Fitch Ratings has expressed a positive outlook for Ghana’s banking sector, highlighting stronger profitability and improving solvency following a period of significant challenges.
The agency’s latest report points to the critical role of high yields on Treasury bills in helping banks rebuild capital reserves and maintain regulatory compliance after suffering from severe losses in recent years.
The banking sector’s struggles began in December 2022, when the government introduced its Domestic Debt Exchange Programme (DDEP), which led to substantial losses for banks, severely impacting their solvency. The initiative aimed to restructure government debt but left many banks grappling with financial instability. However, the situation has shown signs of improvement in recent months. Fitch observed that strong profits in 2023 and 2024, driven largely by high-yield government securities, have set the stage for recovery. The agency projects that most banks will achieve capital compliance by the end of 2025, even as regulatory forbearance — which temporarily eased capital requirements — is expected to expire.
Fitch’s optimism is rooted in the profitability that is currently bolstering the capitalisation of banks. “High profits are driving a recovery in the banking sector’s capitalisation after the large losses imposed by Ghana’s DDEP,” the agency noted. The high returns on Treasury bills, a key government security, have helped many banks strengthen their balance sheets and recover from the damage caused by the debt exchange program.
In addition to these internal recovery efforts, Ghana’s ongoing sovereign debt restructuring has provided much-needed stability to the banking sector. The restructuring, which is expected to conclude in early 2025, has already yielded positive outcomes, including the completion of a Eurobond exchange in October 2024. This milestone improved Ghana’s access to international finance and eased local currency liquidity pressures, further enhancing the stability of the financial system. Fitch responded by upgrading Ghana’s Long-Term Local-Currency Issuer Default Rating from ‘CCC’ to ‘CCC+’. The agency also expects macroeconomic conditions to improve in 2025, with projected GDP growth, declining inflation, and a stabilising exchange rate all contributing to a more favourable environment for the banking sector.
Despite the positive developments, risks remain, particularly in the area of non-performing loans (NPLs). The NPL ratio in the banking sector rose to 22.7 percent by October 2024, up from 18.3 percent the previous year. This increase in credit risk is a concern for the Bank of Ghana, which has acknowledged the rise in NPLs but stressed that the sector remains “sound, well-capitalised and liquid.”
According to the Bank of Ghana’s latest report, the sector’s total assets grew by 42.4 percent to GH¢367.2 billion by October 2024, and private sector credit rose by 28.8 percent, reflecting improved lending activity compared to a contraction in the previous year. These growth figures underscore the resilience of the sector and the effectiveness of ongoing recapitalisation efforts. However, the central bank has emphasised the need for banks to continue adhering to strict credit policies and recapitalisation plans.
Bank of Ghana Governor Dr. Ernest Addison, in his remarks from the November 2024 Monetary Policy Committee meeting, underscored the importance of prudent credit underwriting standards and sustained profits as crucial for the continued recovery of the sector. “Performance will depend on banks’ adherence to recapitalisation plans and the implementation of prudent credit policies,” he said.
As the banking sector moves forward into 2025, the combination of improved profitability, strengthened capital reserves, and a stabilising macroeconomic environment offers a promising outlook. However, challenges such as rising NPLs and the expiration of regulatory forbearance will require continued vigilance and sound management to ensure the sector’s long-term stability.