Banking Industry Defies Economic Downturn So Far

The nation’s banking industry has performed admirably in the first 10 months of the year, particularly over the third quarter, despite significant shocks in the broader economy recently-released information by the Bank of Ghana (BoG) has shown.

On the back of strengthening across the board during and after the industry shake-up, banks in the country weathered effects of the pandemic and deteriorating macroeconomic conditions to record strong asset growth and improved profitability in the period under consideration.

Cumulatively, value of the banking industry’s assets grew by 43.7 percent between October 2021 and October 2022 to hit GH¢249.9 billion – that is, 42.2 percent of the revised 2022 Gross Domestic Product (GDP) outrun of GH¢592billion.

“Underpinning the growth in assets was sustained growth in deposits and borrowings, as well as the revaluation effect of the foreign currency component of key balance sheet indicators,” BoG Governor Dr. Ernest Addsion said at a press briefing after the 109th meeting of the Monetary Policy Committee (MPC).

Providing further details, he stated that total deposits and borrowing grew by 46.5 and 17.2 percent respectively to hit GH¢172.1billion and GH¢30.4billion at the end of October 2022.

The industry remained profitable, posting a cumulative post-tax profit of GH¢4.4billion; a 17.2 percent rise over the 10 percent growth during the same period last year. Profitability was underpinned by net interest income, which grew by 22.7 percent to GH¢12.8billion.

Also, net fees and commissions grew to GH¢2.9billion – raising operating income by 27 percent in the process.

Financial Soundness

The industry’s Financial Soundness Indicators were a mixed bag but remained “broadly positive” as the Non-Performing Loans (NPL) ratio improved from 16.4 percent in October 2021 to 14 percent in October this year – attributed to the higher growth in credit relative to increase in the NPL stock.

However, the currency depreciation and mark-to-market investment losses by some banks ensured the industry’s Capital Adequacy Ratio (CAR) shrank from 19.8 percent to 14.2 percent on a year-on-year basis; it however remained above the prudential minimum threshold of 13 percent.

The central bank was however quick to note that despite the 10-month performance, key indicators are pointing to a slowdown in the industry; with macroeconomic headwinds expected to take a toll on the performance of banks as well as credit to the private sector.

“There are strong signs of emerging spillover effects from the recent macroeconomic challenges,” the BoG Governor remarked.

Credit performance

The BoG however noted that in its latest survey of credit conditions conducted in October 2022, commercial lenders are expecting to persist with tightening credit to businesses and households over the next six months.

“This is expected to reflect in a steady increase in average lending rates and a marginal decline in credit demand by enterprises and households,” Dr. Addison added.

Already, the interbank weighted average rate has increased to 23.98 percent in October 2022 from 12.66 percent a year ago – in tandem with hikes to the monetary policy rate and central bank-mandated hikes in the Cash Reserve Ratio from 12 percent in August 2022 to 14 percent in October.

As such, average lending rates across the industry rose from 20.34 percent to 31.4 percent YoY.