Johannesburg, 21 May 2021: GCR Ratings (“GCR”) have reviewed the Financial Institutions Sector Risk Scores for Ghana and Zimbabwe. As a result, we have increased the Ghana score to ‘3.0’ from ‘2.5’ and affirmed ‘1’ score for Zimbabwe.
The Financial Institutions Sector Risk Scores are available for download at https://gcrratings.com/risk-scores/
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 insurer to its current operating conditions. For more details on the above, please read the related criteria and research listed below.
GCR will periodically publish updated “Financial Institution Sector Risk Scores”, which will supersede previous publications. The publication titled “GCR Financial Institutions Sector Risk Scores, 21 May 2021”, available at https://gcrratings.com/risk-scores/, supersedes the article published on 10 February 2021.
Financial Institutions sector risk scores
The Ghanaian financial institutions sector risk score of ‘3.0’ is balancing on-going ramifications of the COVID-19 pandemic and the sound performance of the banking sector. The financial sector has proven to be resilient to the weakened operating environment. However, Ghanaian banks face increased asset quality risk from borrowers pressured by the economic effects of the coronavirus pandemic. Positively, the policy measures taken by the Bank of Ghana may help minimise the associated downside risk somewhat. Furthermore, the score takes in account the modest fiscal position of the government and state-owned enterprises. We also consider the banking sector to be somewhat fragmented and regulated in line with regional norms.
Asset risk and diversification compares adequately to regional peers. The banking sector is adequately capitalized, with capital adequacy ratio (CAR) averaging 20.2% at February 2021 (Dec 2020: 19.8%), comfortably above the minimum regulatory requirement. We expect profitability to remain sound, albeit constrained by the introduction of a financial sector clean-up levy in April 2021. Weak credit demand on account of the pandemic, culminated in a decline in growth in gross loans and advances to 5.8% in December 2020. On the other hand, investments grew strongly by 33.4%, resultantly, investments remained the largest component of banks’ assets (43.1%). Positively, the foreign currency exposures of 29.6% at Feb 2021 are moderate for the region. According to the BoG, 9% of banking sector loans had been restructured at end-2020 benefitting from debt relief. We expect to see non-performing loans (NPLs) to increase moderately as these measures unwind in 2021. Accordingly, the NPL ratio increased to 15.3% in February 2021 from 14.8% in December 2020 (15.7% in June 2020, 14.3% in December 2019). Positively, margins are high, and we therefore expect the capital adequacy to remain strong.
The Zimbabwe financial institution sector risk of ‘1’ is restrained by hyperinflation, foreign currency (“FCY”) challenges and the ramifications of the on-going COVID-19 pandemic posing major risks to the banking industry’s operations and performance. Furthermore, inconsistent monetary policy, and a long-term weak fiscal position are a material risk to business stability and the already weak banking sector consumer confidence. As a result of the hyperinflationary environment, monetary losses will erode performance gains and nominal capital. Furthermore, yields are under threat from high inflation.
Despite the sound loan book performance of the banking sector, we expect that banks’ operations may face additional challenges with credit extension and FCY loan repayment. Local currency liquidity is sound, however, GCR expects foreign currency liquidity challenges to persist and high probability of default on FCY debt. Positively, GCR notes, 1) the stability of the exchange rate from Q4 2020 albeit, with dislocations from parallel rates; 2) introduction of the auction system that has worked well in availing foreign currency to otherwise disadvantaged individuals; and 3) review of the minimum capital requirements, provided a firm stance is taken against non-compliant institutions.
Regulation is viewed relatively weaker than the regional average, improvement efforts are constrained by a high probability political interference resulting in an unstable operating environment. Failure by regulatory and monetary authorities to arrest regulation, governance & policy certainty may result in the sector score being negatively impacted. The score also considers the somewhat fragmented sector, but the banks in the top tier are generally profitable and adequately capitalized. Funding is largely deposit based, spread between corporate and retail deposits. However, the Zimbabwean government and her agents continue to fail to honour obligations in foreign currency (“FCY”) in a timely manner. As a result, GCR will continue to reflect a default event, for both foreign and local currency obligations, for the international issuer and issue scale ratings of Zimbabwean entities.
Due to severe foreign currency shortages, hyperinflation, and significant monetary and exchange control policy changes over the last 12-18 months in our opinion, the national scale credit ratings on Zimbabwean entities are not directly comparable to credit ratings and risk scores within other markets. Furthermore, outlook statements may fail to capture forward looking trends due to the extreme volatility in the operating environment and audited opinions. See the latest Jurisdictional Supplement for Criteria, published July 2020, available at https://gcrratings.com/criteria/
*Country Risk scores as at date of publication.
|Primary Analyst||Vimbai Mandebvu||Financial Institutions Analyst|
|Johannesburg, South Africa||VimbaiM@GCRratings.com||+27 11 784 1771|
|Primary Analyst||Matthew Pirnie||Group Head of Ratings|
|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 Ratings Scales, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, March 2021|