Moody’s says significant drop in non-performing loans of Ghana banks is credit positive

As at October 2019, the non-performing loans (NPLs) of banks in Ghana stood at 17.3 per cent, but according to the Bank of Ghana, it has dropped to 13.9 per cent as of December 2019 and credit rating company, Moody’s says, that is a credit positive.

According to Moody’s the drop is credit positive for the banking system and support financial stability.

In a report copied to, Moody’s attributes the decline to the recent clean-up and recapitalization exercise of the country’s central bank.

“It also reflects continued improvement in the banking system, which has been recovering since 2017 from one of the country’s worst banking crisis,” Moody’s said.

Moody’s notes that between 2017 and early 2019, Ghanaian banks recapitalised following the increase in minimum required paid-up capital and higher capital requirements, while seven insolvent banks where closed down. However, elevated NPLs have lingered. Asset risks remain the key credit challenge for Ghanaian banks because asset quality has weakened since 2014, it said.

Commenting, Christos Theofilou, a vice president and banking analyst at Moody’s says: “The drop in Ghanaian banks’ non-performing loans, which follows a recent clean-up and recapitalisation exercise, is credit positive for Ghana’s banking system and supports financial stability. Asset risks remain the key credit challenge for Ghanaian banks because asset quality has weakened since 2014.”

According to Moody’s NPLs peaked at 23.5 per cent in April 2018 as a consequence of slow economic growth and exchange-rate volatility in 2015 and 2016 and weaknesses at the seven insolvent banks, preceded by rapid credit growth and lax credit underwriting standards.

It adds, that since their peak, NPLs have been improving at a slow pace, dropping to 17.3 per cent in October 2019 and 13.9 per cent by December 2019, a significant acceleration in the declining trend.

The central bank attributes the NPL improvement to increased loan recoveries, write-offs, and higher credit growth. We believe the improvement largely reflects enforcement of central bank’s loan-loss write-off policy for NPLs that have been fully provisioned for more than two years. New regulatory directives on risk management will likely support this trend, Moody’s said.

“Although the Bank of Ghana has not reported NPLs excluding fully provisioned NPLs under “loss” classifications, we expect that this category has also fallen to 5 per cent-6 per cent as of December 2019 from 8.1 per cent of gross loans as of October 2019.

With lower NPLs reducing Ghanaian banks’ asset risks and improving their solvency, they can concentrate on extending credit to the economy. For example, GCB Bank Limited (B3 positive, b31 ) reduced NPLs to 7.1 per cent by September 2019 from 14.8 per cent in December 2016, well ahead of the system’s NPL reduction. Over the same period, it has almost doubled its loan book, far outpacing loan growth in the banking system,” Moody’s said.

The agency says it expects credit growth to remain high at close to current levels in the next 12-18 months, noting that as part of its monetary policy statement the Bank also reported credit growth in the system strengthened to 18.3 per cent during 2019, compared with just 10.6 per cent during 2018.

“Credit growth is expanding, supported by strong 22.2 per cent deposit growth in 2019 and a gradual reduction in the average lending rate, which fell to a still-high 23.6 per cent in December 2019 marginally down from 24 per cent in December 2018, but below a recent peak of 29.2 per cent in November 2015,” Moody’s added.

By Emmanuel K. Dogbevi

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