Banks suffered a modest growth in profit this year as a consequent for sacrificing lending for investments.

Although a strategy to help shield their loan books against COVID-19-induced risks, shifting from lending to investments constrained growth in the main revenue lines of banks at a time when provision for bad loans rose.

This resulted in the net profit of the banking sector growing by 5.9 per cent in the first two months of the year, down from 38.8 per cent in the same period last year, according to a Bank of Ghana (BoG) report

The central bank’s Banking Sector Development report for March said the “modest profit performance” in the first two months was “attributed to declines in growth in revenue lines and higher loan provisions.

“Growth in profit after tax slowed to 5.9 per cent from 38.8 per cent during the prior year. Interest income growth declined to 9.5 per cent in February 2021 from 22 per cent February 2020 due to the relatively low growth in credits while net fees and commissions increased by 13.7 per cent, lower than the 18.4 per cent recorded in the previous year,” the report said.

Increased investments

The report said unlike last year when banks were motivated to lend to businesses and households, the pandemic had dampened their appetite for loans, causing them to increase investments.

Consequently, it said growth in banks’ investment holdings outpaced other asset classes “due to the higher propensity of banks to invest more in less risky government instruments as a result of the pandemic-induced elevated credit risks and slowdown in credit demand. Investments shot up by 45.9 per cent to GH¢67.9 billion, compared to the growth of 7.2 per cent in the prior year,” it said

On the other hand, it said gross loans and advances continued to experience a subdued growth, rising by 3.6 percent – a sharp decline from the 26 per cent growth in the corresponding period last year.

“This is attributable to weak credit demand, higher repayments and banks’ increasing appetite for less risky assets. Adjusting gross loans for provisions and interest in suspense, net loans and advances grew by 2.2 per cent to GH¢41.4 billion, down from 27.2 per cent over the same comparative periods,” the report said.

“New loans and advances for the first two months of 2021 of GH¢4.7 billion also reflected the sluggish credit market condition with a 24.6 per cent decline from the pre-pandemic level of GH¢6.2 billion for the first two months of 2020,” it added.

Impact on profit

Given that banks earn more fees and commissions from loans, the BoG report said the slower growth in credits, trade-financing and other off-balance sheet transactions contributed to the decline in growth revenues during the period.

It said this caused growth in net interest income to decline from 25.9 per cent in February 2020 to 10.9 per cent in February 2021.

It said the decline in interest income was in spite of a dip in growth in interest expenses resulting from the contraction in borrowings.

Cost control

The report found that banks were making modest gains from control measures resulting in their costs declining marginally by 0.3 per cent compared to a growth of 18.6 per cent over the same period in 2020.

It said the marginal gain in operating cost was, however, offset by higher loan provisions.

“Total provisions increased by 62.2 per cent in February 2021, compared to 6.5 per cent in February 2020, due to the rising non-performing loans (NPLs) partly from the general pandemic-induced repayment challenges as well as some bank-specific loan recovery challenges,” it said.

Overview

The report posited that the banking sector in the first two months of 2021 remained “broadly liquid, profitable, well-capitalised, and resilient.”

It said the strong policy support and regulatory reliefs implemented to moderate the effects of the COVID pandemic, continued to impact positively on the industry’s performance and that was also benefiting the real sector.

It noted that financial soundness indicators were broadly positive, underpinned by healthy solvency, liquidity, and profitability indicators while efficiency indicators remained strong due to the cost control measures on the bottom line that was adopted by banks to contain the impact of the pandemic.

“Asset quality risk, however, remains elevated due to loan repayment challenges which necessitated loan restructuring reliefs by banks. The latest credit conditions survey shows that credit growth is expected to pick up on the back of anticipated increases in credit demand and continuous ease in credit stance in the next two months,” it said.