The total stock of loans that banks fear may go bad have reached close to GH8 billion as at June this year, the latest Bank of Ghana Banking (BoG) sector report said.
The report which tracked the performances of banks from June 2016 to June 2017 showed the latest numbers translate into a Non-Performing Loan (NPL) ratio of 21.2 percent in June 2017, compared with 18.8 percent in June 2016.
The report attributes the spike in total industry Non Performing loans to the energy sector debts and other related expenses. The banking sector indicators, revealed that asset quality pointed to a deterioration in the loan portfolio between June 2016 and June 2017, although the rate of growth (year-on-year) in the industry’s NPLs slowed down from 82.5 percent in June 2016 to 30.7 percent in June 2017.
The report also brought up some interesting developments worth considering. Contrary to reports that government was the cause of these rising bad debts the report revealed otherwise as the private sector accounted for more than 90 percent of the debts.
According to the report “private sector, being the largest recipient of outstanding credit balances also accounted for the greater proportion of banks’ NPLs”.
The share of private sector NPLs in total debts increased from 87.3 percent in June 2016 to 94.9 percent in June 2017 while the proportion of banks’ NPLs attributable to the public sector declined from 12.7 percent to 5.1 percent over the same period.
The report attributed it to the restructuring of the TOR and VRA debts accounted for the decline in the public sector’s share of NPLs during the review period.
Most private sector non-performing loans were debts of indigenous enterprises accounting for 77.2 percent of total NPLs in June 2017, from 73.0 percent in June 2016.
Three largest sectors in terms of outstanding credit balances, namely, the Commerce & Finance, the Services and the Electricity, Gas & Water sectors, accounted for 63.6 percent of total NPLs in June 2017 compared with a share of 65.7 percent in June 2016.
The commerce and Finance Sector the sector accounting for the largest share of NPLs) declined from 42.4 percent in June 2016 to 36.8 percent in June 2017.
The Agriculture, Forestry & Fishing sector was however the sector with the highest proportion of its loans (39.3 percent) being classified as non-performing as at end-June 2017.
It was followed closely by the Commerce & Finance Sector with a sectoral NPL ratio of 30.3 percent. Domestic gross loans which stood at GH¢37.51 billion as at end June 2017, grew by 3.4 percent year on year in real terms, following an 8.2 percent contraction in June 2016 .
Real private sector credit followed a similar trend, growing by 2.6 percent after recording a negative growth rate of 8.2 percent a year earlier. Real credit to households contracted by 0.7 percent in June 2017 compared with a 2.3 percent contraction in June 2016.
The private sector remained the largest recipient of banks’ credit (both domestic and foreign) although its share of banks’ credit declined marginally from 87.4 percent in June 2016 to 86.9 percent in June 2017.
As a result, the share of banks’ credit to the public sector increased from 12.6 percent to 13.1 percent over the same period.
Credit to private enterprises which formed the largest proportion of credit to the private sector accounted for 71.2 percent of credit extension in June 2017, slightly up from 70.0 percent in June 2016.
Households held 14.3 percent of total banks’ credit in June 2017, compared with a share of 14.9 percent a year before.
The Commerce & Finance, Services, and Electricity, Gas & Water sectors remained the three largest in terms of outstanding credit balances in June 2017, with a combined share of total banking sector credit of 56.3 percent.
Outstanding credit balances allocated to the Commerce & Finance sector (the largest sector) was 25.7 percent by the end of the first half of 2017.
The Mining & Quarrying and the Agriculture, Fishing & Forestry sectors were allocated the least shares of credit of 2.4 percent and 3.9 percent respectively. The share of credit to both sectors declined marginally over the one year period.
The Bank of Ghana however admitted that key risk to the banking industry is the high stock of impaired assets to total loans as measured by the non-performing loans (NPLs) ratio.
The industry’s NPL ratio increased between June 2016 and June 2017 driven by the energy related and other large non-oil related exposures.
The Asset Quality Review (AQR) exercise conducted in 2016 also revealed some weaknesses in banks’ credit classification practices, leading to the downgrading of some already-existing credit facilities.
The industry’s asset quality is, however, projected to improve as banks put in place measures to strengthen credit risk management processes and improve loan recovery efforts.
The issuance of the 10-year energy sector bond would help offset part of the energy sector debts, particularly debts owed by Bulk Oil Distribution Companies (BDCs) and reduce the stock of non-performing loans in the industry.
Profitability in the banking sector declined for the period ending June 2017 compared with the same period last year with profitability indicators such as the banks’ return on assets (ROA) and return on equity (ROE) declining.
The industry’s income before tax of GH¢1.53 billion contracted by 0.4 percent year-on-year in June 2017 compared to a 3 percent annual growth in June 2016.
The decline was due to factors such as, modest growth in loans and advances, increasing non-performing loans, lower yield on investments and net interest income.
Growth in operational costs also led to further declines in income before tax for the industry. The industry’s net income of GH¢1 billion contracted by 5.2 percent year-on-year in June 2017.
The banking industry remained generally solvent with the average Capital Adequacy Ratio (CAR), a measure of solvency, well above the minimum 10 percent regulatory requirement.
The industry’s CAR however declined from 16.2 percent in June 2016 to 14.8 percent in June 2017. The industry’s Risk Weighted Assets (RWA) to total assets also recorded a decline from 71.3 percent to 65.4 percent over the same period.