Focus on Ghana: A more positive outlook for 2018

Alhassan Andani (pictured right) holds a bachelor’s degree in agricultural economics from the University of Ghana and a master’s in banking and finance from Fin Africa Institute in Milan.

He was Deputy Managing Director of Barclays Bank Ghana before joining Stanbic Bank in 2006 as Managing Director. Under his leadership, the bank grew from a two-branch operation into a full-fledged tier-one bank. Stanbic received the Best Investment Bank for 2013 award from EMEAFinance Magazine. Andani was the Chartered Institute of Ghana’s Marketing Man of the Year 2014.

The banking sector has been facing some tough times since 2015. Has the situation stabilised?

Since 2015-2016, the recovery of the banking sector has been very slow, due mainly to the then government’s policy for deregulating the energy sector. This is a critical area of the economy, which the government was paying subsidies to prop up.

The deregulation created a grey area where the full cost build-up in the energy utilities hadn’t all been passed on to the consuming public.

Therefore, the government was building up unsustainable debts, which translated into receivables on the books of the utility and power companies. These debts then weighed heavily on the books of banks and suppliers, who were the creditors.

This situation came to a head in September 2016, when we started to see non-performing loans (NPLs) and assets really damaging the banking sector. The situation was exacerbated by the poor performance of the bulk distribution companies, such as the oil and gas firms, which also owed lots of money.   

We started a discussion in 2016, but it is only because of the government’s energy bond that we have been able to get some payments, meaning the banks have been able to stabilise.

How has the drop in the Bank of Ghana’s benchmark interest rate affected the sector as a whole?

The rates for government treasury bills have fallen year-on-year, from around 25% in December 2016 to around 19% at the end of 2017. For banks which had large exposures to government securities, this has meant a significant drop in earnings, which we are not crying about because banks should be making money in the ‘real sector’ of the economy.

Banks take advantage of government treasury bills if they are available in the market because they are safe. However, I don’t think any bank sets up only to make money through high interest rates on securities. The rapid decline of the interest rates has meant that banks are looking to replace those treasury bills with risk assets, but this takes time. 

So, the first impact here is on the government treasury bills. Risk assets would always be determined on a risk-reward basis, and margins are still pretty good.

I know that the market is still looking to banks to reduce lending rates, but surely we will reduce rates in tandem with all the other factors as they happen. 

We see the Bank of Ghana’s policy rate is still a bit slow in coming down, even though it announced reductions of 450 basis points recently. Having the policy rate at 20% when inflation is sitting at 13% is still problematic and I don’t think that [a reduction of] 700 basis points is out of the question.

Overall, this indicates there is something in the economy we need to look out for, maybe some risk issues that the Bank of Ghana and ourselves will need to be aware of. That gap tells you there is some embedded risk which is not very obvious to everybody else. 

That also impacts the rates that we banks are currently lending at. But that said, the policy rate has reduced by 450 basis points and we think that it will continue to come down. So the banking sector is readjusting to actually making money from the real sector, which is good for overall GDP growth.

Multilaterals such as the IMF and World Bank have been warning about exposure to Ghanaian sovereign debt, is that something that plays on the minds of bankers?

Yes, because the sovereign debt position impacts the global rating of the country and therefore, our costs of doing business elsewhere. However, we have an issue with how the debt is assessed. I always say that the IMF and World Bank should revise their notes on what they call ‘available foreign international reserves’, because today the banking sector holds about $3bn in foreign currency deposits.

The Bank of Ghana’s own reserves of foreign currency are what is typically used to measure FX debt cover. Now, if you don’t include the funds available to the banking sector, then you are leaving out a significant portion of funds available in the country.

We’ve had discussions with the local IMF team about this and we hope they take this into consideration. But the rigid way of assessing developing countries won’t change just on the basis of a conversation. 

The multilaterals have economic models that come from the past, despite the fact that the world has moved on. In the past, in many African countries, local entities had to surrender their foreign exchange earnings to the central bank but they were allowed to hold stocks of local currency. However, in Ghana you don’t need to surrender your FX to the central bank – you can keep it in your own account and you sell it when you need local currency.

I believe these organisations have got to take this into consideration, especially when these institutions are assessing our ability to meet maturing foreign liabilities.

How is the banking sector adjusting to the new minimum capital requirements? Are most banks on track to meet them by December 2018?

I think there are two sides to it. Already, even at the C120m ($26.8m) threshold, some banks have to deal with capital adequacy challenges. This has nothing to do with the increase in the capital base but because of the heavy debt overhang, which has impacted the capital adequacy ratios of the banks. Now the banks have to factor in the increased capital requirement as well.

So it’s natural that there has been a bit of pull-back. I think most banks are paying close attention to their balance sheets now and then looking at options as to how they can meet the new minimum capital requirements.

If you didn’t have a very clear route map to meeting them, you are not going to be out there creating risk assets, because who would you sell those risk assets to if you were not able to raise your own capital?

In my view, probably the top eight banks have got a clear map which takes account of the equity and allowable reserve that can be capitalised, so the top eight banks can easily meet their minimum capital of C400m ($89.34m). But there are others whose capital amount plus allowable reserves won’t take them there, so they need an additional injection. Those that won’t be able to meet the requirements will need to either merge with bigger banks or simply move down a tier, for example, becoming a savings and loans institution, which has a lower threshold in terms of capital requirements. 

So you expect to see significant activity in terms of consolidation in the sector?

Yes, I expect we’ll see some moves towards consolidation. However, we are not there yet as banks are still in the first phase of internal management, whereby they assess their books to see if they can meet the requirements and present their findings to shareholders. The shareholders themselves will nod and say, “Okay, do we have it within ourselves to reach a minimum?” If they don’t have it within themselves, then they’ll have to make sure that they get the right advisory to try and get other people involved.

At this stage the banks will have a few options, including going to the local stock exchange to raise capital. Only once they have assessed all their options do I expect discussions about merging with bigger banks to happen. We should have a clearer idea of the capabilities of most institutions by the end of the first quarter of 2018.

Do you believe there too many banks?

The Ghana Association of Bankers is a collection of independent banks coming together to ensure that we can contribute to policy discussions to shape a better industry. But with 36 banks and given the size of our economy, we can’t do any large transactions. Even the C400m capital requirement doesn’t allow you to do any significant transactions. 

In my view, we need some big banks that can actually take on larger risk and also be able to participate to a greater extent in the economy in West Africa. Ghanaian companies are moving to the sub-region, and the oil and gas sector will be growing significantly, so we need bigger banks that can support this expansion.

In terms of the minimum capital requirement, banks shouldn’t sit back once they have reached the target because there’s not much business you can do with C400m. And only big banks can raise the kind of funds that we need to progress our economy. 

Finally, what is your forecast for 2018? 

Things look positive this year. If we look at GDP growth, anything north of 6% would be positive for us and the physical challenges, such as the power shortages, that have hindered our economy, seem to be under control.

We are seeing a rise of confidence in the real sector; there is increased activity in agriculture, oil and gas, manufacturing, mining, agro-processing and agribusiness. This means that the economy will need further capital loans.

While the NPLs on banks’ books remain an issue, the launch of the energy bond has helped to alleviate some of the associated pressures in the sector. We hope to see the government take further steps this year. 

So things look positive for our sector. And it was also reassuring to hear the Minister of Finance saying in his 2018 budget announcement, “I want to continue to consolidate fiscal expenditure”. That is the sort of budget discipline that will prevent the government having the kind of issues that we’ve seen before.