Banks remain calm ahead of 2nd round of DDEP — PwC survey
Banks in the country remain calm ahead of the second round of the Domestic Debt Exchange Programme (DDEP), a new survey by PwC has indicated.
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The second phase of the DDEP, which involves local dollar-denominated bonds and cocoa bills, is currently underway, with a memorandum of exchanges issued by the Ministry of Finance and the Ghana Cocoa Board respectively.
Unlike the first, which saw the government swap 12 old bonds for new ones at reduced coupon rates and longer tenors, the tenor under the second phase for the eligible instruments is much shorter with arguably improved returns.
In its survey, PwC highlighted that the response of the banking industry appears to be calm, as industry players believe the impairment already taken on this round two eligible instruments would be more than enough for any modification loss required, given the improved terms when these eligible instruments eventually are exchanged for the new ones.
From the survey, it was realised that the impact of the first round of the DDEP on banks' businesses was varied and far-reaching, with profitability, liquidity management, solvency, investor perceptions, and asset portfolio quality dominating the responses on impact.
Bank executives continued to predict that there would be challenging economic hurdles in the future, but they remained confident in their full and quick comeback.
The first round of the DDEP hit very hard at the banking sector, with the industry recording losses of about GH¢37.7 billion.
The 2022 financial results of the banks showed that 17 out of the 23 universal banks operating in the country recorded significant losses.
Exposure to government securities
The PwC survey also indicated that banks wished that they had taken a less significant position in government securities.
The IMF report on Ghana’s US$3 billion extended credit facility programme noted that some of the banks had as much as between 30 to 50 per cent exposures in government securities.
This was a clear case of poor risk management practices and a breach of the Banks and Specialised Deposit-Taking Act (Act 930).
While the Banks and Specialised Deposit-Taking Act (BSDI) places a 25 per cent limit on banks’ financial exposure to a single individual or entity, some banks failed to comply with it.
Section 62 of the BSDI Act states that “a bank or specialised deposit-taking institution shall not take financial exposure in respect of a person or a group of connected persons, which constitutes in the aggregate, a liability amounting to more than 25 per cent of the net own funds of that bank or specialised deposit-taking institution.”
The PwC survey noted that the banks thought they should have used more robust economic policy analysis and market research to improve their ability to predict economic risks.
Impaired assets
Commenting on the survey, Senior Country Partner of PwC Ghana Vish Ashiagbor said the direct impact of the bond exchange by banks meant their assets were now impaired and significant impairment losses needed to be recognised by the affected banks.
He said banks needed to deal with uncertainties associated with signing up for the bonds, including deciding on how much impairment losses should be recognised, as well as the possible liquidity challenges that may be associated with the exchanges.
“These have been challenging to the industry,” he stated.
Significant implications
The Chief Executive Officer of the Ghana Association of Banks (GAB), John Awuah, also commenting on the survey, said that as the largest holder of the government’s domestic debts, the implementation of the DDEP had significant implications for the banking sector in various ways.
He said even though the DDEP was voluntary and contained no compulsion to participate by the banking sector, the banks prioritised the stability of the economy, knowing that the banking sector is a subset of the economy and anything that would destabilise it would invariably affect the sector.
To this end, he said, the sector took a very difficult decision and supported the government in the DDEP to get the economy back on track swiftly.
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“This sacrificial feat had direct and indirect implications for the sector,” he stated.
He said that directly, the banking sector’s own analysis of the economic and accounting impact of the DDEP was assessed as huge, resulting from the volume of exposure to government securities (some of which were loans and advances at origination but received settlements in government bonds).
He noted that this directly impacted banks’ balance sheets and profitability, as the value, yield and maturity of the exchanged securities changed significantly.
Banks experienced significant losses due to the impairment losses resulting from the expected credit losses on the old bonds for the 2022 financial year,” he said.
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He said the alterations in the interest rates and maturity of the new bonds resulting from the DDEP give a lower future cash flow generating capacity for the bonds and potential liquidity pressures.
Collectively, he said, the industry's earning assets-to-total-assets ratio dipped from 65.6 per cent in the preceding year to 60.3 per cent in 2022, and the industry slipped from a profitability of GH¢4.99 billion in 2021 to a loss of GH¢6.02 billion by the end of the 2022 financial year.