Bank of Ghana publishes the Banking sector report on a bi-monthly basis. The report chronicles developments in the industry and is one way the regulator ensures there is some level of transparency. (between the sector and the general public).

'The Report provides an overview of banking sector developments, which served as input for economic assessment during the MPC session. Through the publication, Bank of Ghana aims to promote accountability and transparency in the monetary policy formulation and implementation process.'

The most recent report examines developments of the 23 banks in the country. These developments are mainly focused on the prudential returns of these institutions as of February 2020. Prudential returns largely focus on the ‘numbers’ of the banks. Their capital adequacy and liquidity ratios etc. The banking industry has performed well as at February 2020, however, the pandemic has the potential to ‘rattle the cages.’

The banking sector showed improved financial performance at end-February, characterized by stronger total assets growth, higher credit growth to the private sector and strong growth in deposits as confidence in the sector firmed up. The industry’s profit after tax was also higher relative to the same period last year.

In addition, indicators of financial soundness pointed to a solvent, liquid and profitable banking sector. The industry’s measure of solvency, the Capital Adequacy Ratio (CAR) under the Basel II/III framework remained well above the regulatory 13 per cent prudential limit.

Asset quality also improved reflected in declines in the Non-Performing Loans (NPL) ratio on the back of recoveries, write-offs, and increased credit growth. Despite the strong performance of the banking sector, initial assessments of the potential impact of the COVID-19 pandemic indicates that banks’ operations may face challenges with a credit extension, loan repayment, and correspondent banking relationships.’

The Central Bank swiftly announced a number of measures to mitigate the negative impact of the virus on the banking community.

The 17-page report covers a lot but I will focus on 3 key issues. They are Asset structure, Credit Portfolio and Non-Performing Loans (NPLs).

1. Asset Structure

A bank's balance sheet in principle may not differ from the balance sheets of other companies but what a bank may call its assets may slightly differ from other entities. On the asset side of a balance sheet, banks will be looking at the following, CASH & BALANCES DUE FROM OTHER FINANCIAL INSTITUTIONS, LOANS (ADVANCES), INVESTMENTS (T-BILLS, BONDS) & OTHERS (PROPERTY, PLANT & EQUIPMENT-PPE).

It is safe to assume that between all these the banks will make out loans more than anything else right? Well, let's read what the regulator had to say.

'The asset structure of the banking industry’s balance sheet did not change substantially over the period. Investments continued to dominate although its share in total assets declined to 36.3 per cent in February 2020 from 39.9 per cent in February 2019. Loans and advances (net) represent the second largest component with its share moving up to 31.5 per cent from 29.3 per cent over the period on account of the strong growth in credit.

Cash and Due from Banks followed with a marginal increase in its share to almost a quarter of total assets. The share of fixed and ‘other’ assets, which constitute the non-earning assets of banks, remained virtually unchanged at 8 per cent.'

Putting all the 23 banks together, the banking industry, their assets are skewed towards investments followed by lending. Want to guess why? Some argue this is lazy banking others say banks are managing risk. Which would you agree with?

Check this out from the report. A graphical representation of the text above.

It is clear lending between Feb 2019 and Feb 2020 has picked up. Striking the balance between asset allocation is by no means an easy task. Management of a financial institution is not a 'young man's game.' It requires a certain amount of tact and meticulousness. If a bank lends too much relative to the other assets it increases its risk. If it decides to channel its assets to cash reserves it runs the risk of not generating enough to offset cost it incurs.

Large allocation to investments (T-Bills etc.) vis-a-vis lending will mean certain critical sectors of the economy will be starved of credit to function. Banks in some circumstances have taken what you may argue the easier way out due to a number of headwinds rather than taking the steepest path uphill. Nigeria recently experienced this (link immediately below). The Central BANK OF NIGERIA pushed them to lend more by maintaining a certain loan-to-deposit ratio (60%).

Which means they must lend out a certain portion of deposits received. Eg. Using 60%, for every $100 received, banks must give out $60 as loans. This has implications for other assets such as cash and investments. Less funds available on hand. It is a measure of financial intermediation. In simple words, are banks lending? Ghana's ratio is at 55% now.

'...a key measure of financial intermediation, increased from 51 per cent to 55 per cent over the two comparative periods. This indicates deepening financial intermediation.'

Asset Allocation can either make or break a bank!

2. Credit Portfolio

Ever wondered where the preponderance of bank loans are channelled to? Which sectors are recipients of the greatest share of bank credit?

'The steady increase in credit observed during the last quarter of 2019 continued and culminated in the strong year-on-year credit growth in February 2020. The private sector continues to dominate the loan book although its share marginally declined to 87.5 per cent in February 2020 from 90.7 per cent in February 2019. In terms of classification, the services sector maintained its lead with the highest share of credit, followed by the commerce and finance sector.

'Together with the manufacturing sector, these three sectors accounted for 52.5 per cent of total credit with respective shares of 24.6 per cent, 20.8 per cent, and 10.6 per cent as at end of February 2020. The other economic sectors accounted for the remaining 47.5 per cent in various proportions. The mining and quarrying sector remained the lowest recipient of industry credit with a share of 2.7 per cent.'

Check this out from the report. A graphical representation of the text above.

'....the services sector maintained its lead with the highest share of credit, followed by the commerce and finance sector. Together with the manufacturing sector, these three sectors accounted for 52.5 per cent of total credit...'

One may argue why sectors such as Agric are not getting enough credit? The sectors that we argue have the potential to transform the economy? Interesting you may say. But on the bright side the manufacturing sector is one of the largest recipients of credit. Remember I said banks undertake risk management? The riskier the sector, the less credit they will get. Another thing we should note is that banks are looking for a quick turn around of their investments. 

Some of the sectors they lend to the most have a 'short term lending profile' as compared with others that may take some time for their business to 'process' these funds they receive, that is to make use of the loans in their business operations. This will result in loans being paid back over a longer period. This long term nature also increases the risks of these institutions not being able to fully service the loans over the term as compared to sectors which have a quick turn around, all things being equal. This leads me into our third area for discussion.

3. Non-Performing Loans (NPLs)

Perhaps the most discussed subject in the Ghanaian banking landscape, amplified by the media. But what is arguably often not discussed is the sectors of the economy that contribute to these bad loans on the books of banks.

'There was a broad improvement in the NPL ratios across most of the sectors, except for the mining and quarrying and the transportation, storage & communication sectors. In particular, sectors with the highest NPL ratios in the industry recorded significant improvements in asset quality within the review period.'

NPLs may emanate from either the bank in question that's lending or the broader economy (including the sector receiving the loan's peculiarities) or a combination of these factors.

So the stock of NPLs may not be blamed on only the banks but there may be certain peculiar changes with a sector that has taken a loan or perhaps some headwinds in the economy such as a depreciation of the cedi which may see companies that have taken on debt struggle with their operations which may feed into servicing of these loans.

The stock of NPLs according to the report is ¢6.33 billion. That's basically in simple terms, money that isn't coming back just yet into the banking sector or a proportion of it or may never come back at all in a worst-case scenario. Borrowers are struggling to pay a combination of interest and principal and some may not even pay at all.

'The positive effect of the decline in the stock of NPLs on the NPL ratio underpinned by the rebound in gross credit. This resulted in a decline in the NPL ratio to 13.8 per cent February 2020 from 18.2 per cent in February 2019.'

Decline in NPLs bodes well for bank lending. There is an almost inverse relationship here. The higher the NPLs the fewer banks will lend and vice versa.

The Bank of Ghana, however, has a warning for us all. The pandemic has a potential to alter this credit delivery and NPL structure but they have put in place measures they believe will mitigate the negative impact and stand ready to support the sector per their mandate in the Bank of Ghana (Amendment) Act, 2016 (Act 918).

'Looking ahead, the COVID-19 pandemic poses a major risk to asset quality. However, the recently announced policy measures could help moderate any potential deterioration in asset quality.'

Below is a screenshot of Standard Chartered's 2018 Assets, taken from their 2018 Annual Report to throw more light on the ASSET STRUCTURE discussion. Stanchart is not under the spotlight here. I chose them because they are an institution of repute and I deal with them regularly for banking transactions. Their service is stellar.

RECOMMENDATIONS;

1. This report focuses on prudential returns but we need to highlight more the market conduct side of the sector. Market conduct focuses on the relationship between the banks and their customers in terms of products, service delivery etc. There is a unit within the Banking Supervision Department known as ICRO that handles these issues.

I have come across a number of reports that speak to the issues of Market Conduct such as the Bank Charges and Annual Percentage Rates. I believe a comprehensive report that encapsulates all (complaints etc.) will need to be looked at. (I stand to be corrected if there is one already).

'The Investigation and Consumer Reporting Office (ICRO) is the financial industry watchdog office of the Bank of Ghana (BOG), with responsibility for protecting consumers of financial products/services and educating them on their rights and responsibilities. It is an office within the Banking Supervision Department (BSD).'

2. The regulator has a full plate but I believe a sort of press briefing, Q&A session or some sort of engagement with the public to disseminate this info on a quarterly basis on semi-annual. This can even be done in conjunction with the other regulators under the Financial Stability Advisory Council (FSAC) since the Governor is the chair.

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Philip Nanfuri is a Chartered Development Finance Analyst (CIDEF).