First quarter (Q1) results of banks have shown signs of recovery after a large majority of them suffered heavy losses on account of the crippling effect of the Domestic Debt Exchange Programme (DDEP), indicating financial sector resilience in an otherwise troubled economy.
Partially on the account of the DDEP and the difficult economic conditions which slowed business activities, Ghana’s banking sector went into deep distress after posting heavy losses at the close of the 2022 financial year that threatened the financial sector stability.
About 16 out of the 23 commercial banks in the country recorded heavy losses at the close of 2022 year with only five banks posting profits.
The five profit-making banks are United Bank for Africa (UBA), Guaranty Trust Bank (GTB), FBNBank, Societe General Bank, and Bank of Africa (BOA).
Swift recovery in Q1
In spite of the heavy losses which totalled over GH¢6 billion, the recovery has been swift, with most banks bouncing back from their losses and declaring profits as first quarter analysis of the banking sector has revealed.
This situation has brought some respite to investors and shareholders while restoring hope to a sector which many feared was going to face another turbulent time after the financial sector clean-up some years ago.
Analysis of the first quarter financial statements posted by the banks showed a reversal of losses suffered last year to increased profits.
For instance some of the country’s prominent banks such as GCB Bank posted a profit after tax of GH¢190 million in quarter one of this year from a loss of GH¢555.8 million at the end of the 2022 financial year.
Absa Bank also managed to recover from a loss of GH¢429.2 million in the year under review to post a profit of GH¢257 million in quarter one of this year, while Zenith Bank also made an impressive come back from a loss position of GH¢419.8 million to post a profit of GH¢217 million in the quarter under review.
Standard Chartered Bank also came back from a loss position of GH¢299.6 million to declare final profit of GH¢296 million, with Cal Bank also making a dramatic return from a whopping GH¢815.2 loss at the end of last year to a remarkable profit of GH¢60 million in quarter one.
Fidelity Bank also managed its way from a loss of GH¢518 million at the end of the year 2022 to post a profit of GH¢125 million. Consolidated Bank Ghana (CBG) which suffered the industry’s heaviest loss at the end of the 2022 financial year also managed to crawl back to post a marginal profit of GH¢10.5 million in quarter one of the year.
Impairment
The unprecedented losses were mainly due to the impairment of government bonds, which arose from the implementation of the DDEP, according to analysts.
They claimed that by changing the structure of the bonds floated by the government, that is, altering the terms of the old bonds with new terms in the new bonds, they became new instruments which the banks needed to treat differently in their books.
IFRS 9
Analysts point to the application of International Financial Reporting Standards 9 (IFRS 9) which specifies how an entity should classify and measure financial assets, financial liabilities, and some contracts to buy or sell non-financial items.
The objective of IFRS 9 is to establish principles for the financial reporting of financial assets and financial liabilities that will present relevant and useful information to users of financial statements for their assessment of the amounts, timing and uncertainty of the entity's future cash flows.
To the analysts together with some unnamed treasury managers in the banking sector, the losses could have been less if the impairments on their books were treated differently.
In this case, they maintained that, some of the banks which recorded losses took advantage of the DDEP and laxity offered by the central bank, to totally or almost clear their books of any impairments to enable them to start on a clean sheet this year.
They feared that, despite the development, the banks are not out of the woods yet because the full impact of the DDEP will rear its ugly head in the second quarter into the end of the year.
This is where we will see the real issues because the development will “seperate the men from the boys,” one Treasury Head told the Graphic Business.
Return to profits
A financial analyst, Watson Kosi Kzokoto attributed a number of factors to the development, saying the dramatic reverse of losses into profits could be a result of changes in accounting practices.
Banks may have adopted new accounting policies or practices that led to a reduction in impairments, which in turn boosted profits. For example, the banks may have revised their assumptions around credit risk, which resulted in a lower estimate of impairments,” he said.
Dzokoto said it was important to note that those scenarios were not mutually exclusive, and it's possible that multiple factors contributed to the banks' bounce-back in profits.
He noted, however, that without more information on the specific banks and their financial performance, it's difficult to say for certain what the main drivers were, adding that “Whether or not profit making would continue will depend on the net effect of the combination of factors listed above.”
Forbearance
The Bank of Ghana (BoG) in anticipation of the potential risk of the DDEP, set up the Ghana Financial Sector Stability Fund (GFSF) to assist banks that participated fully in the debt exchange programme and may require liquidity and capital support (Solvency).
The GFSF was established with a target size of GH¢15 billion to be provided by the Government of Ghana and its development partners but it is not clear yet whether any of the banks will opt for the support.
Background
Government last year embarked on a DDEP programme in a bid to secure budgetary support of US$ 3 billion as the debt to gross domestic ratio hit well over 100 per cent.
Under the DDEP programme, government swapped its old existing bond for 12 new bonds with coupon interest of less 10 per cent and maturing period from this year budgetary support of US$ 3 billion as the debt to gross domestic ratio hit well over 100 per cent.
Under the DDEP programme, government swapped its old existing bond for 12 new bonds with coupon interest of less 10 per cent and maturing period from this year up until 2032.
The banking sector is the most dominant investor in the Government of Ghana debt instruments, a phenomenon occasioned by both regulatory and market economics. Only GH¢10 billion of GoG issued debts were owned by banks.
As of 2021, banks held over GH¢55 billion in GoG debts securities representing almost 30 per cent of the banking industry total assets. Data available indicate that of this amount about 80 per cent were in bonds.
Interest income payment on GoG securities is the primary source of income by the banks.
In 2021, 65 per cent of the interest revenues of banks were generated from the investments in securities.
By September 2022, of the GH¢160 billion total domestic debt issued by the GOG, banks were the largest holders of about 32 per cent, firms and institutions accounted for 25 per cent, others including retail, 14 per cent, Bank of Ghana-10 per cent, Pensions 5.6 per cent, rural banks, 1.4 per cent and insurance companies 0.9 per cent.
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