Banks breach deposit Act : More DDEP losses expected, GH¢17.2bn yet to be captured

Banks’ activities on the domestic bond market was a clear case of poor risk management practices and a breach of the Banks and Specialised Deposit-Taking Act (Act 930), Banking Consultant and Expert, Dr Richmond Atuahene, has said.

Although the Banks and Specialised Deposit-Taking Act (BSDI) places a 25 per cent limit on banks’ financial exposure to a single individual or entity, some banks had between 30 to 50 per cent of their net funds in government securities, which was clear breach of the law.

Section 62 of the BSDI Act states that “A bank or specialised deposit-taking institution shall not take financial exposure in respect of a person or a group of connected persons which constitutes in the aggregate, a liability amounting to more than 25 per cent of the net own funds of that bank or specialised deposit taking institution.”

In an interview with the Graphic Business on how banks have been hard hit by the Domestic Debt Exchange Programme (DDEP), Dr Atuahene said the banks brought this upon themselves by focusing too much on government securities which were considered  as risk free.

The problem was partly created by the banks themselves, instead of them investing in productive sectors, they were busy investing in government securities. A particular bank had about GH¢9.1 billion in bonds, meanwhile loans to individuals and industry was GH¢4.2 billion,” he pointed out.

He said the banks engaged in poor risk management practices, stating that “if they had used their risk management practices very well, they wouldn’t have piled up their monies in government bonds.”

“This should be an eye opener for the banks going forward. They need to practice robust risk management systems. This should be a lesson to all the banks,” he stated.

More losses expected 

Dr Atuahene said the banking sector may record annual losses for the next two financial years due to the government’s domestic debt restructuring activities.

The DDEP programme which saw the government swap old bonds for new ones at reduced coupon rates and longer tenors hit hard at banks, some of whom had as much as 50 per cent exposure in government bonds.

Audited 2022 accounts of the banks showed that 16 out of the 23 banks operating in the country recorded losses, with five of them recording decreased profits. An analysis by the BoG indicated that the banks recorded losses totalling GH¢8 billion in the year under review.

Although the banks quickly made a rebound in the first quarter of 2023 by recording profits, Banking Consultant, Dr Richmond Atuahene, says the banks would end 2023 with losses again when their financials are audited.

He said the DDEP resulted in total losses of about GH¢37.7 billion, out of which only GH¢19.4 billion was captured in the 2022 financial results.

This therefore leaves a balance of about GH¢17.2 billion which would be captured in the 2023 audited financial results.

“In the first quarter and second quarter, because the banks are publishing unaudited accounts, they won’t factor in the deferred losses. It is only at the end of the year, when the accumulated losses will hit against their profit.”

“So if someone says they have done well in first quarter, you are talking about management accounts. At the end of 2023, there will be audited accounts which would capture the rest of the intended losses,” he stated.

Dollar bonds/cocoa bills 

With the banks also heavily exposed in the dollar denominated bonds and cocoa bills which are next in line for restructuring, he said that would further add up to the losses.

The government is seeking the full participation from all investors in its dollar denominated bonds and cocoa bills, as the successful completion of this aspect of the domestic debt exchange programme is very crucial to the country’s quest to restore debt sustainability which is a critical component of the IMF programme.

Although the government is yet to submit an official invitation to all investors in its dollar denominated bonds and cocoa bills to voluntarily participate in this debt exchange programme, reports indicate that banks have reached an agreement with the government to restructure these bonds and bills totalling about GH¢15 billion.

With regard to the dollar denominated bonds, a draft memorandum of the invitation cited by the Graphic Business shows that the government intends to swap two dollar denominated bonds which are expected to mature in November 2023 and November 2026, respectively with new bonds that would mature in four and five years’ time.

The new bonds will also come with a reduced coupon rate of 2.75 per cent and 3.25 per cent. This compares to the 4.75 per cent and 6 per cent offered for the old bonds.

On the cocoa bills, reports indicate that the government is offering a 12 per cent rate on five new bonds maturing in 2025 through to 2029 to replace the cocoa bills which was an average interest of 30 per cent.

This is expected to lead to more losses for the banks, a situation which would severely affect their liquidity and capital.

As a sector which has already gone through some reforms which saw the collapse of nine banks, these fresh challenges have raised a lot of concerns.

Responding to questions at the last Monetary Policy Committee press conference, the Governor of the Bank of Ghana, Dr Ernest Addison, emphasised that the impact of the DDEP had affected the capital buffers and liquidity of banks.

While no bank had approached the central bank yet for liquidity support, he said the BoG was ready to support any bank with liquidity should the need arise, in line with its rule book for liquidity assistance

Way forward

On the way forward, Dr Atuahene, called for the immediate operationalisation of the Financial Sector Stability Fund which is expected to support financial institutions who were hardly hit by the DDEP.

The World Bank has committed to support the establishment of the fund with US$250, with the government also in discussions with African Development Bank (AfDB) for another US$100 million to support the fund.

Government recently noted that it has so far raised US$750 million for the operationalisation of the fund. The fund intends to raise US$1.5 billion in total.

Dr Atuahene, said the fund must target local indigenous banks since the multinational banks would always find a way of raising their own capital.

We should operationalise the stability fund and make sure that all the banks that are affected are refinanced. We should structure it very well to support the banks,” he stated.