According to a recent report by Fitch Ratings, the banking sector in 2023 witnessed a remarkable resurgence in profitability, attributed to the exceptional performance of treasury bills, thus facilitating a rebound in capitalization from the setbacks experienced in the previous year.

The significant growth in profitability was fueled by exceptionally high yields on treasury bills, which served as a catalyst for financial intermediaries to recover from the substantial losses incurred in 2022 due to the impact of the Domestic Debt Exchange program.

Fitch Ratings forecasts that profitability will remain robust in 2024, despite a decline in treasury bill yields from their peak, owing to sustained support from capital-raising initiatives encouraged by the Bank of Ghana (BoG).

However, the banking sector faced challenges stemming from the restructuring of domestically issued debt instruments in 2023, resulting in substantial net present value losses for sovereign domestic creditors and a notable weakening of capitalization. The majority of these losses were incurred in December 2022, coinciding with the announcement of the restructuring proposals.

Fitch suggests that the true capital impact of these losses may be obscured by two factors: the utilization of a low discount rate by banks to determine the fair value of new bonds, thereby reducing required impairment charges, and the permission granted by the BoG for banks to phase in the impact of impairment charges on regulatory capital over four years.

Despite these challenges, the banking sector reported exceptionally strong profitability in 2023, driven by robust net interest margins buoyed by the high treasury bill yields since the initiation of the debt exchange.

This performance occurred in the face of incremental impairment charges resulting from the sovereign debt exchange and higher loan impairment charges attributed to an increasing non-performing loans (NPLs) ratio. Fitch highlights that with dividend payouts expected to be limited, the strong earnings are poised to support significant capital improvement.

The strong profitability observed within Ghana’s banking sector is poised to complement the ongoing capital-raising initiatives, according to insights provided by Fitch Ratings. The Bank of Ghana’s directive to undercapitalized banks to present credible recapitalization plans has spurred a proactive response from the banking community.

Several Banks To Leverage Strong Profitability

Fitch anticipates that several banks will leverage strong profitability to raise core capital from shareholders and seek additional support from the Ghana Financial Stability Fund. The commitment of significant resources to the fund, including the local-currency equivalent of $500 million from the government and $250 million from the World Bank’s International Development Association, underscores a concerted effort to bolster the financial resilience of the sector.

Moreover, foreign-owned banks are identified as being particularly well-positioned to navigate Ghana’s challenging operating environment, thanks to their ability to tap into extraordinary support from their substantial shareholders. This additional layer of support enhances their capacity to weather economic headwinds and maintain stability in the face of volatility.

Fitch’s assessment includes the rating of two prominent Ghanaian banks, Guaranty Trust Bank (Ghana) Limited and United Bank for Africa (Ghana) Limited. Both banks have been assigned Long-Term Issuer Default Ratings (IDRs) of ‘B-‘/Stable, reflecting the likelihood of support from their Nigerian parent companies. Additionally, they received Viability Ratings of ‘ccc’, indicating the assessment of their standalone financial strength within the context of the challenging operating environment.

Looking ahead, Fitch emphasized that the combination of strong profitability and capital-raising initiatives will continue to bolster the recovery in capitalization. The BoG’s encouragement of undercapitalized banks to present credible recapitalization plans, along with the commitment of resources from the Ghana Financial Stability Fund and the World Bank’s International Development Association, underscores a concerted effort to fortify financial stability.

Fitch’s analysis highlights a positive trajectory for Ghana’s banking sector, with the resurgence in profitability serving as a cornerstone for capitalization recovery. Despite challenges posed by debt restructuring and increasing NPLs, the sector’s resilience and strategic initiatives position it well for sustained growth and stability in the years ahead.