“Although it is partly explained by seasonal demand , a sustained depreciation of the cedi is credit negative for Ghanaian banks because it will hurt their asset quality, retracting the recent improvements in the system’s nonperforming-loan (NPL) ratio,” Peter Mushangwe, a banking analyst at Moody’s was quoted as saying in a commentary copied to ghanabusinessnews.com.
Citing data from FactSet, Moody’s says the 12-month non-deliverable forward contract exchange rate for Ghana’s local currency, the cedi, reached GH¢6.34 per US dollar, a depreciation of about 12.5 per cent from the current rate.
According to Moody’s the cedi has depreciated by about five per cent over the past month to GH¢5.50 per dollar, and has lost about 12 per cent of its value against the dollar since the beginning of the year.
It indicates that Ghanaian banks hold a substantial amount of foreign-currency loans at 26 per cent of total loans as of September 2018, the highest level since June 2016.
Moody’s says it believes some of these loans were extended to borrowers whose revenues are in cedi, and who thus now require higher cedi cash flows to meet their foreign-currency loan repayments.
“Similarly, we believe that some banks’ importing clients will be unable to pass on to their clients the increased costs from a weaker cedi, which will negatively affect such borrowers’ cash flows and their ability to meet obligations,” it added.
It points out further that any resultant inflationary pressures from depreciation of the cedi will also erode borrowers’ real disposable income, impairing their capacity to repay loans. Import trade and manufacturing (key sectors that use foreign currencies for product imports, but whose revenues are largely in cedi) accounted for 15 per cent of the total private-sector lending as of November 2018.
These asset quality pressures will likely slow recent improvements in the system’s average NPL ratio, which, although high at 18.2 per cent as of December 2018, has declined from 22.6 per cent in June 2018, it noted.
The agency says a weaker cedi will also strain Ghanaian banks’ capital adequacy ratios. Although their regulatory capital to risk-weighted assets averaged a solid 20.2 per cent as of September 2018, the depreciating cedi will negatively affect banks by inflating their risk-weighted assets (as foreign-currency loans convert into a higher amount in local currency).
“We estimate that a 10 per cent depreciation of the cedi reduces the capital adequacy ratio by up to 100 basis points. For GCB Bank Limited (B3 stable, b32 ), the only Ghanaian bank we rate, we expect asset quality pressures to be less acute. As of December 2018, we expect that about 16 per cent of GCB’s loans were denominated in foreign currencies. However, a large portion of the bank’s loan book is untested following strong loan growth of 72 per cent during the 12 months to September 2018. We expect GCB’s NPL ratio to be between 8 per cent and 11 per cent over the next 12-18 months,” it said.
By Emmanuel K. Dogbevi