Fitch downgrade of local banks worrying, says economist

Professor John Gatsi, said the action by Fitch is indicative of the additional risk that banks in the country are being confronted with

The downgrade of some local banks by Fitch Rating Agency has led analysts to raise concerns about its possible impact on the wellbeing of banks, owing to the quantum of credit extended to the central government and its agencies.

Fitch, in February, assigned Ecobank Ghana Limited (EGH) – the nation’s second-largest bank – a Long-Term Issuer Default Rating (IDR) of ‘B-‘ with a Negative Outlook; and Viability Rating (VR) of ‘b-‘, on account of its dependence on sovereign securities.

It similarly downgraded United Bank for Africa (Ghana) Limited’s Long-Term Issuer Default Rating (IDR) to ‘B-‘ from ‘B’ and Viability Rating (VR) to ‘b-‘ from ‘b’, with a Stable outlook for Long-term IDR outlook, due to the “likelihood of extraordinary support from its Nigeria-based parent, United Bank for Africa Plc”.

Speaking with B&FT on the issue, Dean of the University of Cape Coast (UCC) Business School, Professor John Gatsi, said the rating agency’s action is indicative of the additional risk that banks are being confronted with.

“Even if the central government does not default, there is the elevated risk of restructuring its obligations so that the expected time of repayment and the income to be generated could be elongated beyond time; and that would create problems, including cash-flow problems for the banks,” he explained.

The professor of finance added that in such an event, if the regulator were to apply existing rules sternly it would raise the rate of non-performing loans (NPLs); which would invariably lead to further downgrades in the banks’ soundness indicators.

“If the regulator is straightforward, it could also raise non-performing loan challenges for the banks; because if the indebtedness is not paid for within three months, it should be crystalised into an NPL, per the regulation, which has an implication on the bank’s outlook. So, these are important issues that we must take seriously,” he stressed.

Data contained in the Bank of Ghana’s Monetary Policy Report for January 2022 revealed an increase in the share of Treasury instruments as a fraction of banks’ total assets to 46.2% from 43.1% in 2020.

Prof. Gatsi said it is time for banks to revise their position of viewing their investments in government securities as risk-free.

“The risk profile of government has increased and keeps increasing. It is high time the banks began to revise their strategies and the composition of their portfolios,” the economist added.

Reasons for the Fitch downgrade

For Ecobank, Fitch said: “The bank does not meet Fitch’s criteria to be rated above the sovereign on a standalone basis… Fitch believes that EGH is unlikely to remain solvent in the event of a sovereign default, due to the concentration of its activities within Ghana, its material reliance on sovereign-derived income and high exposure to the sovereign relative to capital, primarily through government securities,” the agency said.

And for UBA, the ratings agency said: “The downgrade of UBA Ghana’s VR follows the downgrade of Ghana’s Long-Term IDRs, as the bank does not meet Fitch’s criteria to be rated above the sovereign on a standalone basis.

“Fitch considers that UBA Ghana is unlikely to remain solvent in a sovereign default scenario, due to the concentration of its operations within Ghana, reliance on sovereign-derived income, and high exposure to the sovereign relative to capital – primarily through local-currency government securities,” it explained.

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