Full Statement: Moody’s on Ghana Commercial Bank’s deposit ratings
Moody’s Investors Service has today changed to negative from stable the outlook on Ghana Commercial Bank Ltd’s B1 local-currency long-term deposit ratings and B2 foreign-currency deposit ratings.
Concurrently, these deposit ratings and the E+ standalone bank financial strength rating (which maps to a b2 baseline credit assessment) were affirmed.
The rating actions follow the change in the outlook on Ghana’s B1 government bond ratings to negative on December 5, 2013.
The rating actions reflect (1) the risk of further weakening in the government’s capacity to support the bank in case of need; and (2) Ghana Commercial Bank’s high exposure to government securities, which links the bank’s standalone creditworthiness to that of the sovereign.
Ratings rationale
Weakening capacity of the government to provide support
Today’s rating actions reflect the risk of a further weakening in the capacity of the Ghanaian government to support Ghana Commercial Bank in case of need. This assessment is reflected by the negative outlook on Ghana’s sovereign B1 bond rating, which is driven by
(1) the government’s weak fiscal fundamentals and rising debt levels, which reflect both continued spending overruns and relatively low revenue ratios compared with rating peers, despite rapid growth; and
(2) the weakening of Ghana’s external position on the back of large external imbalances and a low level of foreign-exchange reserves, which have increased the country’s susceptibility to event risk in view of the strong correlation between domestic economic activity and the global business and commodity cycles.
While Moody’s currently believes that the government’s capacity and commitment to support Ghana Commercial Bank warrants a one-notch systemic support uplift in the banks’ deposit ratings, a downgrade of the government debt rating would prompt Moody’s to reassess this one-notch rating uplift.
High exposure to government securities signals high interlinkages with sovereign credit risk
Moody’s notes that today’s rating action is also driven by the extensive links between Ghana Commercial Bank’s balance sheet and sovereign credit risk, owing to the banks’ high direct exposures to government securities.
According to the bank’s financial statements and Moody’s estimates, the bank’s exposure to government credit risk (i.e., investments in government securities, central bank balances and public sector loans) stood at around 70% of total assets at year-end 2012 or 9x its Tier 1 capital.
In addition, while Moody’s notes material improvements in Ghana Commercial Bank’s profitability and capitalisation metrics over the past 18-24 months, the domestic market remains the predominant focus of the bank’s operations and the operating environment is susceptible to event risk at the sovereign level.
What could move the ratings down/up
Moody’s will likely downgrade Ghana Commercial Bank’s deposit ratings if the Ghanaian sovereign’s creditworthiness weakens further, leading to (1) a weakened capacity of the government to provide support, and/or (2) an increase in the credit risks embedded in the bank’s loan and securities portfolios.
Although upward pressure on Ghana Commercial Bank’s ratings is currently limited, improvements in the domestic operating environment and sovereign’s credit risk profile that could prompt Moody’s to change the outlook on Ghana Commercial Bank’s deposit ratings to stable.
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By Moody’s Investors Service
December 10, 2013