The GCR Financial Institutions Sector Risk Assessment
The Financial Institutions sector risk score (ranging from 0 to 15) is a key factor in the operating environment component score. The core of the GCR Ratings Framework is based on GCR’s opinion that an entity’s operating environment largely frames its creditworthiness. As a result, the operating environment analysis anchors the underlying risk score for the GCR rating methodology. GCR combines elements of the country risk and sectoral risk analysis, blended across countries for entities operating across multiple jurisdictions, to anchor an issuer to its current operating conditions. For more details on any of the above, please read the related criteria and research listed below.
GCR will periodically publish updated “Financial Institutions Sector Risk Scores”, which will supersede previous publications. The publication titled “GCR Financial Institutions Sector Risk Scores, May 2020”, available at https://gcrratings.com/risk-scores/ supersedes the article published on 4th December 2019.
Financial Institutions Sector Risk Scores
Ghanaian Financial Institutions Sector Risk score: ‘2.5’. Country Risk Score 3.5*, Mapping Table 3.5 to 4.0
The Ghanaian financial institutions sector risk score of ‘2.5’ is restrained by the unquantified ramifications of the on-going COVID-19 pandemic and lower commodity prices, which pose major risks to the banking industry’s operations and performance. Ghanaian banks face asset quality deterioration linked to high exposure to oil and gas sectors as a result of low but increasing oil prices. Despite the sound performance of the banking sector, initial assessments of the potential impact of the COVID-19 pandemic indicate that banks’ operations may face challenges with credit extension, loan repayment, and correspondent banking relationships. The policy measures taken by the Bank of Ghana may help minimise the associated downside risks, including reducing the minimum regulatory capital adequacy ratio (CAR) to 11.5% and liquidity reserve requirement to 8%. Furthermore, the score takes in account the modest fiscal position of the government and state-owned enterprises, the improving albeit high stock of sector wide Non-performing loans of 14.5% at March 2020 and moderately high foreign currency lending (30% of total loans). We also consider the banking sector to be somewhat fragmented and regulated in line with regional norms. The banking sector is also considered to be adequately capitalized, with CAR averaging 21.2% at March 2020 broadly attributed to the 2018 regulatory reforms and recapitalization measures. Profitability is sound and improving, with an average return on equity of 21.2% at March 2020, but the operating efficiency remains low and the reduction in interest rates to 14.5% at April 2020 will affect net interest income and overall profitability going forward. Furthermore, yields are under threat from rising inflation to 10.6% at April 2020, consequently we expect interest rates will be restored to historic levels in the medium term. Local deposits are the primary funding source, with limited wholesale or external funding. Liquidity is sound, with cash and balances due from banks accounting for 36% of total assets at March 2020. However, there is a notable reduction in foreign currency deposits which may result in high liability mismatch on the dollar balance book. Fixed income capital markets are underdeveloped versus global peers.
*Country Risk scores as at date of publication.
Analyst: Financial Institutions
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Group Head of Ratings
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Related criteria and research
Criteria for the GCR Ratings Framework, May 2019
Criteria for Rating Financial Institutions, May 2019
GCR Ratings Scales, Symbols & Definitions, May 2019
CREDIT RATINGS ISSUED AND RESEARCH PUBLICATIONS PUBLISHED BY GCR, ARE GCR’S OPINIONS, AS AT THE DATE OF ISSUE OR PUBLICATION THEREOF, OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. GCR DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL AND/OR FINANCIAL OBLIGATIONS AS THEY BECOME DUE. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: FRAUD, MARKET LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND GCR’S OPINIONS INCLUDED IN GCR’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND GCR’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND GCR’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL OR HOLD PARTICULAR SECURITIES. NEITHER GCR’S CREDIT RATINGS, NOR ITS PUBLICATIONS, COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. GCR ISSUES ITS CREDIT RATINGS AND PUBLISHES GCR’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING OR SALE.