC9.11 billion, it is estimated that with a discount rate of 19.3% using weighted coupon rate of 9% NPV the losses resulted in GHC7.44 billion from the total shareholders’ equity of GHC2.85 billion (December, 2021), thus giving the negative net worth of GHC4.45 billion and making the bank insolvent”.
It is estimated that 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.
“Any losses of the banking sector would likely have negative multiplier effects on solvency, GDP growth, employment, shortage of credit delivery to the private sector, output and poverty – which will in turn impact negatively on domestic revenue generation,” he said.
He projected capital shortfalls are more likely to emerge for a group of weak banks and a few others because of their higher share of exposure to government domestic debt relative to their capital.
Developments in the banking sector
According to the BoG, the performance of the banking sector moderated in December 2022 compared with December 2021, with some key Financial Soundness Indicators (FSIs) recording significant declines. This broadly reflects the current macroeconomic conditions, with rising cost of credit due to inflationary pressures, and revaluation-driven balance sheet performance.
Profitability levels in the banking sector have declined; driven by the mark-to-market losses on investments, higher impairments on loans and rising operating costs. Profit-after-tax was GHC3.9billion at end December 2022, representing an 18.9% contraction year-on-year compared to 12.3% 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%, but remained above the prudential minimum of 13% as at December 2022, from 19.6% in December 2021 – attributed to losses on mark-to-market investments, 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. The non-performing loans (NPL) ratio however improved, to 14.8 percent in December 2022 compared with 15.2% in December 2021; on account of high credit growth relative to the increased stock of NPLs between the two periods.
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