The July 2024 report on the Bank of Ghana’s monetary policy says key financial soundness indicators (FSIs) in the first half of 2024 point to “a liquid and profitable sector with improved capital buffers.”

It said the industry’s liquidity position remained strong in June 2024, with improvements in the core measures following the increase in the CRR requirement.

The ratio of core liquid assets (mainly cash and due from banks) to total deposits improved to 47.1 per cent in June 2024, from 35.8 per cent in June 2023.

Also, the report said the ratio of core liquid assets to total assets rose to 35.8 per cent in June 2024, from 27.7 per cent in June 2023.

Furthermore, the ratio of broad liquid assets to total deposits increased to 90.6 per cent, from 83.6 per cent, while broad liquid assets to total assets increased to 68.9 per cent from 64.7 per cent over the review period.

Capital Adequacy Ratio

The report said the industry’s solvency position, measured by the Capital Adequacy Ratio (CAR) adjusted for the regulatory reliefs, was 14.3 per cent in June 2024, higher than the prudential minimum of 10.0 per cent, and unchanged from the 14.3 per cent recorded in June 2023.

The CAR in June 2024 reflected the recognition of 2024 profits posted by banks for purposes of CAR computation, as well as the on-going recapitalisation of banks.

Profitability

The banking industry remained profitable for the first half of 2024, the report mentioned.

It explained that the sector recorded higher profit-before-tax (PBT) and profit-after-tax (PAT) in June 2024 relative to the same period last year.

However, the growth rate in profit moderated to 25.5 per cent in June 2024 relative to 51.4 per cent recent same period last year.

It said generally, all income lines increased but at a lower growth rate in June 2024 relative to the same period last year.

Net interest income grew by 19.4 per cent to GH¢11.8 billion, lower than the corresponding period’s growth of 41.4 per cent in 2023.

In year-on-year terms, interest income increased to GH¢18.0 billion from GH¢15.1 billion, representing a growth of 19.1 per cent relative to 44.3 per cent in June 2023.

The lower growth in interest income was explained by the relatively lower rates on money market instruments this year compared to the first half of 2023, as well as a decline in lending rates.

Interest expenses also rose to GH¢6.2 billion in June 2024, representing a lower growth rate of 18.6 per cent compared to the 50.0 per cent recorded in June 2023.

Net fees and commissions recorded a slower growth of 16.8 per cent in June 2024, from 30.6 per cent a year ago, while other income recorded a sharp contraction of 16.2 per cent to GH¢2.4 billion in June 2024, from GH¢2.8 billion in June 2023.

These developments in the different income lines culminated into a sharp increase in industry’s operating income to GH¢16.8 billion in June 2024, from GH¢14.9 billion in June 2023.

Similarly, gross income increased to GH¢23.0 billion in June 2024, from GH¢20.1 billion in June 2023.

The cost lines recorded similar increases in June 2024, but at lower growth rates compared to the same period in 2023.

The industry’s operating expenses grew by 15.5 per cent in June 2024, compared to 44.9 per cent in June 2023, on the back of slower growth in staff costs and other operating (administrative) expenses.

Impairment losses on financial assets, as well as provisions for bad debt and depreciation, contracted by 39.5 per cent in June 2024, compared to 32.7 per cent increase in June 2023.

Consequently, the industry’s profit-after-tax increased by 25.5 per cent to GH¢5.4 billion in June 2024, compared with the 51.4 per cent growth recorded in June 2023.

Profit-before-tax also rose by 22.8 per cent to GH¢8.1 billion.

The lower growth in profit during the first half of this year was because of lower increases in interest income and other income lines in 2024, relative to the same period in 2023.

(a)    Return on Assets and Return on Equity

The banking sector’s profitability indicators, namely, return-on-assets (ROA) and return-on-equity (ROE), moderated during the period under review following the slowdown in growth of profit-before-tax and profit-after-tax, respectively.

ROE declined to 35.3 per cent in in June 2024, from 37.6 per cent in June 2023, while ROA was marginally lower at 5.4 per cent, from 5.5 per cent in the same reference period.

(b)    Interest Margin and Spread

Interest spreads for the banking sector widened to 6.4 per cent in June 2024, from 6.0 per cent in June 2023.

The increase in spreads was on the back of an increase in gross yields to 9.4 per cent in June 2024, from 9.1 per cent in June 2023, while interest payable declined to 3.0 per cent, from 3.2 per cent a year earlier.

The interest margin to total assets ratio also inched down to 3.7 per cent from 4.1 per cent, while interest margin to gross income rose from 49.1 per cent to 51.4 per cent during the period under review.

The ratio of gross income to total assets (asset utilisation) declined to 7.1 per cent in June 2024, from 8.3 per cent in June 2023, while the profitability ratio rose from 21.3 per cent to 23.5 per cent over the review period.

(c)     Composition of Banks’ Income

Income from investments remained the largest component of banks’ total income in June 2024, with its share rising to 42.0 per cent from 40.1 per cent in June 2023 following the growth in total investments.

The share of interest income from loans improved to 36.3 per cent from 34.9 per cent during the same review period.

The share of banks’ income from fees and commissions also went up to 11.4 per cent from 11.1 per cent, while the share of income from other sources moderated to 10.2 per cent from 13.9 per cent.

Operational Efficiency

The industry’s efficiency improved on the back of the slowdown in growth of operating expenses during the review period.

The cost-to-income ratio declined from 78.7 per cent in June 2023 to 76.5 per cent in June 2024, while cost-to-total assets ratio decreased to 5.4 per cent from 6.5 per cent a year earlier.

The operational cost-to-total assets ratio also went down to 3.5 per cent from 4.4 per cent a year earlier, while the ratio of operational cost to total income reduced to 49.6 per cent in June 2024 from 52.8 per cent.

Banks’ Counterparty Relationships

Total offshore balances increased by 71.4 per cent to GH¢29.9 billion in June 2024, compared to the 67.8 per cent growth in the previous year, driven largely by substantial growth in placements. Industry placements with foreign counterparties increased by 69.4 per cent in June 2024, from 58.8 percent growth recorded during the same period a year earlier.

Nostro balances on the other hand, moderated to 73.6 per cent, compared with a growth of 77.9 per cent in June 2023.

As a result, the ratio of offshore balances to net worth rose to 92.6 per cent from 78.3 per cent.

The share of banks’ external borrowings in total borrowings declined to 28.1 per cent in June 2024, from 37.3 per cent in June 2023, while the share of domestic borrowings increased to 71.9 per cent, from 62.7 per cent in June 2023.

Banks’ external borrowings were tilted towards long-term instruments, although the share of long-term borrowings in total external borrowings declined to 61.7 per cent from 68.8 per cent, while the share of short-term borrowings picked up to 38.3 per cent from 31.2 per cent a year earlier.

Credit Conditions Survey

Results of the June 2024 Credit Conditions Survey indicated a net easing in the overall stance on loans to enterprises between May and June 2024, on the back of a net easing in the stance on all components of enterprise loans (namely short-term and long-term enterprise loans, loans to SMEs, and loans to large enterprises).

Banks projected their overall stance on enterprise loans to record a net tightening in July and August 2024, from a tightening in all components of enterprise loans apart from loans to large enterprises.

The overall stance on loans to households also eased during the June 2024 survey round from net ease in loans for house purchase, while consumer credit and other lending tightened marginally.

Over the next two months, banks project further net easing in the overall stance on loans to households, which will be reflected in loans for house purchases and consumer credit.

On the demand side, the June 2024 survey further indicated a soaring in overall demand for enterprise loans from increases in the demand for loans on all components of enterprise loans.

Banks projected a net increased demand for corporate loans over the next two months, also driven by net increases in the demand for all categories of enterprise loans.

Credit demand by households recorded a net increase between May and June 2024, from a net increase in the demand for both mortgages and consumer credit and other lending.

Over the next two months, banks expect a slump in the demand for both consumer credit and loans for house purchases to drive a decrease in the overall demand for household loans.

Outlook

The report analysed that the banking sector’s performance in June 2024 pointed to continuing recovery from the macroeconomic challenges since 2022.

However, asset quality concerns remained a drag on the performance of the sector, it observed.

It stressed that the banking sector remained profitable, liquid, and generally efficient during the review period, with stable solvency reflecting the rebound in profitability in the industry post-DDEP implementation, as well as the ongoing recapitalisation effort by banks.

The outlook remains stable, but recapitalisation and enforcement of stringent credit underwriting standards, and intensified loan recovery efforts are critical to ensuring good performance of the banking sector in the medium term.