Fate of six banks hangs in a balance : BoG set to decide on their survival

The fate of six banks hangs in a balance as the Bank of Ghana (BoG) will, in the next few weeks, decide on the fate following their inability to meet recapitalisation deadlines after several extensions.

The banks in the eye of the storm are mostly local banks that have failed to provide to the regulator a sound and convincing road map on their recapitalisation plans.

The Bank of Ghana Governor, Dr Ernest Addison, told the Graphic Business on the sidelines of the 76th Monetary Policy Committee news conference in Accra that the central bank was in consultation with stakeholders to determine the fate of the six weak banks.

“Recapitalisation has become necessary to stabilise the activities of the banking sector due to loan portfolios of banks,” the governor said.

 The Bank of Ghana, in March directed . nine banks whose asset quality fell below the minimum industry requirements to submit to it comprehensive recapitalisation plans.

The move was in response to the asset quality review of the banks by the IMF staff statement of the 2017 Article IV Consultation Mission for the fourth review under the extended credit facility, which states that failure to recapitalise would adversely impact credit, the real economy and financial deepening that would ultimately lead to quasi-fiscal costs to the BoG.

Following the central bank’s directive, three banks increased their capital base to GH¢120 million and met the standard requirements for banks with a credible plan to further increase it to a proposed threshold by the central bank.

“We’ll have to make a decision on those six banks whose capital is weak and therefore fell below the minimum threshold,” the governor said.

This is to strengthen the financial sector, enhance the central bank’s supervisory role and put the real economy on a sound footing.

Minimum threshold

But the Head of Banking Supervision Department of the Bank of Ghana, Mr Raymond Amanfo, said apart from the six banks whose capital fell below the minimum threshold, the central bank was also considering various proposals from the banks suggesting recapitalisation thresholds

Checks by the Graphic Business show that some foreign banks are pushing for a US$200 million recapitalisation for banks.

But Mr Amanfo said there were many proposals the central bank was considering among which is a suggestion to increase the minimum capital to between GH¢400 million to GH¢300 million while others, mostly local banks want a threshold of between GH¢200 million to GH¢250 million.

But the concern for the central bank is not to raise the minimum capital beyond the liquidity threshold of the local banks in order to force them to merge or be taken over by a foreign bank.

“If we are not careful and we increase the minimum capital higher than the liquidity threshold of the local banks, they will be forced to merge or be taken over by the foreign banks,” Mr Amanfo said.

The fear is that some foreign banks avoid funding some key sectors of the economy, which leaves a vacuum for microfinance operators.

The directive for clear recapitalisation plans by the BoG is, therefore, seen as a major attempt to bolster investor confidence in the banking sector.

Asset risk

Ghanaian banks face high asset risks, despite solid capital buffers, stable funding and an economic recovery.

The increase in problem loan levels was driven by large exposure to energy companies, for which unpaid government subsidies prevented scheduled bank loan repayments.

Stricter loan reclassification following the BoG's 2015 asset quality review, coupled with the country's general economic slowdown in the past two years, also contributed to the increase in problem loans.

 Capital buffers and strong earnings provide some loss-absorbing capacity against weak asset quality but are also under some pressure.

Capital buffers, with a capital adequacy ratio of 17.6 per cent as of December 2016, and bank capital-to-assets of 14.1 per cent as of June 2016, are in line with peers but are potentially under pressure from the need to increase provisioning levels.

Profitability is also strong, but has been on a declining trend and analysts expect return on assets and return on equity to remain broadly stable at around four per cent and 20 per cent, respectively, in 2017.