Announcements Criteria Research

GCR affirms the Ghanaian Financial Institutions’ Sector Risk Score of ‘2.5’ balancing on-going asset quality pressure and good profitability

Johannesburg, 29 May 2020 – GCR Ratings (“GCR”) has affirmed the Ghanaian Financial Institutions’ sector risk score of ‘2.5’.

The Financial Institutions Sector Risk Scores are available for download at https://gcrratings.com/risk-scores/

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.

Analytical contacts

Analyst Vimbai Muhwati Analyst: Financial Institutions
Johannesburg, ZA VimbaiM@GCRratings.com +27 11 784 1771
Analyst Matthew Pirnie Group Head of Ratings
Johannesburg, ZA MatthewP@GCRratings.com +27 11 784 1771

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
GCR Country Risk Scores, May 2020
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