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Rising non-performing loans of Ghanaian banks is credit negative – Moody’s

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Bank of Ghana3Rising non-performing loans (NPL) in the Ghanaian banking industry even though, bad for business, is not ending soon, a new report by Moody’s says. The situation, according to the rating agency, is credit negative for the banks.

In a report issued today, June 27, 2016 by the rating agency and copied to ghanabusinessnews.com, Moody’s says the rising nonperforming loan ratio is credit negative for Ghanaian banks because as they require higher loan-loss provisions for the NPLs, it lowers profitability and impairs banks’ internal capital generation.

“We believe that NPL ratios will continue climbing as a result of aggressive loan growth in recent years,” Moody’s said.

Citing the Bank of Ghana annual report released last Tuesday, it says banks’ nonperforming loans ratio increased to 14.7 per cent at end of 2015 from 11.0 per cent at the end of 2014.

The ration has further grown to 16.2 per cent as of March 2016.

The central bank’s annual report indicates that the primary driver of the system’s deteriorating asset quality is Ghana’s (B3 negative), general economic slowdown. Real GDP growth decelerated to 3.9 per cent in 2015 from an average of 8.7 per cent between 2011 and 2014.

The report further notes that in 2015, slower economic activity exacerbated by an energy crisis, rising inflation and interest rates, and a volatile and weaker local currency, the cedi, all negatively affected borrowers’ repayment capacity.

“The slowdown also affected government revenues, leading to delayed government payments to some corporates in the oil and gas and construction sectors in particular, negatively affecting these companies’ cash flows and performances,” it adds.

While Moody’s states that it expects asset risks to remain elevated over the next 18 months, it points out that Ghanaian banks have enjoyed strong loan growth in the past few years, with loans and advances growing 41.5 per cent in 2014, for example.

“Although loan growth declined to 24.9 per cent in 2015, recent high growth has created a large stock of unseasoned loans and we believe these loans create vulnerabilities given Ghana’s deteriorating operating environment and rising interest rates. Ghana’s banking system is dominated by short-term and variable-interest-rate loans, allowing banks to raise their lending rates upon renewal or re-pricing, thereby reducing borrowers’ ability to service their loans,” the report authored Akin Majekodunmi, Vice President – Senior Analyst in Moody’s Financial Institutions Group said.

And because Ghanaian banks are significantly exposed to energy utility companies that are struggling to perform as a result of delayed government payments, although the government is now working to clear these outstanding arrears, asset risks have been compounded by the banks’ high single-name concentrations, the report says.

Additionally, the banks’ foreign currency loans as a proportion of total loans was fairly high at 32 per cent as of 2015, and the volatile and weaker cedi negatively pressures unhedged borrowers’ and importers’ ability to pay, it says.

According to the report, the higher asset risks, require banks to increase their loan-loss provisions, which will eat into their profitability and reduce the amounts they can retain for capital.

“Banks’ pre-provision income has been harmed by depressed revenues because of weaker economic growth and slowing loan demand amid rising inflation. Weak organic capital generation will hurt banks’ capital, particularly as unanticipated credit losses are likely to rise this year,” the report says.

While noting that performance will vary across banks in the country, the report states that smaller banks are likely to report weaker profitability.

By Emmanuel K. Dogbevi

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