Medium-term outlook: Banking sector needs critical actions for good performance

The Bank of Ghana (BoG) has identified several critical actions that are needed to ensure good performance of the country’s banking sector in the medium term.

These include recapitalisation and enforcement of stringent credit underwriting standards and intensified loan recovery efforts.

This is despite the fact that the outlook of the sector remains stable according to the central bank’s Monetary Policy Report for the first half of the year.

The banking sector remained profitable, liquid and generally efficient during the review period, with stable solvency reflecting the rebound in profitability in the industry post-Domestic Debt Exchange Programme (DDEP) implementation, as well as the ongoing recapitalisation effort by banks. 

For instance, the BoG referenced the banking sector’s performance in June 2024, which pointed to continuing recovery from the macroeconomic challenges since 2022 but warned, however, that asset quality concerns remained a drag on the performance of the sector. 

Balance sheet

Beginning with the bank sector balance sheet in the period under review, the BoG in its report said total assets of the banking sector grew by 33.3 per cent to GH¢323.2 billion as of June 2024, relative to a growth of 21.2 per cent recorded in June 2023. 

The higher growth in assets was driven by a robust growth in deposits, as well as the depreciation of the Ghana cedi. 

Foreign assets grew by 57.6 per cent in June 2024, compared to 74.5 per cent in June 2023 while domestic assets grew by 31.0 per cent in June 2024, up from 17.8 per cent growth same period last year.

The share of foreign assets in total assets increased to 10.2 per cent from 8.6 per cent while the share of domestic assets declined to 89.8 per cent from 91.4 per cent in June 2023.

The report revealed that investments grew by 19.2 per cent to GH¢107.2 billion in June 2024, up from a growth of 11.0 per cent in June 2023, due to significant growth in both short-term and long-term instruments.

The growth in investments reflected a 7.3 per cent growth in short-term bills, from a growth of 149.6 per cent in June 2023 while long-term investments (securities) also grew by 28.6 per cent in June 2024, having contracted by 23.2 per cent in June 2023. 

“The mixed growth in both bills and securities investments culminated in a reduced share of investments in total assets to 33.2 per cent in June 2024, from 37.1 per cent in June 2023.

Gross loans and advances rose by 15.6 per cent to GH¢84.5 billion in June 2024, relative to a 15.4 per cent growth in June 2023. Growth in net loans and advances (gross loans adjusted for provisions and interest in suspense) also moderated to 10.3 per cent from 11.3 per cent during the same period last year,” the report indicated.

The higher growth in assets, the report said, was funded by increases in deposits and other funding sources. 

Deposits remained the main source of funding for the banking sector, accounting for 76.1 per cent share of total assets in June 2024, from 77.4 per cent in June 2023. 

Deposits improved by 31.1 per cent to GH¢245.9 billion in June 2024, as against 42.8 per cent growth recorded in June 2023. 

The foreign currency component of deposits grew by 29.8 per cent to GH¢81.2 billion in June 2024, relative to a growth of 62.5 per cent in June 2023, suggesting some currency depreciation effect on the overall growth in total deposits. 

Borrowings also picked up by 44.4 per cent to GH¢23.2 billion in June 2024, up from a 39.1 per cent contraction recorded in June 2023. The growth in borrowings reflected an uptick in both short-term foreign and domestic borrowings while long-term domestic and foreign borrowings contracted. 

Asset and liability structure

The asset structure of the banking industry’s balance sheet in June 2024 reflected banks’ preference for less risky assets.

Cash and bank balances replaced investments as the largest component of total assets, with an increased share of 35.8 per cent in June 2024, from 27.7 per cent in June 2023, on account of a significant increase in banks’ reserves in compliance with the new Cash Reserve Ratio (CRR) requirements. 

Investments (comprising bills, securities and equity) were the second largest component of banks’ assets at the end of June 2024, although its share in total assets declined to 33.2 per cent from 37.1 per cent in June 2023.

Investments and cash and bank balances together accounted for 69.0 per cent of total assets in June 2024, compared to a share of 64.8 per cent in June 2023. 

Net loans and advances constituted the third-largest component of total assets, recording a share of 21.4 per cent in June 2024, down from 25.8 per cent during the same period a year ago. 

Non-earning assets (fixed assets and other assets) in banks’ total assets recorded a marginal pickup in share to 9.6 per cent from 9.4 per cent during the same period in 2023.

On the liability side, the report said the share of deposits in banks’ liabilities and shareholders’ funds declined marginally to 76.1 per cent in June 2024, from 77.4 per cent in the corresponding period last year. The share of borrowings rose to 7.2 per cent in June 2024, from 6.6 per cent a year ago, reflecting the growth in total borrowings during the period. 

The share of shareholders’ funds in banks’ liabilities and shareholders’ funds also rose to 10.0 per cent, from 9.2 per cent, consistent with the strong growth of shareholders’ funds. 

The proportion of “other liabilities” was unchanged at 6.8 per cent during the review period.