Background of Banks Clean-Up
The Bank of Ghana has confirmed 23 banks out of about 37 banks originally in operation following the recapitalization exercise that ended on December 31 2018. By implication, the number of banks has reduced by 14 out of which 9 were taken over through purchase and assumption agreements, 6 of them merged into 3 and 1 bank wound up its operations in Ghana while 1 bank was down-graded to a savings and loans company. The remaining 6 including 1 merged entity were to be capitalized through the Ghana Amalgamated Trust (GAT).
9 Bank Purchase and Assumption Deals
In 2017 the licences of UT Bank and Capital Bank were revoked by the Bank of Ghana and GCB Bank took over through a purchase and assumption agreement at a total cost of GHc2.2 billion.
In August 2018, Bank of Ghana consolidated 5 defunct local banks (Unibank, Biege Bank, Severeign Bank, Royal Bank, and Construction Bank) to operate under a newly established bank namely the Consolidated Bank Ghana Limited. The funding gap for these 5 banks was bridged through the issuance of GHc7.96 billion bond. In December 2018, additional 2 defunct local banks (Heritage Bank and Premium Bank) were added to the 5 defunct local banks at the cost of GHc1.40 million bringing the number to 7 defunct local banks under the Consolidated Bank Ghana Limited.
All together 9 local banks have lost their licences and have been taken over through a purchase and assumption agreements at a total cost of GHc11.56 million.
3 Bank Mergers, 1 Bank Exit and 1 Bank Down-Grade
The BoG also approved three applications for mergers, consequently, First Atlantic Merchant Bank Limited and Energy Commercial Bank have merged, Omni Bank and Bank Sahel Sahara have merged, and First National Bank and GHL Bank have merged.
The Bank of Baroda (Ghana) received approval from BoG to wind up its operations in Ghana effective December 31, 2018 through an offload arrangement with Stanbic Bank in respect of clients deposits. GN Bank was down-graded to a Savings and Loans company.
6 Banks Through GAT Arrangement
The government and BoG acknowledged that there were six banks which were seen as well-governed, solvent but unable to meet the BoG’s GHS400 million new minimum capital for banks on their own. The government therefore announced a GHc2.0 billion bailout package for these six indigenous banks through a Special Purpose Vehicle known as the Ghana Amalgamated Trust (GAT) to enable them meet the Bank of Ghana (BoG) deadline on recapitalization. These 6 banks include National Investment Bank (NIB), Agric Development Bank (ADB), Prudential Bank Limited (PBL), Universal Merchant Bank, and the merged Omni/BSIC Bank.
GAT will commit funds from pension funds and other investors, through a bond issuance program, with proceeds of up to GHc2.0 billion to be used for equity investments in the eligible indigenous banks, as determined by the investors. The bonds to be issued will be listed on the Ghana Fixed Income Market (GFIM) to ensure access to liquidity by investors.
Approach by GAT
- For the banks to qualify for investment by GAT, it must be an indigenous bank and it must be well governed, solvent and meet the BoG requirements on capital adequacy ratio and other prudential guidelines.
- The investments will be administered by Ghana Amalgamated Trust Limited (GAT) which is a special purpose vehicle (SPV) incorporated on December 17 2018 to invest in banks.
- GAT will source funds from capital market through bond issuance. The bond will be opened to foreign and domestic investors, with key targets being domestic pension funds. The bond will be issued on the assets of the six banks.
- The amount of funds a bank requires to recapitalize will determine how much of its shares will be relinquished to GAT.
- GAT will appoint a director each to the board of the beneficiary bank to help oversee the interest of GAT as well as ensure prudence in the operation of the bank.
- The exit strategy for GAT will be within three (3) to five (5) years’ time using any of the following exit routes; (a) Listing of GAT’s stakes on the Ghana Stock Exchange (GSE), (b) Existing shareholders buying GAT out or (c) New shareholders buying GAT out.
Feasibility and Sustainability of GAT
For GAT to be feasible and sustainable, certain challenges need to be managed well. These include fair equity valuation, interest rate matching, liquidity management, exit and/or exercise price provisions, legal considerations, regulatory regime, and future performance of the banks.
Equity Valuation – To determine how much stake GAT can hold in any of the banks it plans to invest in, there must be an acceptable equity valuation agreed by each bank and GAT. To ensure confidence and credibility of the valuation process, there must be due diligence to cover the legal and financial considerations of the banks.
For those banks that have not been listed on the GSE, the starting point will be their Net Book Value which is the accounting price of any firm. However, fair market value can be computed for these banks using comparable stock market indices, industry outlook, cash flows and company fundamentals as a going concern. For ADB that is listed, the negotiation of its price for investment purposes may start from its market price on the GSE.
Interest Rate Matching – Interest rate matching is another challenge for GAT to be managed well. The interest on the bond will be different from the interest from the underlying assets (bank shares). The return for GAT on the banks’ equity investment will emanate from dividend income and/or exit or exercise price. Dividend payments depend on other several factors such as profitability, dividend pay-out policy, cash flows, etc. All things being equal, on the average each bank must earn more than the bond interest to justify the investment. For example, if the bond is priced at 21% interest per annum then the banks involved must make more than 21% Return on Equity (ROE) to justify the investment.
Liquidity Management – Cash flows need to be managed such that cash inflows will be more than enough to pay bond holders periodic interest before maturity when the principal is paid off. A pure private equity fund may not be able to meet interest payments when it falls due unless significant part of the GAT fund is invested in debt instrument or preference shares or other quasi-equity financial instruments with fixed predictable interest payments that can compensate for the bond interest. Otherwise, GAT will have no option but to postpone interest payments. Notwithstanding, tradability on the GSE platform is to ensure liquidity as it provides marketability but this will also depend to a large extent on the interplay between demand and supply.
Exit or Exercise Price – The exit or exercise price of disinvesting from any of the banks by GAT will be determined in the equity investment agreement. The exit strategy for GAT as indicated earlier, will be within three to five years’ time under any of the following; (a) Listing of GAT’s stakes on the Ghana Stock Exchange (GSE), (b)Existing shareholders buying GAT out or (c) New shareholders buying GAT out. The price to be paid in the listing of GAT’s stake in any bank will be determined by the performance of the banks as well as demand and supply factors at the time of sale. Selling through existing shareholders or new shareholders can however be locked in an agreement now and it is usually sold at a multiple of current net worth or earnings or dollar value of the investment.
Legal Provisions – Both GAT and the banks need to be circumspect with all the legal provisions in the investment agreement. There must be clear minority shareholder protection clauses, specific use and monitoring of funds to be invested, call and put options, tag along clauses, restrictions to related party transactions, and other anti-dilution clauses.
Future Performance of Banks – It is assumed that the banks will perform creditably but the future performance of banks depends on a number of factors including stable macro-economic environment, regulatory regime, good corporate governance, judicious use of resources, etc. which may be difficult to predict with certainty.
Regulation of GAT – The operations of GAT Fund will cut across many regulators namely the Securities and Exchange Commission (SEC), Ghana Stock Exchange (GSE), National Pensions Regulatory Authority (NPRA), Bank of Ghana (BoG) and the Ministry of Finance (MoF). Hence, direct and indirect regulatory demands from all these regulators may be a challenge.
Benefits of using the GAT platform
If the challenges perceived are managed well, the GAT platform will be beneficial to the banking sector in particular and the economy as a whole. The benefits include the following:
Adequate Capitalization – Adequate capitalization will help the banks to do bigger size transactions, improve liquidity, enjoy economies of scale and improve profitability.
Avoidance of Down Grade/Revocation – The failure of these banks to raise the required minimum capital would have meant a downgrade or revocation of their licences. The GAT platform therefore provides a credible vehicle to bail the banks.
Protection of Jobs – Government’s commitment to this initiative will help protect jobs, local enterprises, enhance the capacity of local banks and ensure strategic Ghanaian interests in the banking sector.
Business Development Support – GAT also seeks to provide business development support in order to facilitate the strengthening of these banks both from a perspective of corporate governance and growth.
Strong and Resilient Financial Sector – The Government and all regulators have shown commitment to build a strong and resilient financial sector. It is expected that financial regulators will remain vigilant to ensure that the public is protected and that confidence in all financial institutions that are licensed by the various regulators is restored.
Transformation of NIB and ADB – These banks have faced significant challenges and it is expected that injection of adequate capital will strengthen them to support Government’s efforts in promoting industrialization and agribusiness, especially for small and medium scale enterprises.
In conclusion, the feasibility and sustainability of the GAT platform for the selected indigenous banks will depend to a large extent on how it is structured and how successful it can manage the following:
- The determination of fair market price of the banks.
- The interest rate payments on the bonds, it may be important to postpone to a reasonable future date or maturity of the bond period.
- Liquidity management, part of the GAT Fund may be invested in an instrument that will yield liquid funds for operations and other contingencies.
- Fair exit or exercise price for all disinvestments by GAT from the banks.
- Reasonable and acceptable legal provisions for both GAT and the banks.
- Good performance of the banks to ensure strong profitability, liquidity and high net worth to support expected exit value.
- Smooth and responsible regulations to avoid overlaps.
If the GAT fund is structured and managed well to overcome the aforementioned risk factors it will benefit the banking sector in particular and the economy as a whole. It will generate adequate capitalization for the banks which will help the banks to do bigger size transactions, improve liquidity and corporate governance structures, enjoy economies of scale and improve profitability. It will also protect jobs to boost economic activity, local enterprises, enhance the capacity of local banks and ensure strategic Ghanaian interests in the banking sector.