Non-performing loans (NPLs) in the banking sector hit GH¢8.74 billion in June this year, the Bank of Ghana has reported.

It has risen by GH¢11 million since June.

According to the Bank of Ghana report, the NPL ratio increased between June 2017 and June 2018 although the annual rate of growth of non-performing loans declined in June 2018, with a significant portion of the banks’ loan books remaining impaired.

About the Bank of Ghana Data

This report covers developments in the Ghanaian banking sector as at the end of June 2018.

The industry comprised 34 licensed banks, 17 classified as domestically-controlled, while the remaining 17 were foreign-controlled.

Details of the Non-Performing Loans

Credit risk within the banking sector remained elevated with about a fifth of all loans within the industry being classified as non-performing, the report said.

The non-performing loans ratio, however, declined marginally from April 2018.

The pace of loan impairment also slowed in June 2018 compared with a year earlier. As part of measures to ensure that banks manage credit risks efficiently and also have enough capital to absorb losses, Bank of Ghana has issued the Capital Risk Directives.

The ratio of banks’ total loans classified as impaired remained high in June 2018. However, the NPL ratio fell to 22.6 per cent in June 2018 from the last reported position of 23.5 per cent in April 2018. The comparative position for June 2017 was 21.2 per cent.

Adjusting the industry’s NPL ratio for the fully provisioned loan loss category reduces the ratio to 12.3 per cent in June 2018 compared with an adjusted NPL ratio of 11.3 per cent in June 2017.

In spite of the increase in the NPL ratio over the one-year period, growth in non-performing loans slowed down considerably to 9.7 per cent as at end June 2018, compared with an annual growth of 30.7 per cent in June 2017.

The stock of non-performing loans stood at GH¢8.74 billion by the end of the second quarter of 2018.

Break down of the Non-Performing Loans

The bulk of NPLs in the industry as at end June 2018 were attributed to the private sector, though its share in total NPLs declined to 89.9 per cent from 94.9 per cent in June 2017.

On the other hand, the proportion of impaired assets attributed to the public sector increased from 5.1 to 10.1 per cent over the same comparative period. With the increase in the share of household credit in total credit within the review period, the share of household NPLs in total NPLs also went up from 5.1 per cent in June 2017 to 6.3 per cent in June 2018.

A breakdown of NPLs into sectors indicated that the Commerce & Finance, Services and Electricity, Gas and Water sectors accounted for 56.3 per cent of total outstanding credit balances in the banking industry as at end June 2018.

A quarter of all loans in the industry were, however, attributed to the Commerce and Finance sector alone by the end of the review period. The Mining and Quarrying sector, as well as the Agriculture, Forestry & Fishing sector, accounted for the smallest outstanding credit balances of 2.4 and 3.9 per cent respectively.

Industry distribution of loans The banking sector’s outstanding stock of gross loans of GH¢38.67 billion recorded a moderate growth of 3.1 per cent in June 2018, compared with 15.9 per cent growth a year earlier.

Improvements in loan recoveries (partly due to proceeds from the ESLA bond) and increased write-offs partly offset new advances granted by the banks, led to slower growth in the sector’s loan book in June 2018. Compared with June 2017, investments of GH¢35.82 billion gained prominence (over net advances) on the balance sheet of banks with the biggest share of total assets of 35.7 per cent in June 2018.

Although growth in both components of investments slowed within the review period, the share of securities in total assets increased while the share of bills in total assets declined, indicating a shift in banks’ preference towards longer-dated investment securities. With the exception of the internally generated funds, growth in the banking industry’s other major funding sources moderated in June 2018 compared with June 2017, partly accounting for the slower growth of assets.

The banks’ primary source of funding, deposits, increased from GH¢54.48 billion to GH¢61.78 billion during the period under review. A quarter of these deposits were denominated in foreign currency. On year-on-year, basis, however, deposit growth moderated to 13.4 per cent in June 2018 compared with 31.2 per cent growth in June 2017. Total borrowings for the banks increased to GH¢17.95 billion, representing a 14.4 per cent growth in June 2018 (42.4% growth in June 2017).

Performance of other sectors and test of banking sector soundness

Capital Adequacy Ratio (CAR)

The banking industry remained solvent with the CAR well above the statutory requirement of 10.0 per cent. Efforts by the banks to improve their capital levels to the required minimum of GH¢400.00 million by 31st December 2018, contributed to the increase in the capital adequacy ratio (CAR) to 19.3 per cent in June 2018 from 14.8 per cent in the same period of last year.

The proportion Risk-Weighted Assets (RWA) in total assets also declined to 62.9 per cent in June 2018 from 64.5 per cent in June 2017, signalling some moderation in the industry’s risk-taking activities

Profitability

The banking industry reported profits of GH¢1.22 billion for the first six months of the year, 21.7 per cent higher than the profits recorded in the same period last year. Although net interest income grew at a slower pace by 3.0 per cent in June 2018- compared with 12.0 per cent in June 2017, the net effect of moderating growth in operating expenses and provisions resulted in a higher net income growth for the period ending June 2018. Low yields on money market instruments as well as the high stock of NPLs in the banking industry accounted for the lower interest income banks derived on loans within the first half of 2018.

Investments

More than half of the banking industry’s investments were in short-term investments, however, the share of bills in total investments declined in favour of longer-dated instruments as inflation expectations continue to ease. The share of bills in total investments declined to 54.1 per cent in June 2018 from 69.6 per cent a year earlier, while the share of securities increased from 28.8 to 44.7 per cent over the same comparative period. The proportion of banks’ investment in shares and other equities remained low at 1.2 per cent in June 2018, down from 1.7 per cent a year ago.

Credit conditions survey

The Credit Conditions survey conducted in June 2018 indicated net tightening in banks’ credit stance on loans to corporates. Banks tightened their credit stance on loans to Small and Medium Enterprises (SMEs) and large enterprises as well as on short-term and long-term enterprise loans. There was, however, a net easing of banks’ credit stance on loans to households for house purchases and consumer credit. Banks cited high NPLs as well as balance sheet constraints as reasons for the tight credit stance on loans to corporates.

Outlook for the sector

The banking industry remains safe and sound despite pockets of weaknesses.

By the end of the second quarter of 2018, banks were generally solvent and sufficiently liquid. There were clear signs of continued efforts to recapitalize to meet the December 2018.

On the supervision front, Bank of Ghana continued to put in extra measures to address weaknesses in the banking sector. These included the issuance of the Capital Requirements Directive towards the implementation of Basel II/III in the banking sector, the exposure draft directives on ‘Fit and Proper’ requirements, as well as financial holding company’s directives to address corporate governance issues currently facing the banking system.

The outlook for the industry remains positive in the short to medium-term as measures being introduced will address weaknesses within the banking system.