- Higher non-interest income owing to the rebound in fee income supported by the expansion of digital banking processes
- Reduced loan growth and higher loan loss provisions charge on the back of increased credit risk in vulnerable sectors
- We have Buy recommendations on our banks under coverage, with 69% average ETR (except for Stanchart, Hold)
As Q4 20 earnings season (as well as FY 20) draws closer for Ghana's banks, we highlight five factors to watch:
1) Differing risk exposures
In Ghana, the three sectors that have been most badly affected by Covid-19 are commerce & finance, tourism & hospitality, and transport. These three sectors accounted for 52.9% of total industry loans as of 2019, forcing the banks to reduce lending to these hardest-hit sectors and instead focus on pharmaceutical and health sectors.
The banks we cover have varying sector exposure:
GCB: services, commerce and manufacturing sector (58.6% of total loan book)
CAL Bank: construction, services and commerce (71.5%)
Ecobank Ghana: airlines, hospitality and trade (72.8%)
Stanchart Ghana: manufacturing, health and hospitality sectors (54.6%)
Based on Q320 results, Stanchart recorded the highest NPL growth (+31.3% yoy). We expect this to remain elevated as loans have been redirected from the other vulnerable sectors of the economy to the health sector, which makes Stanchart susceptible to risks associated with the health sector, while the other banks are relieved of losses associated with their sectors.
2) Elevated cost of risk and impairments
The repayment capacity of businesses and individuals has been weakened due to Covid-19. We expect the banks' impairments to remain elevated (but manageable) due to the high rate of loan defaults in the most vulnerable sectors. Stanchart recorded the lowest estimated cost of risk of 0.6% yoy in Q3 20 and a halving in loan impairment charge (-50% yoy), while CAL Bank recorded the highest cost of risk at an estimated 1.0% and the highest loan impairment charge growth (+425% yoy).
Looking at Ecobank Group’s unaudited FY 20 financial statement, Ecobank Ghana’s PBT declined 115% yoy on the back of increased impairment and non-interest income, contributing 47.4% to the group’s total PBT.
3) Digital to drive improving fee income
Bank of Ghana's various digital banking initiatives aim to speed up the digitisation of banks’ operations, especially the Digital Financial Services Policy which was targeted at coping with the economic uncertainty and driving financial inclusion.
Customers had to resort to digital banking during the lockdown in Ghana, and these digital banking platforms have continued to record impressive growth in their usage post-lockdown. This should assist in the pick-up of banks’ fee income after the fee cut earlier in 2020 and the adverse effect of Covid-19. We expect GCB and CAL Bank to benefit most from this development as the bulk of their fee income comes from digital banking/customer fees.
From the Group’s unaudited FY 20 results released by Ecobank, fee income came in positive (+18% yoy), supported by likely improvements in its digital banking platforms and increased usage of the platforms by its customers.
4) Capital should remain adequate
The banks are well-positioned to absorb the increased asset quality risk from borrowers, pressured by the economic effects of Covid-19.
In Q3 20, all of the banks under our coverage recorded CAR above the statutory requirement of 11.5%. CAL emerged with the highest CAR (20.8% yoy), followed by GCB (18.3% yoy), SCB (18.0% yoy), with EGH recording the lowest CAR (17.3% yoy). The overall improvement was aided by the decision of the BoG to suspend dividend payments in 2019 and 2020. We await the Bank of Ghana’s decision on whether the banks are able to declare dividends in 2021.
5) Shift in working patterns to reduce operating expenses
The banks recorded a decline (-5% yoy) in operating expenses in Q3 20 due to the closure of some branches and the banks’ flexible working conditions. We expect to see more declines in operating expenses as Stanchart has announced a permanent move to a flexible work-from-home policy in 2021 while the other banks have encouraged employees to work remotely. This will result in low running costs and lower operating expenses for the banks, especially travel and office expenses, thereby reducing the cost to income ratio and increasing earnings.
According to the Group unaudited FY 20 results, Ecobank recorded a decline in operating expenses (-70% yoy), reflecting how the implementation of staff mobility, reduction in travel costs, and the maximisation of digital infrastructure has helped with cost minimisation.
We have three Buys and one Hold on our Ghana banks. Our top pick is GCB – a high-performance bank with the largest deposit market share which has given it access to cheap deposits. The bank has the second largest loan book size with a relatively lower NPL ratio than its peers, resulting in impressive asset quality over the years.
For our detailed expectations for Ghana banks, and our look ahead to the key trends in Q1 21, please see our in-depth report below:
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This report is independent investment research as contemplated by COBS 12.2 of the FCA Handbook and is a research recommendation under COBS 12.4 of the FCA Handbook. Where it is not technically a res...