The banking sector faces rising risk to asset quality and capital buffers despite a rebound in profitability ratios, IC Research, the research arm of investment bank, IC Securities has revealed.

It said the updated summary of economic and financial data by the Bank of Ghana revealed further weakening in asset quality and erosion in capital buffers during the first 4-months of 2023.

As of April 2023, Capital Adequacy Ratio (CAR) dropped from 15.1% (Domestic Debt Exchange Programme-adjusted) at full-year 2022 to 14.8%, while Non-Performing Loans (NPLs) ratio surged 320 basis points to 18.0%.

“The 30 basis points Year-To-Date weakening in the sector’s CAR leaves the excess cover at 480 basis points compared to the new regulatory minimum of 10.0% and 180 basis points above the pre-DDEP minimum CAR of 13.0%. The deterioration in asset quality, indicated by the higher NPLs, reflects the negative spillovers from the surge in the sector’s risk weighted assets amidst the heightened credit risk occasioned by the macroeconomic shocks in 2022”, it noted.

Against this backdrop, IC Research said “we observed a general tightening in credit stance as nominal growth in credit to the private sector slowed by 12.0 percentages points to 19.8% year-on-year as of April 2023.”

Amidst the elevated average inflation rate, this culminated in a 15.2% year-year contraction in real private sector credit.

IMF sets end-September 2023 for banks to submit recapitalization plans

Given the DDEP-induced shock to capital buffers, the IMF has set a target date of end-September 2023 for banks to submit a time bound capital restoration plan to the BOG for approval.

In addition to the suspension of dividend payments, the BoG will impose restrictions on risk exposures of banks that do not meet the minimum CAR.

In view of this, “we reiterate our expectation for banks to maintain a subdued loan book growth in 2023 as rebuild of capital buffers is prioritized”, it continued.

With the rebound in profitability indicators on the back of higher net interest margins, which stood at 14.1% as of April 2023, it concluded that “we expect the suspension of dividend payments to support capital buffers”.