Since a special forensic audit of Ghana’s banks was conducted in late 2015 by the Bank of Ghana, BoG, as recommended by the International Monetary Fund, IMF, attention has increasingly been focused on the financial solidity – or to be more precise the lack of it – of several banks in the country. The audit revealed that most banks had been failing to properly recognize their potential loan losses and thus provide against them out of their capital. This had meant they were declaring profits which they had not yet made (and indeed might not make at all) and some banks were actually paying dividends out of those “paper” profits.
Since then, two subsequent Asset Quality Reviews, and regulatory enforced reclassification of some loans, from performing to non-performing, have left the banking industry reeling from revelations of record high non-performing loans ratios (the industry average is currently over 21%); declining profitability brought about by enforced higher loan loss provisions being set against income; and core capital shortcomings following the allocation of share capital to cover loan losses. All this has taken some banks to the brink of insolvency and indeed two banks have actually toppled over that brink.
Between the start of 2016 and early 2017, BoG had to provide some troubled banks with a cumulative GHc9 billion or so in Emergency Liquidity Assistance. Repayment of this assistance has been so bad that the central bank has ruled that such short term liquidity lending has to be collaterized.
The situation came to a head in mid-August when the erstwhile UT Bank and Capital Bank both had their operating licenses revoked and their liabilities (which mainly comprise their deposits) and some of their assets taken over by GCB Bank, while the other, poorly performing assets have gone into receivership.
As part of efforts to strengthen the banking industry and restore shaken customer confidence, BoG has raised the minimum capital requirement for universal banks from GHc120 million to GHc400 million, a 233% increase. However the banks have until the end of 2018 to meet the new requirements and in the meantime, the banking industry’s customers are still unsure as to just how financially solid their respective banks are.
Consequently, TOMA IMIRHE, will, in a series to be published over the next few weeks, present our take on the financial solidity of Ghana’s banks.
The takeover of the liabilities and some selected assets of both UT Bank and Capital Bank by GCB Bank has given Ghana’s largest indigenous bank a considerably bigger balance sheet, although the unavailability to the public of its new size and structure makes accurate assessment difficult. Indeed it is as yet uncertain whether the Purchase and Assumption agreement has enabled it to recover its erstwhile position as Ghana’s biggest bank from Ecobank, which itself overtook GCB in 2012 through its acquisition of the erstwhile The Trust Bank.
Two things are certain though. On the upside, the acquisition will not impair GCB Bank’s asset quality because it has been allowed to take over the performing assets and ignore the non-performing ones. On the downside however, the bank’s Capital Adequacy Ratio (CAR) will drop a little since its increased assets will not be commensurately accompanied by increased shareholders’ funds since the two failed banks did not have any significant share capital left by the time they had their licenses revoked.
However, this does not matter at all, since prior to the acquisition, as at June 30, 2017, the bank’s CAR was 26%, more than two and a half times the prescribed minimum of 10%. Besides, the bank’s GHc1, 065.086 million in shareholders’ funds already doubles the recently announced new minimum capital requirement, even after the ineligible reserves are deducted.
The bank has also taken steps to increase its liquidity, while lowering its risks as well. During the 12 months up to June 30, 2017, it reduced its loan book’s size from GHc1, 454.711 million to GHc1, 369.127 million while increasing its investments, in mainly riskless government debt securities from GHc2, 230.987 million to GHc3, 035.66 million. During this period it also nearly doubled its cash and cash equivalent assets from GHc696.774 million to GHc1, 050.446 million.
Not only has the bank enough liquidity for its own operational needs, it has enough to spare for other, less well-endowed banks too; by the end of June 2017 it had net placements with other banks to the tune of GHc312.900 million, up from GHc150.369 million a year earlier.
The bank’s nearly one million shareholders – it is listed on the Ghana Stock Exchange where it has blue chip status – have equity investments that are as safe as customers’ deposits. The bank is consistently profitable delivering after tax profits of GHc105.755 million for the first six months of 2017 alone.
Ecobank Ghana’s position as the biggest bank in the country has come under threat from GCB Bank’s acquisition of the erstwhile UT Bank and Capital Bank. However its position as the biggest, most widely connected international bank and one of the safest havens for depositors in Ghana is still unassailable.
By mid-June 2017, Ecobank Ghana’s CAR was 10.85%. While this is above the minimum ratio of 10%, this still grossly understates the bank’s actual financial solidity. The fact is that Ecobank pays its annual dividends – in one single bullet payment – every May, out of its capital and this consequently depresses its capital and thus it’s CAR, around the middle of the year. The bank’s CAR was 15.29% by end 2016 and 15.49% by the end of the first quarter of 2017. During the second half of the year, Ecobank replaces the capital used for dividend payments from its accumulating 2017 earnings and consequently its CAR returns to its usual level of between 15% and nearly 18%.
By June 30, 2017, Ecobank had GHc865.493 million in total shareholders’ funds, one of the highest levels in the industry, and even after deducting ineligible reserves, the bank still comfortably exceeded the newly announced minimum capital requirement.
The bank has successfully grappled with the non-performing portion of its loan portfolio – which largely arose from the SME portfolio inherited when it acquired the erstwhile The Trust Bank in 2012 – by providing for it adequately from its huge capital. Consequently its non-performing loans (NPL) ratio fell to 11.69% by mid-2017, barely half of the industry average, down from a high of 17.50% a year earlier.
The bank has restructured its balance sheet towards even more safety. Loan portfolio growth has been stemmed, its loan book size of GHc3, 440. 922 million as at June 30, 2017 is actually a little lower than the GHc3, 575.155 million it stood at a year earlier. Instead, much of the strong growth in deposits which reached GHc5, 983.807 million by mid-2017, up from GHc4, 677.059 million a year earlier has been channeled mainly into riskless government securities.
Furthermore, in line with Ecobank’s strong position as a transaction bank, derived from the superiority of its digital banking product and services suite, it has enhanced its liquidity to very high levels. Indeed by mid-2017 it held GHc2, 803.807 million in cash and bank balances, providing a further safety net for its depositors.
Last year, Fidelity Bank was voted Best Bank in Ghana for 2015, an award which coincided with its 10th anniversary as a universal bank. However, its customers will appreciate the safe haven it offers for their deposits even more than the product and service delivery quality which earned it that award.
By June 30, 2017, Fidelity had a CAR of 30.08%, three times the internationally accepted minimum of 10%. The safety this confers has been well recognized by the banking public which had GHc3, 198.715 million with it by mid-2017, up from GHc2, 638.006 million a year earlier.
The bank had shareholders’ funds of GHc562.972 million by the middle of 2017, and indeed ranks as one of only six banks in Ghana already positioned to meet the new minimum capital requirement.
It also enables Fidelity to provide adequately against potential loan losses which it did over the past year, thereby reducing its NPL ratio from 15.08% as at June 30, 2016 to just 9.57% by the middle of this year. This is less than half of the current industry average of 21% which means the bank’s risk asset portfolio is of much better quality than most other banks.
Actually even this relatively low NPL ratio is about to enjoy a further, major drop, since Fidelity is highly exposed to energy sector state owned enterprise, SOE, debt which will be largely repaid when the imminent energy bonds are issued before the end of this year.
Fidelity has done all this without having to reduce the size of its loan book, which stood at GHc1, 909.231 million as at mid-2017, even bigger than the GHc1, 425.365 million it stood at a year earlier. However the bank has prudently channeled most of its newest deposits over the past year into relatively safe public debt securities rather than loans, with holdings of such securities standing at GHc2, 327.845 million by June 30, 2017, up sharply from GHc1, 249.610 million a year earlier.
By pioneering the extension of full blown commercial banking to SMEs, UniBank took on a huge risk which has however turned out very well for what is Ghana’s most important and potentially the fastest growing sector of the economy, classified by type of enterprise.
This has however been at a cost to the bank’s financial solidity, but its sheer growth in size has enabled it to overcome that crucial challenge. It currently has a CAR of 10%, the minimum level prescribed by regulators around the world. Her rapid growth has given it shareholders’ funds of GHc477.757 million as at June 30, 2017, the highest among Ghana’s indigenously owned banks and will enable it smoothly meet the new minimum capital requirement while its counterparts struggle to do so.
Indeed, the only reason why UniBank’s CAR is not far above the regulatory minimum is the sheer size it has achieved within less than two decades of existence. By end 2016, the bank was the third largest adjudged by total assets which stood at GHc5, 743.19 million, and the largest fully privately owned indigenous bank. It also had the biggest loan portfolio in Ghana by that time, of GHc2, 855.539 million.
Now the bank is working to ensure its share capital catches up with the rest of its balance sheet, which it is doing successfully.
It did not pay dividends from its well over GHc40 million in after tax profits generated in 2016. Rather it transferred half of it (GHc20.988 million) to its statutory reserves. Importantly, the bank added GHc51.912 million to its income surplus account last year, and this has effectively become part of its core capital, adding to the size and strength of the safety net the bank offers its depositors.
Even as the bank’s shareholders are preparing to recapitalize it far beyond the new minimum capital, requirement (which it is already on the brink of meeting on its own accord) it is also taking a more conservative stance, shifting towards shorter tenured and therefore safer SME lending, and focusing on safer loan types such as commerce and export finance. Besides the bank is channeling its new deposits into risk free government securities rather than loans.
All this means a slower growing but more financially solid bank that is safer for depositors, who had entrusted GHc2, 615. 88million to the bank as at the end of last year.
Source: Businessweek Africa