Bullish on Ghanaian banks. We are positive on the Ghanaian banking sector, as the nation’s medium-term economic prospects appear strong, the sector’s asset quality problems are moderating and the recently completed recapitalisation exercise should strengthen the sector. Valuations are also attractive with our coverage trading at a median 2019f PB of 1.2x and PE of 5.1x, a 10% discount to 5-year historical PB but a 13% premium on PE terms. Compared to frontier peers, our Ghana banks universe is trading in line on a PB basis but at a 19% discount on PE.
GCB is our top pick. We believe the potential synergies from the merger of UT Bank and Capital Bank, its ability to reprice expensive deposits, which should see margin decline less than peers, and the bank’s strong balance sheet position should be a positive for GCB’s earnings growth.
Medium-term economic growth appears strong. Ghana should remain one of the fastest growing economies in Sub-Saharan Africa, with the IMF forecasting GDP growth of 7.6% in 2019. This should be supported by: 1) the administration’s plans to issue bonds to international investors (less ‘crowding out’); 2) higher government capital expenditure; and 3) rising oil & gas production. For banks, this should result in slower new NPL formation and potential NPL recoveries.
Banking sector consolidation to support economic growth. We think the recent mergers have strengthened the banking sector and better position it to support economic growth over the medium term. This, as well as the increased oversight by the Bank of Ghana, should help to enhance stakeholder confidence. Merged banks can also conduct more business with large corporates via enlarged single obligor limits. However, sector efficiency may decline as one-off restructuring costs increase operating expenses, weighing on profitability in the near term.
Problem loans may have peaked; cost of risk set to decline. The sector’s NPL ratio has gradually moderated from its 23.4% peak as at April 2018 and is likely to continue this trend given the improvement in the macroeconomic environment, with the BoG supporting banks in writing off bad loans that are fully provided for. As such, we expect the sector’s NPL ratio (20.1% as at October 2018) to decline towards 13.3% in December 2019.
Loan book growth to pick up. We expect the banking sector’s lending activities to increase from 2018’s level of 5%, on the back of stronger non-oil sector output, improving asset quality and lower yields on fixed income securities. However, a stringent regulatory environment with a focus on risk management could see the sector loan book growth limited to 15% in 2019f, below the 5-year historical CAGR of 24%.
Further moderation in interest rates. Inflationary pressures and concerns surrounding the Cedi (GHS), given the interest rate hikes in the US, may limit the possibility of another significant cut to Ghana’s monetary policy rate (MPR) in 2019f. In 2018 there was a 300bps reduction, while in 2019 we have had one cut of 100bps so far, and we expect a further 100bps cut during the year.
Net interest margins likely to come under pressure. We expect fixed income yields to decline in 2019 on the back of the cuts in the monetary policy rate and lower domestic borrowing by the government, which could lead to some margin compression. Also, increasing competition amongst larger banks, partly due to the emergence of the Consolidated Bank of Ghana, could put downward pressure on lending rates over the medium term.
Upside risks: 1) better than expected GDP growth; 2) MPR remaining unchanged; and 3) resolution of legacy bad loans owed by bulk distribution companies.
Downside risks: 1) steeper than expected cut to MPR; 2) fiscal slippages; and 3) a slowdown in economic growth.