The most recent Ghana Banking Reports covering up to September 2019, show that banks in Ghana are making more revenues from investments than from loans. This trend had been observed from August 2016 to August 2019. While in 2016 banks made 44.2% of their income from loans, they made 34.5% from loans in 2019.
A number of factors could have led to this trend. The deep write-off policy could account for the lowered income from loans. Gross loans for banks were GHS 37.4 billion and GHS 38.02 billion for 2017 and 2019 respectively. However, the high non-performing loan (NPL) ratio in 2017/18 of 21% had to be cleaned by way of write-off. This gave a lower net loans figure of GHS 29.6 B from GHS36.2 Billion. The decline in the stock of NPLs coupled with the recovery in credit growth translated into a lower NPL ratio of 17.8 percent in August 2019 from 21.3 percent in August 2018.
With banks being more liquid and tightening the risk management procedures, it is expected that credit portfolios would be much healthier than they have been. The recapitalisation has enhanced liquidity and made excess money available. However, the excess liquidity cannot be channeled into loans due to the tightness of the economy. In such economic situations businesses are more likely to default on loans given and consequently NPLs when the default happens. Another factor that might have influenced the lower incomes from loans in 2019 is the relatively lower current lending rates as compared to rates in 2017.
One other possible cause is all the events in the financial sector as well as a shift in the investment environment favouring government-related fixed income investments.
Investments – More Bonds than Bills
Investments is more in long-term bonds than shorter-term bills. Of course, typical 2-year bonds are returning 19% per annum. One would have thought that banks will stay in the short-term bills to remain more liquid. However, the longer-term bonds are currently yielding more. In 2017, 67.2% banks’ investments were in treasury bills as compared to 32% in 2019. The longer-dated bonds are now more attractive to banks.
More Liquid and Profitable
According to the Ghana Banking Report, the banks seem to have gained some traction with good liquidity. Capital adequacy ratio (CAR) now stands at 19.3%. This is much higher than the 13% prudential rate comprised of a minimum standard of 10% and an extra 3% buffer. CAR is what determines the bank’s strength to still pay liabilities in spite of its risk assets like loans. This should be well communicated by banks in order to garner some public confidence.
The current nature of the banking industry is only expected to grow well qualitatively. A lot would however depend on the quality of regulations administered by the Central bank