Investments in short-term securities, mainly Treasury Bills, dipped by 16.8 percent to 55.2 percent in April 2018, from 72.0 percent in April 2017.
This indicates a shift in investors’ preference for higher yield, largely fixed deposits offered by banks and other financial institutions.
Yield on T-Bills have hovered around 13.4 percent for about a year now, culminating in investors shifting attention to financial instruments with higher yield.
According to the June 2018 Banking Sector Report, there was an increased preference for longer-term investment instruments by banks with the share of long term investments in total investments increasing from 26.3 percent in April 2017 to 43.6 percent in April 2018.
The proportion of banks’ investment in shares and other equities, however remained negligible at 1.2 percent in April 2018, down from 1.7 percent in April 2017.
Banks earnings dip 4.6%
According to the report, banks’ profit declined from 9.4 percent in April 2017 to 5.8 percent in April 2018. The industry’s net income stood at GH¢782.20 million.
This was due to a significant reduction in the growth rate of net interest income, coupled with an increase in the growth rate of provisions on non-performing loans.
Interest income contracted by 9.2 percent year on year in April 2018 compared with a 29.2 percent growth in April 2017. This was due to a reduction in interest income on outstanding loans, partly due to the increasing stock of banks’ non-performing loans some of which have interest charges on their accounts frozen, as well as a contraction in interest income on investments attributed mainly to the declining yields on money market instruments.
Importantly, the favorable effect of a reduction in interest expense on net interest income was not enough to make up for the reduction in interest income during the period under review, leading to a moderate growth in net interest income of 0.3 percent.
Return on Assets and Return on Equity
Very key indicators to shareholders, the industry’s main profitability indicators, namely, return on equity (ROE) and return tax return on assets (ROA) pointed towards declining profitability in the banking industry for the period ending April 2018 compared with the same period last year.
The ROA declined from 4.0 percent in April 2017 to 3.6 percent in April 2018. Also, the industry ROE fell to 17.3 percent in April 2018 from 19.3 percent in April 2017.
Composition of Banks’ Income
In April 2018, banks generated more income from their investments compared with income generated from loans advanced.
With a share in total income of 42.6 percent, income from investments was the biggest earning source for the banks in April 2018, increasing from 40.5 percent in April 2017.
The share of income from loans, which in previous years was the largest component of total income, however, declined from 43.6 percent in April 2017 to 38.0 percent in April 2018.
Other income generating sources increased in importance for the banks as the share of fees and commissions in total income increased from 10.0 percent in April 2017 to 12.6 percent in April 2018, and the share of banks’ other’ income sources also, recorded a 1.0 percent increase from 5.9 percent to 6.9 percent over the same period.
Asset and deposit structure
According to the report, the banks’ reallocated their assets in favour of less risky investments in April 2018 compared with the same period last year.
As at end-April 2018, 35.9 percent of total funds mobilized by the banks was allocated to investments, making investments the largest component of banks’ total assets while net loans and advances accounted for 31.6 percent of total assets.
This was quite different from what pertained a year ago when net advances (as in times past) accounted for the biggest share of banks’ total assets’ portfolio.
Total deposits remained the main source of funding for the banks’ accounting for 62.5 percent of banks’ total assets in April 2018, same as in April 2017. Borrowings, on the other hand, accounted for 16.8 percent of total liabilities and capital.
Asset Quality
The report noted that the quality of banks’ loan portfolio remained a concern with about a fifth of the banking industry’s loan portfolio impaired by the end of the period.
The increase in NPLs reflected the Banking Sector Report/May 2018 migration of some legacy loans to the non-performing category.
The rate of growth in nonperforming loans, however, declined with the stock of non-performing loans increasing from GH¢7.15 billion as at end-April 2017 to GH¢8.63 billion in April 2018; representing a 20.8 percent year-on-year growth compared with a 24.5 percent growth the previous year.
The current NPLs stock translated into non-performing loan ratio of 23.5 percent in April 2018 from 19.8 percent in April 2017.
Liquidity Indicators
The report emphasized that operational liquidity indicators in the banking sector recorded a mixed performance in April 2018.
Core liquidity measures (core liquid assets to total deposits and core liquid assets to total assets) declined marginally in April 2018 compared with last year, while the broad liquidity indicators recorded some improvements
Despite the decline in the core liquidity indicators, the banking industry remains adequately liquid to meet short-term obligations.
Capital Adequacy Ratio (CAR)
The banking industry remained solvent, with the main solvency indicator, the CAR remaining well above the statutory requirement of 10.0 percent.
The industry CAR improved from 17.4 percent in April 2017 to 18.9 percent in April 2018.
The proportion of Risk-Weighted Assets in total assets also declined marginally from 64.6 percent in April 2017 to 63.4 percent in April 2018, signifying a moderation in the industry’s risk-taking activities.
Overall, the Bank of Ghana said the banking industry as at end-April 2018 continued to be safe and sound despite some declines in some key financial soundness indicators.
The Finder