Exciting era for banks after three years of squeeze
Banks are gradually returning to profitability after three years of economic malaise combined with sector-specific weaknesses to erode the industry’s profits through high cost of production and non-performing loans (NPLs).
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After posting consistent declines throughout last year, data from the Bank of Ghana (BoG) showed that the banking sector’s income before tax (IBT), net profit after tax (NPAT) and Net Interest Income (NII) – the three indices the central bank uses to track profitability – all registered positive improvements in February, this year.
The improvement comes as good news to the banks and the economy as it will help boost confidence levels in the industry. Higher confidence should lead to increased loans and advances to the private sector, which suffered limited access to credit in recent times due to the challenges.
With profit being a factor of the quality and quantity of bank assets, an increase in loans and advances will help sustain the positive improvement in the IBT, NPAT and NII.
The paper’s analysis of the BoG’s March 2017 Stability Report showed that the improvement in the three profitability benchmarks was the outcome of the recent restructuring of the industry’s assets, which saw majority of the previously thought-to-be impaired assets move into the performing category.
Given that revenue on impaired assets is often suspended, the restructuring paved the way for the banks to begin to collect revenue (in the form of interest) on these assets into their incomes and that led to the positive enhancement to the IBT, NPAT and NII as seen in BoG’s March report.
This is reflected in the 17.8 per cent growth in net interest income in February, this year, in spite of a modest 5.5 per cent growth in loans and advances within the same period.
Contraction
The BoG report showed that the banking industry’s IBT, which contracted by 3.2 per cent, one per cent and 0.5 per cent in February, March and July last year, improved to 14.8 per cent in February this year.
It further showed that NPAT improved by 15.9 per cent in February 2016, having rose from GH¢316.3 million to GH¢366.7 million within the 12-month period. In July last year, NPAT had contracted by one per cent.
Although NII, which is the difference between revenues and expenses, did not contract last year, the data revealed that it improved to 17.8 per cent in February this year from 14.6 per cent in February last year.
In March and July last year, the growth of NII dropped to 14.8 per cent and 19.4 per cent from 37.3 per cent and 34.7 per cent in the corresponding months in 2015.
Impact on businesses
While acknowledging the development, the President of the Ghana Association of Bankers (GAB), Mr Alhassan Andani, said the improvement was a huge sigh of relief and a morale booster to an industry that was bruised by internal and external challenges.
It also sets the stage for banks to increase credit to the private sector, Mr Andani, who also manages the Stanbic Bank Ghana Limited, told the GRAPHIC BUSINESS on April 29.
“Once these big loans are reclassified into performing and you start to improve your ratios, you get the confidence back and you start to grant new loans and advances.”
“Also, you see that interest rates are beginning to drop and if you take that together, it means that loans and advances have to increase in size and quality,” he said.
Interest spread
An economist and lecturer at the University of Ghana, Legon, Dr Eric Osei Asibey, said the revelation was “a positive development for the banks and the economy.”
With their intermediation role, the economics lecturer said banks’ return to profitability meant that they were strengthened to give more loans.
“It is definitely a boost to the economy. When banks are making profits, it is good for investors because it increases the returns for investments in the banking sector for shareholders that have stakes there.”
“It also means that the banks are in a position to branch out and expand, which means they can create more employment, give more loans and that should boost growth,” he told the paper on April 29.
That notwithstanding, Dr Asibey said care needed to be taken to ensure that banks did not make profits at the expense of households and depositors.
With the improvement to profitability ratios resulting mainly from interest margins, he said “it could mean that the interest cost on loans is much more than what they give out on savings.”
As of January, this year, BoG data showed that banks were paying an average of 11.9 per cent on deposits but charging 33.4 per cent nominal interest on loans.
