Nigerian banks operating in Ghana may struggle to meet a new 400 million cedis minimum capital requirement, due to stringent measures by their parent country’s central bank, Benjamin Amoah-Adjei, a Senior Research Analyst at FirstBanC Financial Services, an investment bank in Ghana, has disclosed to footprint2africa.com in an exclusive interview.
Mr. Amoah-Adjei, who spoke to footprint2africa.com in Accra, also touched on Ghana’s banking sector and offered key insights into how the new minimum capital requirement by the Bank of Ghana may shape the future of the industry, especially local and Nigerian banks.
The new increment, introduced last month, represents an increase of 233.3 percent from the previous 120 million cedis. Commercial banks have until December 2018 to meet the new requirement.
Below is the full-text interview with Mr. Amoah-Adjei, whose outfit is one of the leading research and investment banking firms in Ghana;
What is your take about the banking sector in Ghana?
The sector remains largely profitable, with industry-wide returns on equity well above 20% at worst. Despite recent challenges, opportunities still remain for banks to grow in less crowded urban areas, especially due to available technology.
What do you make of the new capital requirement for commercial banks?
It is in the right direction, particularly due to the challenges they have faced in the last two years with non-performing loans. Several of them have suffered declining capital levels as a result and so they need a boost to their capital base. In fact, the requirement has even come in a little late and I believe that supports the decision behind the tight deadlines. The new levels are also higher than we expected but if that creates the large banks that we have always longed for, then why not?
What do you foresee happening as a result of the new capital requirement?
Most likely, a few of the new local banks will have challenges raising that amount on such a short timetable.
In addition, some of the Nigerian banks may be unable to call on their parents due to the Central Bank of Nigeria’s stringent restrictions on recapitalising foreign subsidiaries. They would need to have reported significantly impaired capital based on accumulated losses or the Central Bank of Nigeria (CBN) would have to judge the new capital requirements as commensurate to profit levels in the Ghanaian banking sector so as not to expose the subsidiaries to undue risk of chasing above-normal returns. Obviously, this appears rather subjective and we are yet to hear the CBN’s comments on the matter.
For banks who fall between these two groups, listing on the exchange or finding a suitable partner for a merger would be the best approach. Of course we must also consider the fact that due to the short timeframe, anyone wishing to follow either path would have to move quickly before their competitors’ take up all the available funds in fresh IPOs and secondary issues, as well as merger opportunities. We expect to see more bank listings next year as well as secondary rights issues on the Ghana Stock Exchange (GSE). Mergers should also starting springing up by January 2018.
In addition, several of the banks who are close to or already above the new levels due to high-income surplus will issue out bonus shares to account for the transfer of funds to stated capital. Expect this from the large banks like GCB Bank, StanChart and Ecobank, although this will result in an additional tax bill. This also means that most banks will not be able to pay dividends for the 2017 financial year, even if they report strong profits.
As an analyst, do you agree that we have too many banks serving a small population?
The number of banks has never been my worry, since that invariably drives competition and forces some of them to look outside the crowded space in Accra, Kumasi and Takoradi. What we need is bigger banks to drive the nation’s economy, and if we can have 33 big banks that’s fine with me. As you would have noticed the Central Bank has continued to issue licenses even as this announcement was coming up. It’s not about the number of banks, it’s about how big they are and what they can do.
What other measures can stakeholders take to achieve a strong and consolidated banking sector?
Let us all support the government in rolling out this national identification policy. It will be very useful in helping the banks manage their credit risk and tracking down loan defaulters. In addition, the government will have to ensure that it settles its debts to the banks, especially those from the energy sector.
Shareholders and directors must ensure that weak corporate governance practices are gotten rid of completely. The Central Back must remain proactive in its response to banking risks and must maintain the aura of toughness it has taken up recently.
How can banks improve profitability, especially in the face of increasing non-performing loans?
They cannot avoid giving loans if they want to grow, especially with the sharp drop in government securities that we have observed. They just need to be more careful about their lending activities.
As the economy picks up steam, there will be strong demand for loans to finance business activity and household spending. They have to be careful that in meeting this need they do not take too much risk to justify the new capital levels to shareholders. Some of them will also have to improve on their corporate governance structure in order to better manage their risks and it appears the Central Bank is leading the way on this one.
Mr. Amoah-Adjei is an investment professional with over three years of experience, with specialty in Equity Research and Economic Analysis. He is proficient in Financial Modelling and Data Analysis, with deep insights into the Ghanaian economy and capital markets. He is also a CFA Level III candidate.