In the last one year the Bank of Ghana embarked banking sector reforms involving major actions that resulted in the consolidation of the country’s banks. The action reduced the number of banks in the country from 34 to 23, and the credit rating agency, Moody’s says, the action is credit positive for the country’s banking sector.
“We see the Ghanaian banking sector’s consolidation as credit positive because it supports financial stability by removing weaker banks and gives remaining banks pricing power, enhancing their efficiency and profitability,” says Peter Mushangwe, a vice president and banking analyst at Moody’s.
In comments sent to ghanabusinessnews.com, Moody’s said a Bank of Ghana update on the banking sector reforms which revealed that the number of banks in the system declined to 23 at year-end 2018 from 34 in just one year after Ghanaian banks were required to have minimum nominal capitalization threshold of GH¢400 million by year-end 2018 is credit positive because it supports financial stability by removing weaker banks and gives remaining banks pricing power, enhancing their efficiency and profitability.
Moody’s noted that of the 34 banks at the beginning of 2018, five were consolidated into a single bank, six banks merged to create three larger banks, and four banks had their licences revoked, converted into a savings and loans license or exited Ghana.
“Before the consolidation, Ghana’s proportion of commercial banks to its population was high, but this ratio has declined, although it remains relatively high compared with other sub-Saharan African banking systems,” it said.
The consolidation, Moody’s acknowledged has removed weaker, undercapitalized banks that posed a risk to financial stability, citing Premium Bank as an example. It pointed out that Premium Bank had a capital adequacy ratio of negative 125 per cent and had its license revoked.
The consolidation, Moody’s said, has also led to higher capital for the system, improving banks’ capacity to absorb loan losses.
“The remaining 23 banks have recapitalized their operations either organically or through capital injections and mergers. Partly because of the capital injections, the system’s capital adequacy ratio increased to 20 per cent in October 2018 from 17 per cent in October 2016 and currently we expect it to be higher following completion of the recapitalization efforts and further liquidations.
We expect surviving banks to be better capitalized, and therefore better positioned to resolve their high nonperforming loans (NPLs). The consolidation will also lead to better economies of scale for the remaining banks, which will likely result in better pricing power, particularly for deposits, which would help alleviate negative pressure on interest margins,” Moody’s said.
By Emmanuel K. Dogbevi
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