Ratings agency, Moody's is warning of some challenging times for commercial banks in the country this year in terms of decline in revenue. This warning was captured in the latest report released by the ratings agency on the banking sector in Ghana.

“Last Friday, Bank of Ghana released its summary of economic and financial data, noting a continued slowdown in the growth of bank loans and advances in 2017. Specifically, loans and advances grew by just 5.9% in 2017, compared with 18.3% in 2016 and 24.9% in 2015,” according to the report.

“We expect the muted loan growth to reduce Ghanaian banks’ revenue, straining their efficiency ratios and profitability.” Akintunde Majekodunmi, vice president and banking analyst at Moody’s’ said.

Loans

Ghanaian banks expanded their loan books significantly in 2014 and 2015, supported by robust economic growth. System loans grew almost twofold to GHC30 billion in 2015 from GHC17 billion at year-end 2013.

However, Ghana’s operating environment deteriorated considerably in 2016 as real GDP growth slowed to 3.5% from an average of 7.7% during

The slowdown in loan growth will reduce interest income from loans and loan-related fee income and commission income, reducing bank operating revenue.

Already, interest income from loans and advances declined to 44.9% of total revenue as of October 2017 from 50.4% in October 2016, although it remains the largest contributor to revenue. This reduction in loan growth is occurring amid declining interest rates.

Treasury bill rate

In 2017, Ghana’s 360-day treasury bill rate declined by 650 basis points, the 182-day treasury bill rate by 472 basis points, and the average lending rate dropped by 238 basis points (see Exhibit 2), pushing down the industry interest spread to a still-high 9.5% in October 2017 from 12.7% in 2016. Consequently, banks’ costs, which partly reflect a high inflation rate of 11.8% as of December 2017, are at risk of growing faster than operating revenue in 2017 and 2018, negatively affecting their efficiency ratios.

The banks’ cost-to-operating income ratio already deteriorated to 54% as of October 2017 from 49% in October 2015 and the return on assets declined to 3.0% from 5.3% over the same period.

“We expect loan-loss provisioning to remain elevated because of Ghana’s high nonperforming loans (NPLs), further straining profitability. NPLs increased to 22.7% of gross loans as of December 2017 from 17.3% in December 2016 and 14.7% in December 2015.”

Restructuring

Despite the restructuring of some problem loans relating to state-owned enterprises in 2017, banks continued to face high asset risks, reflecting Ghana’s economic slowdown in 2016.

High concentration risks will continue to compound banks’ asset risks: the commerce and finance, services, and electricity, water and gas sectors contributed 61% of total NPLs as of October 2017.

However, the slowdown in loan growth likely will subdue the formation of new NPLs in 2018 and 2019, owing to the muted flow of new, untested loans in the overall loan book in 2017.

Ghana Commercial Bank

The report said, “For GCB Bank Limited, the only Ghana-based bank we rate, annual loan growth was flat as of September 2017, although interest income growth was 9.3%, supporting its operating income.

We expect that GCB will continue to report robust profitability figures over the next 12 months because the bank invests more in longer-dated government securities and has resumed lending to the corporate sector – asset classes that command higher yields.”

We also expect GCB’s lower NPL ratio (13% as of September 2017 compared with 22.2% for the industry) and its high capital adequacy ratio (25.0% compared with 14.5% for the industry) to allow it to take up opportunities as Ghana’s economic activity improves,” the report concluded.