The banking sector performance improved at the end of March 2020, but there are emerging signs that the impact of the COVID-19 pandemic is beginning to weigh on the industry’s performance adversely, the latest Bank of Ghana report has revealed.

Total assets grew by 20.1 per cent year-on-year, underpinned by sustained growth in deposits and shareholders’ funds. Credit and investments also achieved comparable respective annual growth rates.

However, the growth rates in these key performance indicators show a contraction during the first quarter of 2020 compared to the first quarter of 2019.

Total assets grew by 3.5 per cent in the first quarter 2020, lower than the 5.7 per cent growth recorded same period last year. In addition, deposits, credit, investments and profit-after-tax recorded similar lower growth rates.

The lower-than-expected growth rates in the key performance indicators during first quarter 2020 reflect the challenging operating environment for the banking sector due to COVID-19.

Notwithstanding this, the financial sector soundness indicators remain healthy. The latest stress tests conducted in April 2020 suggest that banks remain well-positioned to withstand mild to moderate liquidity and credit shocks based on strong capital buffers and high liquidity positions.

Capital Adequacy Ratio was well above the revised regulatory limit of 11.5 per cent, liquidity remains strong and efficiency indicators have improved.

The non-performing loans ratio of the industry inched up in March 2020 due to commercial banks’ decisions to slow credit extension while monitoring the impact of the COVID-19 pandemic on the economy.

In the outlook, the evolving economic and operating environment could pose some challenges to the sector. Banks continue to project tightening of credit stance to protect their balance sheet although credit demand could pick up.

The policy measures recently announced by the central bank are expected to help boost the sector’s credit operations and moderate emerging risks in the outlook.

Measures by banks to control operational costs, minimise operational losses and contain credit risk while supporting credit expansion to critical economic sectors will be crucial in balancing growth and stability in the sector.

Banks’ balance sheet

The banking industry posted a strong annual growth in total assets as of March-end 2020 compared with same period last year.

Total assets increased by 20.1 per cent year-on-year to GH¢133.5 billion in March 2020, higher than the 13.2 per cent growth recorded a year ago.

The increase in asset size was driven mainly by domestic assets, which recorded a doubling in the growth rate at March-end 2020 compared to May 2020.

Accordingly, the share of domestic assets inched up to 93.8 per cent from 91.4 per cent over the period. Gross loans and advances grew by 19.6 per cent to GH¢44.82 billion in March 2020, higher than the modest 3.7 per cent growth a year earlier.

Similarly, net loans and advances (gross advances adjusted for provisions and interest in suspense) grew by 19.8 per cent to GH¢39.28 billion against a 6.8 per cent growth in March 2019.

The industry’s investments in bills, securities and equity as of end-March 2020 stood at GH¢52 billion, reflecting a slower year-on-year growth of 15.7 per cent compared with the 27.4 per cent growth at end-March 2019.

The slowdown in investments growth is due both to the base effects of the special resolution bonds issued to Consolidated Bank Ghana (CBG), which increased the investment balance as at end-March 2019, as well as a contraction in short-term bills investment.

The share of investments in total assets accordingly dipped by 150 basis points but remains the largest asset component.

Total deposits grew by 15.1 per cent year-on-year to GH¢84.1 billion as at end-March 2020, suggesting sustained confidence in the sector, although lower than the 20.5 per cent increase recorded a year earlier.

Deposits continue to be mobilised mainly from the domestic economy, with domestic deposits accounting for a share of 99.5 per cent of total deposits.

Foreign Currency Deposits (FCD) saw a sharp decline in growth of 9.5 per cent compared to 32.1 per cent a year earlier, suggesting lower holdings of FCD due to the relative stability of the local currency .

The industry’s loan-to-deposit ratio, a key measure of financial depth, was 53.3 per cent in March 2020 compared with 51.3 per cent a year ago, indicating an uptick in intermediation.

Key developments in DMBs' balance sheet banking sector developments

Banks increased borrowings to support credit growth. In line with the rebound in credit, and with credit growth outpacing growth in deposits, banks increased borrowings to support credit expansion. Accordingly, total borrowings increased by 22.8 per cent compared with the contraction of 8.4 per cent in the prior year.

The growth in borrowings, however, came mainly from the short-term end, with short-term domestic and short-term foreign borrowings accounting for about 77.5 per cent of the increase.

Banks shareholders’ funds position remains strong, with higher capital levels supported by profit retention.

Profit retention boosted reserves of banks and contributed to the increase in shareholders’ funds by 19.2 per cent to GH¢18.4 billion as at end-March 2020, higher than the prior year’s growth of 13.5 per cent.

The strong capital base and level of shareholders’ funds enhance the stability and resilience of the banking sector. Total assets recorded a year-to-date growth of 3.5 per cent in Q12020, lower than the 5.7 per cent in Q12019.

Similarly, deposits inched up only 0.7 per cent, lower than the 6.9 per cent growth over the corresponding period. Credit growth also dipped due to the slowdown in demand for credit and tight credit stance by banks.

The slower growth rates recorded during Q12020 reflect the emerging impact of the economic slowdown and rising risk aversion because of COVID-19. On an annual basis, the industry’s balance sheet growth performance was strong, but banks’ quarterly assessment points to a slowdown in business activity emanating from COVID-19.

However, the latest stress tests suggest banks are resilient and well-positioned to withstand mild to moderate liquidity and credit shocks, which could emanate from the emerging operating environment.

Asset and liability structure

The asset mix of the industry was broadly unchanged; investments dominated with a share of 38.9 per cent in March 2020, marginally lower than the 40.4 per cent share in March 2019. Loans and advances (net) followed with its share virtually unchanged at 29.4 per cent over the two periods.

The share of “Cash and Due from Banks” inched up to 23.9 per cent from 23.0 per cent. Non-earning assets (fixed assets and other assets) also edged up marginally to 7.8 per cent.

The share of deposits declined to 62.9 per cent in March 2020 from 65.7 per cent in March 2019, in line with the slowdown in the growth of deposits.

The share of borrowed funds, on the other hand, recorded a marginal increase from 13.7 per cent in March 2019 to 14.0 per cent in March 2020.

Shareholders’ funds’ relative share remained broadly unchanged at 13.8 per cent in March 2020. “Other liabilities” increased its share from 6.7 per cent to 9.3 per cent over the corresponding period due mainly to funds from the Receiver to CBG.