Latest financial stability report (July 2011) released by the Bank of Ghana (BoG) indicates that profit of banks for the first five months of the year dipped.
Even though some banks have released impressive half year financial results, with some doubling their profits, the banking industry’s profit generally declined from January to May 2011. Accordingly, profitability indicators for the banking industry revealed a decline in banks’ earnings performance for the five months ending May 2011.
Highlights from the banks income statement indicate that the banking sector’s profit before tax in terms of year-on-year growth recorded a decline of 26.0 percent in May 2011 compared to 51.2 percent the same period last year.
Similarly, the industry’s profit after tax declined by 14.2 percent compared to 51.1 percent in May 2010.
However, the reduction in the year-on-year growth in the net interest income from 46.3 percent to 5.6 percent over May 2010 and May 2011, and increase in operating expenses culminated in the reduction in the industry’s profit performance. The banks have already expressed worry about the intended imposition of taxes on their advisory services which they believe will increase the cost of operations.
The industry’s return on assets also went down from 12.0 percent at the end of May 2010 to 11.3 percent at the end May 2011. However, return on equity increased from 1.1 percent in May 2010 to 3.3 percent in May 2011.
On composition of bank’s income, interest income from loans which continue to be the largest source of income for the banking industry, constituted 46.0 percent of total income in May 2011 compared to 61.5 percent in May 2010.
Regarding credit conditions, banks eased credit stance on loans to enterprises as at end of June 2011. Both short-term and long-term access to credit was eased.
Demand for loan for working capital and inventories decreased while there was however marginal increase in demand for loans for fixed investment.
In contrast, banks maintained a tightened credit position on loans to households for house purchase despite improvement in the cost of funds and decreased risks regarding general economic activities.
The analysis of the banking sector’s balance sheet, profit and loss accounts and other prudential reports however revealed that the banking industry is adequately capitalized, liquid and profitable. Liquidity risk also remained well-contained in the short to medium term but non-performing loans however remain high and concentrated in some banks and sectors.
On the outlook, the Central bank advised banks to improve the lending environment by enforcing the use of credit bureau information prior to accessing loans and improving the transparency in base rate setting.
In addition, banks must further strengthen their risk management practices and step-up efforts at recovering overdue loans.
Source: Charles Nixon Yeboah
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