‘CAMELS’ analysis of 2018 Ghana`s banking sector performance

The years 2017 and 2018 will go down memory lane as the period in which the central bank of Ghana stepped up its game to reform and address some ailing issues in Ghana`s financial sector.

The actions of the Bank of Ghana were aimed at sanitising the industry. Some of the earlier regulatory activities were the Introduction on IFRS 9 provisions – Guidelines for Financial Publications for Banks issued on 30th June 2017, increased minimum capital to GHS 400m – Notice on New Minimum Paid Up Capital issued on 11th September 2017.

In 2018, some of the major reforms included guidelines for financial holding companies under the Financial Holding Companies Directive issued in July 2018. There was also a guideline for mergers or acquisition of banks contained in Mergers and Acquisition Directive issued in July 2018. 

Guidelines for Anti-Money Laundering contained Guidelines for Anti-Money Laundering/Combating the Financing of Terrorism issued in July 2018, Guidelines in determining whether a person is fit to be director, shareholder or key management – “Fit and Proper” Directive issued in July 2018, Guidelines for term limit on CEOs and Board Members as contained in the Corporate Governance Directive (Transitional Provisions) issued in July 2018 and revised in September 2018, Guidelines for voluntary winding up – Directive for Voluntary Winding Up issued in September 2018, Guidelines for cyber-security  contained in the Cyber & Information Security Directive issued in October 2018, Guidelines on corporate governance under the Corporate Governance Directive issued in December 2018.

If we will recall, following the recapitalisation exercise that ended at the close of business on 31st December 2018, there are now twenty-three (23) universal banks operating in Ghana, down from thirty-four (34) banks that operated earlier. More importantly, as part of the recapitalization exercise, Bank of Ghana approved three (3) bank mergers; for First National Bank and GHL Bank, Energy Bank and First Atlantic Bank and Sahel-Sahara Bank and Omnibank. GCB Bank through a Purchase and Assumption Agreement acquired selected assets and liabilities from two banks (UT Bank and Capital Bank) which had their licenses revoked in 2017. It didn’t end there, the Consolidated Bank Ghana Limited was formed in 2018 and through a Purchase and Assumption Agreement acquired selected assets and liabilities from seven banks that had their licenses revoked in 2018 and 2019. 

These banks were Beige Bank, Construction Bank, Heritage Bank, Premium Bank, Sovereign Bank, The Royal Bank and Unibank.

The big question is, after most of these banks met the Ghs400m regulatory requirement, what next? Are they now bigger and stronger than before? Has it shaped their 2018 audited financials? What are the core Tier 1 capital levels and has it restored investor confidence in the financial system? I will try to use CAMELS analysis for banks and methodology of risk assessment of banks condition and see how some Seventeen (17) banks performed with reference to levels of Capital Adequacy Ratios (CAR), Asset Quality, Management, Earnings, Liquidity levels and Sensitivity.

Figure1. Shows the meaning of CAMELS

Capital Adequacy Ratio/ Core Tier 1 Capital Levels

A bank`s CAR is a measure of a bank's capital. It is expressed as a percentage of a bank's risk-weighted credit exposures. It is used to protect depositors and promote the stability and efficiency of financial systems. Bank of Ghana tracks a bank's CAR to ensure that it can absorb a reasonable amount of loss and complies with statutory Capital requirements. From a Capital Adequacy Ratio (CAR) perspective, data from the published 2018 audited financials from 17 of the 23 banks has shown tremendous improvement in CAR year on year with industry average hovering 25.43% (2017: 21.33%). 

This excludes CAR position for FBN and FNB since they are outliers. Most banks have significantly improved and that makes these banks stronger to stand internal and external shocks. 

More importantly, a major indicator of the importance of the recapitalisation exercise is seen in the core Tier 1 Capital (going-concern capital) of these banks. Basically, a bank`s core Tier 1 capital comprise of stated capital, retained earnings (income surplus) and statutory reserves to its total risk-weighted assets. Although FBN and FNB maintained the lead as banks with high CAR at 190.3% and 182% respectively, in terms of Core Tier 1 Capital, GCB and Barclays were the well-capitalized banks in Ghana with core Tier 1 of Ghs1.4bn and Ghs1.3bn respectively. All the 17 banks were indeed above the 10% prudential limit set by the bank of Ghana. The recapitalization exercise was also aimed at meeting Basel II Pillar 1 requirements.

 Asset Quality

The most common cause of a bank’s failure is the magnitude of losses incurred by the erosion of asset quality. Lending was by far the largest activity for commercial banks in Ghana with credit risk accounting for more than 80% of Risk Weighted Assets (RWA).

 From a perspective of Loan Portfolio, Securities and Derivatives, Asset quality continued to a major issue for most of the banks in Ghana. There were other banks which took a tight credit stance in 2018. Some banks like Standard Chartered Bank saw flat growth in their loan and advances book. Industry Customer loan and advances saw 1% growth to Ghs31.8m. Among the top 5 banks, Ecobank significantly grew its loan book by over 50% to Ghs4.1m (2016: Ghs2.6bn), controlled 13% market share and maintained the top position. Barclays held 10.01% (2017:8.2%) of market share with GCB at 8.8 %( 2017: 8.07%)

Industry non-performing loans for the 17banks were hovering around 19.2% (2017: 21.12%). This is a key area that industry watchers believe must come down further considering all the initiatives undertaken. Banks like United Bank for Africa (72%), ADB (49%) and Access Bank (32%) where high on NPLs and indications were that it`s as a result of some asset refinance arrangements. The numbers will normalize in subsequent months reporting.GT Banks maintained the lowest NPL on the market, reduced their NPLs to 4% (2017:19.9%).

Sources:  Daily Graphic, April 2019, Banks 2018 Audited Financials.

Management Quality

The quality of management in a bank is the most important element in the CAMELS system. On management measure of these banks, following the issue of guidelines on corporate governance under the Corporate Governance Directive issued in December 2018, Guidelines in determining whether a person is fit to be director, shareholder or key management – “Fit and Proper” Directive issued in July 2018, Guidelines for term limit on CEOs and Board Members as contained in the Corporate Governance Directive (Transitional Provisions) issued in July 2018 and revised in September 2018, it`s intriguing to note that most banks had well constituted Board of Directors with a clear division of responsibilities at the top hierarchy of the Banks. 

The positions of the Board Chair and the Managing Director are now separated for most of the banks. For example, in Societe General (SG) and Republic Bank, the two top positions of Board Chair and Managing Director in the Banks are not both occupied by foreigners. At SG, the Chairman has always been a Ghanaian National and the Managing Director is a French National. 

Further, no two related persons occupy the positions of Board Chair and Managing Director of the Company. To further promote sound corporate culture, most banks have a clear cut succession plan, independent auditors, key management oversight, directors’ appointment and management director`s tenor etc. All these have been put in place to restore confidence in the managers of the banks.

Earnings

The banking sector in Ghana remained profitable as per the 2018 audited financials published by 17 banks. Average industry Operating revenue was about Ghs10.7bn (2017: Ghs9.9bn) and saw 8.1% growth year on year. Ecobank and GCB respectively controlled about 12.1% and 11.9% market share at the end of 2018.  Fourteen (14) banks saw a positive year on year growth on their revenue lines. Industry PBT stood at Ghs3.6bn with Barclays Bank maintaining the top position as the most profitable bank with PBT of Ghs554m in Ghana. (A position they have maintained since last year). This was followed by Ecobank Ghana with PBT of Ghs501m. Net Interest Incomes accounted for 70% of overall industry revenue.

Sources:  Daily Graphic, April 2019, Banks 2018 Audited Financials

Liquidity

Liquidity inspires depositor and Lender confidence. In fact, illiquidity rather than poor asset quality is the immediate cause of a bank’s failure. Some banks were forced to close down in 2018 when the regulator and general public had no confidence in them. Liquidity in the bank management is needed for 2 reasons: First, to satisfy the demand for new loans without having to recall existing loans or realized investments such as bonds holdings and second, to meet daily and seasonal swings in deposits so that withdrawals can be met in a timely and orderly fashion.

The sector remained solvent with improved liquidity and Liquidity Coverage Ratios (LCR). Total liabilities for the 17 banks increased by 17.3% from Ghs58.2bn in 2017 to Ghs68.2bn.  GCB was ranked first with customer deposits of about Ghs8.1bn with a 17.3% year on year growth. GCB and Ecobank respectively controlled 11.8% and 11.2% of the market share. The intriguing aspect of the liquidity position of these banks was that, even though there was banking sector crises and reforms in 2018, there was no major attrition from the banks as most of the banks saw a positive year on year growth. Banks who played in the mobile money space saw significant growth in the balances.

Sources:  Daily Graphic, April 2019 edition, Banks 2018 Audited Financials

Sensitivity

Sensitivity to market risk addresses the degree to which changes in interest rates, foreign exchanges and commodity prices can adversely affect financial institutions earnings. For most Banks in Ghana, market risk primarily reflects changes in exchange rate risk. Even though the banks had the ability to identify, monitor, manage and control its market risk, it provided management of the banks with clear supervisory concerns of these areas.

In conclusion, the evidence is clear; Basel II pillar 1 objective has been achieved by the Bank of Ghana as evidenced in the level of Capital Adequacy Ratios. The next step is for the central bank to attend to pillar 2 covering the implementation of stringent supervisory framework for these banks. Asset quality continues to be a major challenge and it is important players tighten up credit policies, control and monitoring framework as well as increase Liquidity Coverage Ratios.

A sound banking system acts as a catalyst for a robust financial sector because investor confidence is restored. This was evidenced in the $3bn Eurobond issuance by the Ministry of Finance which was oversubscribed by 7times. The importance of a stronger and well-regulated banking sector cannot be over emphasized, as the industry is shaping up and pointing to a positive direction. There is thus the need to maintain and sustain the gains.

Credit: Ghana stock Exchange, Daily Graphic, Selected 17 banks, Bank of Ghana

Disclaimer: The views expressed are personal views and doesn’t represent that of the bank or the institution the writer works for.

About the writer

Carl Odame-Gyenti is a second year PhD (Financial Management) student, a Finance and Telecom enthusiast, managing local and global Investors, Intermediaries, Non-Bank Financial and Financial Institution relationships with an international bank in Ghana. 

He has embarked on several international assignments in Singapore, Dubai, Kenya, Nigeria and Southern African markets. He has passion for youth and community development. He is married to Hilda and with two (2) lovely girls: Michelle and Nicole. Contact:  Carl.odamegyenti@gmail.com, Cell: +233-204-811-911