Announcements Criteria Research

GCR improves the Ghanaian Financial Institutions Sector Risk Score to ‘2.5’

Johannesburg, 4th December 2019 – GCR Ratings (“GCR”) has improved the Ghanaian financial institutions’ sector risk score to ‘2.5’ from ‘2’, upon improving sector-wide asset quality and stability of government finances.

Rationale

The improvement in the score reflects the combined improvement in asset quality and stability in the governments fiscal position. Sector-wide non-performing loans reduced to 17.8% at August 2019 from 21.3% one year earlier, reflecting more aggressive write-offs, intensified recoveries, strong economic growth and a gradual recovery in credit growth. Whilst non-performing loans remain high versus regional peers, we see significant improvements in the loans to utility sectors (water, electricity and gas) and the primary sectors. The service sector did increase its bad loans, however from a relatively lower starting point.

We also believe the government’s commitment to the Fiscal Responsibility Act will also stabilize the sovereign risk, at least until the run up to the 2020 preparations. Overall the governments net debt position is forecasted to stabilize at 55% of GDP in the next three years.

Ghanaian Financial Institutions Sector Risk score: ‘2.5’

The Ghanaian financial institutions sector risk score of ‘2.5’ is restrained by the modest fiscal position of the government and state-owned enterprises, the currently high stock of sector wide nonperforming loans of 17.8% at August 2019 and moderately high foreign currency lending (33% of total loans). We also consider the banking sector to be somewhat fragmented and regulated in line with regional norms. Broadly, we consider the 2018 regulatory reforms and recapitalization to have been a success in stabilizing the system. The banking sector is also considered to be adequately capitalized, with total CAR averaging around 19.8% at August 2019. Profitability is sound and improving, with a return on assets around 4.3% at August 2019, but the operating efficiency remains low. 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 35% of total assets. Fixed income markets are underdeveloped.

The GCR Financial Institutions Sector Risk Assessment

The Financial Institutions Sector Risk Score, assessed on a scale between 0-15, is important in a number of ways. Firstly, as 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 ratings methodology. Financial institutions are especially vulnerable to these factors. GCR combines elements of the country risk and sectoral risk analysis, blended across countries for entities operating across multiple jurisdictions, to anchor a financial institution to its current operating conditions. Furthermore, the operating environment (the country risk score combined with the financial sector risk score) creates the floor from which government support can be provided for banks and the hurdle which may cap risk scores for entities significantly exposed to one jurisdiction. For more details on any of the above, please read the related criteria and research listed above.

GCR will periodically publish updated “Financial Institutions Sector Risk Scores”, which will supersede previous publications. The publication supersedes the article published on 30th October 2019, but exclusively for Ghana. Financial Institution Sector Risk Scores are available for download at https://gcrratings.com/risk-scores/.

Analytical contacts

Primary analyst Matthew Pirnie Sector Head: Financial Institutions
Johannesburg, South Africa 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 Country Risk Scores: June 2019
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