Some Key players and analysts in the financial service sector have projected a massive contraction and decline in bank’s profitability due to the acceptance of the implementation of the domestic debt exchange program (DDEP) in their activities.

The impact of the introduction of mark-to-market in bank’s investment, a prelude to the DDEP, according to these analysts, has already delved severe damage to the books of many banks, hence the fear of a worse situation this year once banks have signed onto the debt exchange programme.

One analyst, who works with a tier one bank, during an interview disclosed that his bank’s profit-after-tax was GH¢3.9 billion at the end of December 2022, representing 18.9 percent contraction year-on-year, compared to 12.3 per cent annual growth recorded in 2021.

According to the insider, Capital Adequacy Ratio (CAR), which declined to 16.6 percent, although remained above the prudential minimum of 13 percent as of December 2022, from 19.6 per cent in December 2021, had its development was still attributed to losses on mark-to-market investments.

“The uncertainties in the economy would further shrink banks’ exposure to investments on all fronts. It has already begun to manifest as total investments contracted by 4.8 per cent to GH¢79.2 billion in December 2022, relative to a 29.0 per cent annual growth in 2021. This is because banks rebalanced their asset portfolios in response to the DDEP and this phenomenon is likely to be worse this year for obvious reasons.
“The sector’s profitability indicators, namely, the return on equity and the return on assets also declined during the period, in line with declining profit-after-tax and profit-before-tax respectively.”
One Bank Analyst

Another key player in the sector, who prefers to remain anonymous argued that the terms of the DDEP would limit banks ability to lend, as well as engage in investment activities that tend to improve their bottom line and their continuous sustenance.

According to the key player, the DDEP which would come with a more severe ‘haircut’ would impact the already high lending rates, which presently hovered at an average of 35 per cent, making it more difficult for businesses to borrow.

“Although new loans and advances in 2022 increased sharply to GH¢53.7 billion, reflecting annual growth of 47.5 per cent, compared with the growth of 6.8 per cent in 2021, that scenario this year was likely to be reversed under the DDEP.
“As much as the Bank of Ghana had pledged its commitment to support banks to be liquid to be able to carry out their operations, the “promise is farfetched” because the dynamics and communication around the programme were not clear.”
Anonymous Financial Keyplayer

MPC On Banks’ Profitability

Recalling reports by the Monetary Policy Committee (MPC), the Central Bank of Ghana pointed to a decline in the profitability levels in the banking sector on the back of the mark-to-market losses on investments, among other factors.

Net interest income, however, witnessed some growth by 23% to GH¢15.8 billion, higher than the growth of 14.5 in 2021.

Accordingly, operating income increased by 30.9% compared with 14.6 percent recorded a year earlier.

The strong outturn in operating income, according to the MPC report, was, however, moderated by increased operating expenses and provisioning during the year.

Provisions also increased sharply by 184.0 percent in December 2022 relative to a contraction of 4.7 per cent a year earlier, due to the strong uptick in credit growth, elevated credit risks and impairments on investments.

Consequently, profit before tax declined by 13.5 percent to GH¢6.4 billion in December 2022, compared with an annual growth of 22.1 percent a year earlier.