Banks’ profits soar despite bad loans

Banks’ total profit-before-tax for 2010 soared 73.2% over the previous year to GH¢0.59 billion despite the presence of significant loan impairment on their balance sheets, according to data from the Bank of Ghana.

Less taxes, the industry’s profit topped GH¢0.425 billion registering growth of 75% and indicating a vastly-improved performance over the 7% and 13.2% growth respectively in after-tax and pre-tax profit for 2009.

Three other profitability indicators – Profit Ratio, Return on Equity (before tax), and Return on Assets (after tax) – brightened in financial year 2010 after dipping the year before. Profit ratio rose to 14.6%, RoE increased from 23.6% to 28.6%, and RoA went up 0.6 percentage points to 2.7%.

Operational efficiency indicators also turned in an improved performance relative to 2009. The cost-to-income ratio looked better at 85.4%, a drop from 90.1% in the corresponding period of 2009. Cost-to-total asset ratio also fell from 15.8% to 14.3%, and operational cost-to-total asset ratio registered 9.6% – down from 9.7% in the previous financial year.

An analysis of the industry’s income statement shows banks benefitted from the marked improvement in general macro-economic conditions as interest expenses contracted by 5.3%, significantly lower than the increase of 78.2% recorded in 2009.

Growth in income from fees and commissions was 18.8%, compared with 20.8% in the prior year. Other incomes however fell by 24.6%, compared with growth of 26.3% a year earlier.

In terms of the composition of income, both the shares of income from investment and commissions & fees expanded; but income from loans and advances contributed a lower proportion of total income than in the previous year.

The breakdown shows investment income accounted for 22.1% of the total, up from 15.4% in 2009. Income from commissions & fees improved to 14.9% of total income, while the share of income from loans and advances declined to 55.9% from 58.7% in 2009.

Sound profit indicators notwithstanding, the quality of banks’ loan books remains a concern, the Central Bank said. Non-performing loans (NPLs) – a term that refers generically to debt that is sub-standard, or whose repayment is doubtful, or that has been lost – rose beyond their December 2009 levels by as much as 29% and constituted 17.6% of total loans and advances at the end of 2010.

The total value of NPLs amounted to GH¢l.445billion, with some 65% classified as lost. Sub-standard and doubtful loans comprised 18.4% and 16.8%, respectively, of total NPLs.

Loans for commerce & finance, manufacturing and services contributed most to the stock of bad debt. The commerce & finance sector accounted for 41% of total bad debt, while manufacturing’s share of NPLs represented 19.2%.

Amid relative credit tightening, particularly in the first half of 2010, the industry still expanded its loan book by some 15.5% (6.4% in real terms), with total advances contributing 32% of the growth in industry assets.

Nearly three-quarters of loans went to private enterprises, 13.7% to households, and 13.5% to government, public enterprises and public institutions.

Delivering its outlook for the sector, the regulator observed that while the level of non-performing loans poses significant risks, government’s recent payment of arrears to contractors and suppliers is expected to substantially enhance the industry’s solvency.

Source: B&FT