Top banks raise appetite for T-bills/bonds
THE country’s top banks raised their appetite for government securities, comprising treasury (T) bills and bonds, last year as they sought refuge in less risky assets to protect their loan books from deteriorating.
Banks’ investments in the risk-free instruments rose by 22 per cent in 2021 in an asset reclassification drive that helped to bolster the banking sector’s profits.
Advertisement
A report by accounting and auditing firm, PricewaterhouseCooper’s (PwC), showed that the action paid off for the banking sector as it led to a 22 per cent growth in interest income from government securities in 2021 compared to a 52 per cent and six per cent decline in interest income from the cash and short-term funds and loans and advances respectively for the same period.
It subsequently helped the industry’s profit-before-tax margin to grow by 45 per cent, the highest in five years.
The resort to T-bills continued into this year, with Bank of Ghana data showing that as of June, banks were heavy in government securities.
Granting of loans and advances is the core business of banks.
Sovereign risk
Beyond the income earned, the exposure of the banking sector to government securities is risky, given that it exposes the lenders to the risks that the economy endures.
This is reflected in the continuous downgrades of GCB Bank, Ecobank Ghana (EBG), United Bank for Africa (UBA) Ghana and the Guaranty Trust Bank Ghana Limited (GTB) by ratings agencies, Fitch and Moody’s.
The two agencies said in February this year that the country's top banks were too reliant on the government for survival and any shock to public finances exposed them to significant risks. They said in separate statements that GCB Bank, EBG, UBA and GT Bank were overexposed to the government securities and their general business models also tied their fortunes to the public sector.
Similar downgrades over the same concerns were registered later this year in line with the downgrade of the economy.
The PwC banking survey report indicated that all the 21 banks surveyed took refuge in the treasury securities, with the top five banks leading the way.
The PwC banking survey report revealed that the investment in securities subsequently drove growth in the industry’s operating assets up by 13.6 per cent.
The report explained that the increased resort to the government securities was due to the weak credit demand and supply conditions.
It said as a result of banks’ heightened interest for government securities due to the elevated credit risks brought by the pandemic, liquid assets increased by GH¢18.4 billion.
“Bank portfolio reallocation in favour of these less risky assets as at year-end shows that investments in T-bills and securities continue to be the banks’ preferred asset option during the pandemic,” the report said.
Benefits
The report showed that beyond bolstering the industry’s assets, the increased resort to T-bills helped the banks to make more profit in the year under review.
It said the government securities helped the industry’s net interest income to increase from GH¢10.7 billion in 2020 to GH¢11.8 billion in 2021, representing a 10 per cent growth.
“The increase is mainly attributable to a rise in interest income on investment securities.
“This is explained by the increase in total liquid assets from GH¢66 billion in 2020 to GH¢82 billion in 2021, representing a 24 per cent growth.
“The average interest rate on investment securities increased from 14 per cent in 2020 to 15.5 per cent in 2021,” the report indicated.
Implications
The report found that whereas the average interest rate on investment securities in 2021 was comparable to rates in 2020, improved liquidity within the banking industry coupled with the post-pandemic cautious approach lending resulted in increased investments in government securities.
It said GCB Bank and Ecobank Ghana Limited (EBG) continued to dominate the banking sector in terms of operating assets.
It said the two banks had contributed to at least 20 per cent of the operating assets in the sector over the previous years.
“EBG had a 12.2 per cent increase in operating assets. An increase in loans and advances and new investments in bonds and bills totalling 14 per cent and 35 per cent, respectively, were the main drivers of this expansion,” the report said.