Ghanaian banks are well-positioned to absorb increased asset quality risk from borrowers as a result of pressures from the economic fallout of the coronavirus pandemic, Fitch Ratings asserts.
Before the pandemic struck, the sector had already been emboldened by initiatives set out by the government and the Bank of Ghana (BoG) including addressing asset quality issues of the energy sector, raising minimum capital requirements thereby resulting in consolidation. Asset quality issues are likely to increase due to the pandemic-induced defaults but strong pre-impairment operating profitability coupled with an improved capitalization means that banks are on a solid footing to absorb the risks.
As a result of the lockdown measures and the global shock on trade and financial flows, Ghana’s GDP growth was adversely affected as was the GDP growth rates of countries all over the world. Ghana’s real GDP growth declined to 2 percent in 2020 from 6.5 percent in 2019, with the oil and gas and manufacturing sectors experiencing worst contractions.
The repayment capacity of households and businesses have weakened as a result of the slowdown, although debt relief measures and other supportive measures provided to customers have limited the impact on asset quality. The banking sector’s non-performing loans (NPL) ratio increased slightly to 14.8 percent at year-end 2020 as compared to 14.3 percent at year-end 2019.
Furthermore, 9 percent of banking sector loans were restructured in 2020, according to the BoG. This is fairly low as compared to the proportion of loan restructured in other jurisdictions in sub-Saharan Africa, Fitch indicates.
Loans form only a small portion of the sector’s overall assets, and as such loans benefitting from debt relief are broadly captured as performing. However, the Ratings Agency expects NPLs to increase moderately as these measures unwind this year.
Moreover, evidence shows that the banking sector’s double-digit NPL ratio has been falling in recent years, and this comes as a result of government’s initiatives to address the energy sector debt problem, although the ratio is still high. Excluding fully provisioned loans, the sector’s NPL ratio was a more moderate 6.5% at year-end 2020, indicating that a NPL reduction could be achieved through write-offs.
The sector’s profitability has been resilient to the weakened operating environment, supported by debt relief measures, which have limited new NPL generation and loan impairment charges. High interest rates in Ghana feed into the wide net interest margins and strong pre-impairment operating profits. The sector’s annualized pre-impairment operating profit was 17 percent of average gross loans in August 2020, providing a large buffer to absorb an increase in loan impairment charges as debt relief measures expire. Fitch therefore expects high interest rates to continue supporting strong profitability despite increased loan impairment charges.
Also, the sector’s capital adequacy ratio was 19.8 percent at year-end 2020, high above the minimum regulatory requirement of 11.5 percent, which was reduced from 13 percent at the onset of the pandemic as a means to stimulate lending. Therefore, strong capitalization, combined with strong pre-impairment operating profit and current BoG directive against dividend payments, gives banks enough space to absorb pressure on asset quality issues, and also provides space for the sector to continue offering credit to support the recovery process.
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