Still bullish on Ghana banks, as medium-term profitability outlook remains strong, supported by a favourable macroeconomic backdrop (robust GDP growth and lower asset yields). The recent recapitalisation exercise has also strengthened the sector. Valuation is attractive for the Ghana banks that we cover, with median 2020f PB of 0.9x and PE of 4.3x, a 10% discount to 5-year historical PB, but a 13% premium on PE terms. Compared with frontier peers, our Ghana banks are trading in line on a PB basis, but at a 28% discount on PE.
GCB is our top pick (ETR 160%). This is supported by: 1) its strong balance sheet position, which we expect to continue to support loan growth; 2) its scope for repricing of deposits acquired from the merger of UT Bank and Capital Bank; and 3) its attractive valuation, with 2019f PB of 1.1x – a 28% discount to Ghana peers. Our second pick is CAL due to its lower funding cost, which should support NIMs, and its ongoing adoption of technology that could boost operating efficiency and non-interest income.
Earnings growth appears strong over the medium-term. We forecast 14% CAGR for earnings in FY 19f-22f for our coverage with ROE averaging 23.7% (vs 32.3% 5-year historical average), slightly down from our previous forecasts of 16% and 26.4%, respectively. Key drivers of the adjustment are: 1) weaker NIMs on lower interest rates expectation; and 2) a slowdown in asset quality improvement.
Higher non-interest income and efficiency gains. As banks (particularly CAL and GCB) continue to invest in digital banking infrastructure and roll out alternative banking channels, we expect a pick up in non-interest revenue and improved operating efficiency. On the back of this, the cost/income ratio for the sector should decline to 45% by 2022f from 52% in 2018. The moderation will be more evident in CAL and GCB.
Lower funding costs to support net interest margins. We expect cost of funds for Ghana banks to decline to 3.1% in 2022 from 3.9% in 2019f on the back of cheap retail deposit mobilisation and declining interest rates. Although lower interest rates are negative for asset yields, for Ghana banks, the repricing for liabilities should be greater than assets, particularly in the near term, resulting in a net positive for margins.
Stronger capital base to support long-term growth. The higher CAR levels (median of 18.4% in H1 19 vs 23.3% in 2018) following the banking sector consolidation, reflects a sufficiently solvent industry with enhanced capacity for balance sheet growth. This, combined with a positive macroeconomic backdrop and lower yields on fixed income instruments, positions the sector well for increased lending.
Upside risks: 1) better-than-expected asset quality improvements; and 2) higher-than-expected rate cuts resulting in lower cost of funds than we forecast.
Downside risks: 1) a slowdown in economic growth; 2) fiscal slippages creating a crowding-out effect and pushing interest rates higher would be net negative for NIMs, while also restricting loan growth; and 3) weaker-than-expected non-interest income and efficiency gains from investments in technology.