Following the downgrading of Ghana’s sovereign rating to B3, Moody’s has downgraded GCB Bank Limited’s local-currency deposit ratings to B3 from B2, the ratings agency announced March 20, 2015, a day after downgrading Ghana’s ability to borrow from the international financial market.
Moody’s Investors Service downgraded GCB Bank Limited’s global local-currency long-term deposit ratings to B3 from B2, its foreign-currency deposit ratings to Caa1 from B3, and adjusted downward its baseline credit assessment (BCA) to b3 from b2. The outlook on the bank’s deposit ratings remains negative.
According to Moody’s, in turn, GCB Bank’s ratings were downgraded as a consequence of the significant correlation between the bank’s creditworthiness and the sovereign’s own credit profile through the bank’s sizeable holdings of
government-related assets; and Ghana’s weakening operating environment, which will likely exert pressure on the bank’s asset quality metrics.
GCB Bank was founded in 1953, and it is the biggest local bank in the country.
“GCB was started with the specific aim to serve and support Ghanaian workers, traders, farmers, and business people, to empower them to achieve success with locally sourced funding,” the bank says on its website.
Moody’s states the following rationale for the downgrade;
“Today’s downgrade of GCB Bank’s ratings reflects the extensive interconnectedness between its balance sheet and sovereign credit risk, owing to the banks’ high exposures to the government of Ghana (B3 negative),” Moody’s says.
Moody’s indicates that while on a declining trend, GCB Bank’s direct and indirect exposures to the sovereign — through government securities, public-sector loans and central bank balances — remain high.
According to Moody’s estimates, “Together, these exposures accounted for over 50 percent of the bank’s total assets, or three times its shareholder equity as of September 2014.”
The bank’s downgrading also reflects Ghana’s weakening operating environment, which will likely exert pressure on the bank’s financial metrics, asset quality in particular, Moody’s noted, giving the following example, it says, “borrowers’ loan-repayment capacity could come under pressure from Ghana’s slowing economic growth rates,” and Moody’s estimates real GDP to have slowed to 4.2% in 2014 and will further decelerate to 3.5 percent in 2015.
Additionally, Moody’s indicates that increasing inflation rates which it puts at 17 percent by the end of 2014, from 15.3 percent as of end of 2013, high interest rates; and delays in government payments to domestic corporates.
“As of September 2014, the bank reported non-performing loans at 9.4% of gross loans,” Moody’s says.
At the same time, Moodys’ notes that GCB Bank’s ratings also acknowledge significant and sustained improvements in the bank’s capitalisation and profitability metrics, leading to improved loss-absorbing buffers; and management capabilities, technology infrastructure and service levels, which will likely support efficiency and profitability overtime.
“The downgrade of the foreign-currency deposit rating to Caa1, is in line with the lowering of Ghana’s country ceiling for these deposits to Caa1. The country ceilings reflect foreign-currency transfer and convertibility risks,” it adds.
By Emmanuel K. Dogbevi