Banks recapitalisation: Local banks can consider mergers... But with a lot of caution
Locally owned banks in the country are being urged to critically consider mergers as one of the most effective business strategies that can be used for capital restructuring purposes.
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It can also be used as a measure to improve the capital adequacy of banks, a senior financial analyst with Deloitte Ghana has said.
The Bank of Ghana last week signalled to banks in Ghana to submit their recapitalisation plans for review following the implementation of the Domestic Debt Exchange Programme (DDEP) which created serious challenges for the capitals of banks last year.
Government, as part of efforts to secure a $3 billion bailout deal with the International Monetary Fund (IMF), undertook a major debt restructuring exercise meant to reduce its debts to sustainable levels over the medium term.
The debt exchange exercise, which was mostly patronised by players in the banking sector, resulted in creating serious financial challenges as 16 of them recorded heavy losses at the end of the 2022 financial year.
The industry posted before-tax losses of GH¢8.0 billion in 2022 compared with a profit of GH¢7.4 billion recorded in 2021. After-tax loss was GH¢6.6 billion in 2022 relative to profit-after-tax of GH¢4.8 billion in 2021.
The main profitability indicators, namely, return-on-assets and return-on-equity all turned negative in 2022 because of the industry’s loss position.
Much as the banks turned around their profitability fortunes in the first quarter of the year, most of them still face enormous challenges as their stated capital has dropped, a development that has forced the central bank to direct all banks whose capital have been affected by the DDEP to submit their recapitalisation plans to the bank by end of September this year.
They are, according to the BoG, expected to approach their shareholders first to recapitalise their business or resort to the yet-to-be-operationalised Financial Stability Fund for assistance.
Until the DDEP, banks in the country had been resilient and fairly stable after the financial sector clean-up saw their stated capital raised to a minimum of GH¢400 million.
Merger triggers
Industry watchers have warned that the present development within the sector is likely to force some the few locally owned banks to merge in view of the fact that they do not have many options like their foreign-owned counterparts which might fall on their mother banks for recapitalisation.
Much as the Ghana Financial Stability Fund has been created with about US$350 million presently in the vault, questions still linger whether the funds accrued so far will be enough to patch the gaping hole created in the finances of the affected banks.
It is expected that mergers by the local banks in particular would be considered as a critical measure to prevent sanctions from the central bank which could include withdrawal of operational licence.
Caution
But as a matter of caution, the senior financial analyst at Deloitte Ghana, Dennis Brown, said any the decision to merge two or more banks would have to depend on other important factors other than capital expansion.
“The overarching factor will be to determine whether the merger will make business sense or will result in a viable business post-merger. This will depend on other factors such as similarity of organisational cultures, suitability of systems, policies and resources, market synergy and other post-merger integration factors,” Mr Brown said when answering a question from the Graphic Business as to how local banks could shore up their capital after the call from the central bank on banks to submit their recapitalisation plans.
He, however, warned that the decision for local banks to merge should not be influenced only by the recent economic events “but also by the factors mentioned above”.