Banks tighten loans stance

…move towards long-term investments

Dr. Ernest Addison, Governor, Bank of Ghana (BoG)

This year, banks are gradually shifting away from lending towards long-term investments, the latest Banking Sector Report dated July 2019 has revealed.

Data from the Bank of Ghana (BoG), shows that banks’ overall stance on loans to enterprises during the June 2019 Credit Conditions Survey round remained unchanged from the April 2019 survey position, when banks expected the stance on overall enterprise credit to tighten marginally over the next two months, ending June, 2019. This means tightening can be expected to continue at least until the end of the third quarter, and possibly into the last quarter of this year.

Indeed, banks are projecting further marginal net tightening in the credit stance to enterprises over the next two months at least, driven by a net tightening in the credit stance on all loan categories with the exception of loans to SMEs.

Figures show however that credit growth has continued to pick up with loans and advances excluding provisions and interest in suspense (Net advances) increasing by 4.0 percent year on year to GHc 33.94 billion by June 2019, from 3.5 percent growth during the corresponding period a year earlier.

However, investments have remained the largest component of the industry’s assets with a share of 38.6 percent as at June 2019, up from 35.7 percent a year earlier. Investment in bills and securities increased to GHc 43.52 billion at end-June 2019 from GHc 35.82 billion at end-June 2018, indicating an annual growth of 21.5 percent, although lower than the 41.1 percent growth recorded for same period in 2018.

The reports indicates that the industry’s investment portfolio mix reflects banks’ preference for relatively high-yielding long-term domestic debt securities and banking industry resolution bonds issued to bridge the capital financing gaps of the nine liquidated banks. Investments in long-term securities increased by 69.8 percent to GHc 27.21 billion during the period.

The growth in long-term investments was partly due to the issuance of resolution bonds by government to finance the gap between liabilities and selected assets of the two defunct banks taken over by GCB Bank and the seven banks acquired by Consolidated Bank Ghana (CBG).

Banks’ investments in short-term bills, on the other hand, contracted by 18.0 percent to GHc 15.89 billion at end-June 2019, from 9.7 percent growth in June 2018.

Funding Sources

On funding sources, the report reveals that deposits increased by 22.3 percent to GHc 75.57 billion as at end-June 2019, with both domestic and foreign currency deposits growth outperforming the previous year’s performance. The strong growth in deposits reflects increasing confidence and stability in the banking sector following the reforms.

The Regulator note that the sustained growth in deposits pushed its share of the banking sector’s pool of funds from 61.6 percent to 67.0 percent of the entire financial intermediation industry’s deposits during the period under review. This indicates a sustained flight to quality by depositors in the wake of the turmoil in the financial intermediation industry which the Bank of Ghana has now taken steps to resolve by mass liquidations of microfinance, specialized non-bank finance houses and savings and loans companies, found to be undercapitalized or insolvent.

Banks’ borrowings contracted by 17.9 percent to GHc 14.73 billion in June 2019 from GHc 17.95 billion in June 2018. This suggests less reliance on borrowings by banks to fund their assets on the back of growth in relatively cheaper deposits as well as the higher capital levels.