The final race towards bank recapitalization

Dr Ernest Addison, Governor, Bank of Ghana

There are barely two months to the deadline set by the Bank of Ghana for banks in the country to meet the new GHc400 million minimum capital requirement, but about one third of the licensed banks are still short of what is needed. TOMA IMIRHE examines their prospects and the implications for Ghana’s banking public. 

Earlier this week, Bank of Ghana governor Dr Ernest Addison, while attending the annual general meetings of the World Bank and the International Monetary Fund, assured Ghana’s banking public that the country’s banking industry is not in crisis despite the revocation of the licenses of seven banks – more than one fifth of the erstwhile total – since August last year. He pointed out that the combined assets of the seven liquidated banks make up barely 10% of the industry’s total assets.

The calm he is consequently calling for among users of banking products and services is not quite being shared by many of the institutions that offer them though. Although, according to the central bank governor, all the banks still in operation are free of immediate solvency problems, about one third of them are yet to meet the new GHc400 million minimum capital requirement, with barely two months left to the expiration of the deadline.
The progress made by the banks in this direction is not being made public on a regular basis, ostensibly in order to stem unhelpful speculation by the banking public as to the fate of several still capital – deficient banks, ahead of the expiration of the deadline. However, the Governor of the BoG has confirmed recently that only 19 banks have passed the new minimum already or are very nearly there.

This leaves about 10 banks with the task of securing significant new share capital over the coming two months or risk losing their respective operating licenses and with regards to most of them, it is still unclear as to precisely how much each need, what exactly they are doing to secure the needed capital and the prospects for them succeeding in this.

Strict deadline
The BoG has repeatedly warned that the deadline will not be extended despite concerted lobbying by indigenous banks for an extension of up to five years. Government and the Council of State has sided with the BoG over this but the former now claims it could consider providing bridging finance for indigenous banks which are well managed but which are having difficulties in raising the requisite new capital ahead of the deadline because of “unfavourable market conditions.” The perceived lack of activity by several banks towards meeting that deadline suggests they are looking up to government to bail them out temporarily.

Only a few banks are making concerted moves that have been announced to the public. Most notable is an impending arrangement under which Omni Bank and BSIC [Sahel Sahara Bank] are in the process of trying to merge with each other, while Energy Commercial Bank is currently seeking to raise the requisite new capital through an Initial Public Offer that would see it listed on the Ghana Stock Exchange. The rest are combining retained earnings with private arrangements to get existing shareholders to cough up more equity investment, to attract new shareholders, or some combination of the two.
Instructively, there have been no outright acquisitions by any privately owned banks. So far, the only consolidation completed has been driven by government through the BoG – this being the creation of the state-owned Consolidated Bank out of five troubled privately-owned indigenous banks using a process akin to the Purchase and Assumption agreement through which the state-controlled GCB Bank took over the erstwhile UT Bank and Capital Bank, both of which had been found to be terminally insolvent.

Local banks
Another form of departure from what had been widely anticipated though is more encouraging – the fate of indigenous banking. Despite early fears that recapitalization would sound the death knell for indigenous banking in Ghana, several local banks are meeting the stiff new capital requirement. To be sure, GCB Bank’s capacity in this regard was never in doubt. But the replication of its feat by indigenous banks such as privately owned Fidelity Bank and CAL Bank have given strong hope to the country’s indigenous business sector that they will continue to get financing support from locally owned banks.
Instructively, by the middle of 2018, CAL Bank had well exceeded the new minimum, with eligible capital of GHc445.706 million as at June 30. Fidelity was not far behind, with GHc352.238 million in eligible capital as at June 30, meaning that it was within striking distance of the new minimum, even by that time.

On the other hand, though several local banks still have quite some way to go even as their time runs short. For instance, by June 30, Prudential Bank only had eligible capital of GHc 106.234 million, which is barely a quarter of what it needs to retain its license.
This will be even more crucial going forward than it has been in the past. Apart from the well documented corporate governance shortcomings that have afflicted many indigenous banks, Professor John Gatsi, head of finance at the University of Cape Coast pertinently points out that their problems have been exacerbated by the fact that they cater primarily for indigenous, rather than foreign owned enterprises and BoG reports show that the former have significantly higher loan default rates than the latter, on average. This means that they will have severe financing problems if the indigenous banking sector fails to survive the ongoing recapitalization exercise.

Indeed, this perspective reveals the sheer resilience of the well managed indigenous banks, who have to finance enterprises that present a much larger credit risk than that presented by their foreign counterparts. However, there are worries that going forward, that even the indigenous banks that survive the recapitalization exercise in their current form, will be more reticent about lending to local enterprise even though recapitalization is giving them more financial muscle. Instructively it is indigenous enterprise that is mostly affected by the slowdown in bank credit growth that has afflicted the economy since 2016.

Accusations
Accusations of poor governance and risk management practices, being levelled against them by banking industry regulators have intensified the operational challenges that indigenous banks are facing. These accusations have not tended to distinguish between well managed indigenous banks and their poorly managed counterparts. This means exemplary ones such as Fidelity and CAL have suffered runs on their deposits by some customers due to the perceived corporate governance failings of indigenous banks as a whole. Few customers have closely examined key ratios such as capital adequacy and liquidity ratios which show that the better run indigenous banks are safer havens for depositors’ funds than many foreign banks, some of whom instructively, are still in danger of not meeting the deadline for recapitalization.

Regulators
Both regulators and government itself however, are taking careful consideration of the key financial performance and solidity ratios. This is why government says it is looking at the prospect of providing bridging equity finance for well managed indigenous banks that are behind schedule with regards to recapitalization due to what the BoG calls unfavourable market conditions. Translate these to be, for instance, the current lack of available investible equity financing on the Ghana Stock Exchange because MTN Ghana sucked most of it up earlier this year with its record sized Initial Public Offer; and lower than usual returns on equity being delivered by the banking industry because changes in financial reporting regulations have adversely affected revenue recognition and thus profitability levels.

Optimism
But while the fate of several banks, both indigenous and foreign still hang in the balance as the recapitalization deadline approaches, regulators can justifiably claim success in achieving the objectives of the initiative. Whichever banks do survive into next year with their operating licenses intact, will be bigger and stronger than a typical bank operating in Ghana prior to recapitalization. The fact that they will be fewer than hitherto will bring advantages too; for instance better economies of scale and less competition within the industry for human and material resources which hitherto were being stretched too thin, thereby increasing operating costs inordinately.

Already, some BoG chieftains are looking beyond the recapitalization deadline to the other big challenge – ensuring that the bigger, stronger banks that emerge are prudently managed. This means diligent implementation of the numerous, direly needed, corporate governance directives introduced earlier this year.

Many banking industry commentators however suggest that those regulators are getting ahead of themselves; even if a couple of banks fail to recapitalize adequately, merge or be acquired by December 31, the BoG will have to navigate hitherto unchartered waters, in either liquidating them following license revocation, or setting terms for remedial action by them after the deadline expires. No matter what the central bank does in this regard, there is bound to be lots of controversy which the BoG and government itself will have to deal with.