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DDEP: Banks to suffer considerably in 2023 – Fitch Solutions

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The domestic debt restructuring will weigh considerably on banks in 2023, Fitch Solutions, has disclosed.

According to the market and research firm, the Domestic Debt Exchange Programme (DDEP) will affect the banking sector in two main ways.

First, it will significantly weaken banks’ capital levels, with expected capital shortfalls at some banks.

“Banks are entering this phase with a mixed capital picture, with some banks very close to the minimum regulatory capital level of 13.0%”.

Again, based on industry level, capital buffers have fallen considerably in 2022, despite a sudden rise in December.

The fall, Fitch Solutions, said was largely driven by mark-to-market losses on investments and increases in risk weighted assets of banks, due to the depreciation of the cedi and growth in loans and advances.

However, capital levels narrowly avoided falling below the minimum requirement in December 2023, likely as a result of banks retaining more of their earnings, in preparation for expected losses in profits and capital in 2023.

“The debt restructuring and fall in capital could lead to higher funding costs for banks if they become less creditworthy, and could significantly impact the banking sector’s solvency and stability”, it pointed out.

Banks to be more selective regarding sectors to lend

Fitch Solutions said banks in Ghana will be more selective regarding the sectors they lend to in the coming years. 

Local banks will be more inclined to lend to industries with low non-performing loans (NPLs) ratios and positive outlook, especially since we expect to see a rise in NPLs in the coming quarters, given the challenging macro backdrop and slowdown in loan growth”.

“We think that the Mining & Quarrying sector stands out as it has a low NPL ratio of 4.0%, and as we forecast a positive outlook for gold mining in Ghana (which accounts for 95% of the country’s mineral revenue)”, it added.

In contrast, it said nearly one third of all construction loans are non-performing, which suggests that banks are unlikely to increase their exposure to this sector amid challenging economic conditions.

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