New Cash Reserve Regime to Weaken Ghanaian Bank Profits - Fitch

The profitability of Ghanaian banks will weaken due to the Bank of Ghana’s (BoG) recent decision to link cash reserve ratio (CRR) requirements to loans/deposits ratios (LDRs), Fitch Ratings says.

The new regime is partly intended to boost bank lending by raising CRR requirements for banks with low LDRs. However, analysts expect banks to tolerate the higher CRR requirements rather than significantly increase lending to avoid them, given Ghana’s difficult macroeconomic conditions.

The higher requirements will weaken profitability as cash reserves at the BoG are unremunerated.

The Bank of Ghana introduced the new regime in March, directly linking CRR requirements to LDRs on a tiered basis. Banks with LDRs below 40% will be subject to a CRR of 25% of deposits, those with LDRs between 40% and 55% will be subject to a 20% CRR, while those with LDRs above 55% will be subject to a 15% CRR. The new policy marks a material increase for banks with low LDRs as the current requirement is 15%. The new policy will take effect by the end of April.

The BoG’s move follows a significant decline in credit growth due to banks’ risk aversion given Ghana’s sovereign default last year, currency depreciation, high inflation and continued stressed economic conditions.

Credit growth in constant currency terms was marginally below zero in 2023. The new requirement is also aimed at mopping up excess local-currency liquidity to control inflation (25.8% in March), with the BoG having increased the monetary policy rate by a cumulative 1,550bp between January 2022 and July 2023, before easing by 100bp in January 2024.

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The banking sector’s LDR declined to just 36% at end-2023 from 43% at end-2022 due to weak credit growth, and the vast majority of banks will now be subject to a CRR requirement of 25%. Naira Steadies as Banks Issue Update on FX Purchase

“We do not think the penalty of higher unremunerated cash reserves will stimulate a material increase in credit growth. We believe banks will prefer to suffer the opportunity cost of not being able to deploy such liquidity into high-yielding treasury bills than to risk large loan impairment charges as a result of extending credit in the current economic climate”, Fitch stated.

The global rating firm explained that prospects for credit growth are also constrained by the banking sector’s tight capitalisation following Ghana’s domestic debt exchange programme, which imposed large net present value losses on creditors.

Many banks are still using regulatory forbearance to delay the full impact of the resulting impairments on regulatory capital ratios. Continuing strong deposit growth will also make it more difficult for banks to increase their LDRs.

“We expect the banking sector’s LDR to remain far below 55% in 2024, with the vast majority of banks therefore being subject to a higher CRR requirement”, Fitch said.

The new CRR regime coincides with a notable depreciation in the Ghanaian cedi this year, which itself has resulted in banks having to place more cash reserves with the BoG. This is due to the inflation of foreign-currency deposits in cedi terms and the CRR requirement being based on total deposits but having to be met in cedis.

Fitch maintained that substantially higher cedi cash reserves at the BoG will weaken banks’ net interest margins (NIMs) and profitability in 2024, which are already under pressure from declining Treasury bill yields.

However, the global rating agency expects NIMs to remain high by regional standards as treasury bill yields, although declining, will remain high, ensuring that profitability remains a key strength of Ghanaian banks’ credit profiles despite the new CRR regime.

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