IC Research, the research arm of investment bank – IC Securities, has disclosed in its reports that despite a rise in profitability ratios, the banking sector experienced an increased risk to asset quality and capital buffers.
According to IC Research report, the Bank of Ghana’s updated summary of economic and financial data shows substantial deterioration in asset quality and erosion of capital buffers during the first four months of 2023.
The report pointed out that Capital Adequacy Ratio (CAR) fell from 15.1% (Domestic Debt Exchange Programme-adjusted) in full-year 2022 to 14.8% in April 2023, while Non-Performing Loans (NPLs) ratio increased 320 basis points to 18.0%.
“The 30 basis points Year-To-Date weakening in the sector’s CAR leaves the excess cover at 480 basis points, compared to the new regulatory minimum of 10.0% and 180 basis points above the pre-DDEP minimum CAR of 13.0%.
“The deterioration in asset quality, indicated by the higher NPLs, reflects the negative spillovers from the surge in the sector’s risk weighted assets, amidst the heightened credit risk occasioned by the macroeconomic shocks in 2022.”
IC Research
Banks Instructed By BoG To Submit Recapitalization Plans
In light of this, IC Research reported that there has been a general tightening in credit stance as nominal growth in credit to the private sector slowed by 12.0 percentage points to 19.8% year on year as of April 2023. Against the backdrop of high average inflation, this resulted in a 15.2% year-on-year reduction in real private sector credit.
Given the DDEP-induced shock to capital buffers, the International Monetary Fund has set a target date of end-September 2023 for banks to submit a time bound capital restoration plan to the BOG for approval.
In addition to the suspension of dividend payments, the BoG will impose restrictions on risk exposures of banks that do not meet the minimum CAR.
“We reiterate our expectation for banks to maintain a subdued loan book growth in 2023 as rebuild of capital buffers is prioritized. With the rebound in profitability indicators on the back of higher net interest margins which stood at 14.1% as of April 2023, we expect the suspension of dividend payments to support capital buffers.”
International Monetary Fund
According to the Governor of the Bank of Ghana, Dr. Ernest Addison, the regulator will ensure all banks comply. He pointed out that the banks minimum capital requirement will be increased from the current ¢400 million.
Responding to a question at the Monetary Policy Committee of the Bank of Ghana press briefing, the Governor of the Bank of Ghana, Dr. Ernest Addison, said “The impact of the exchange has been to reduce the capital buffers of banks. So if you look at the analysis that was done when we take cognizance of the three percent additional buffer the banks will need to add up to their capital”.
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