Banks’ story of resilience in 2020
Industry financial review
This 2020 financial performance review of the banking sector covers 21 out of the 23 licensed commercial banks. Not included in the review are National Investment Bank (NIB) and OmniBSIC, whose 2020 financial statements were not available at the time of preparing this report.
Pre- and Post-Tax Profits
Despite the pandemic, banks made more money in 2020 compared to 2019. Pre-tax profit increased by GH¢1.1bn (23.1 percent) to GH¢6.1bn last year. The growth was fuelled by a strong increase in total income and moderate growth in total expense, despite a spike in provisions for credit losses. After paying an effective income tax rate of 29.5 percent, the industry’s post-tax profit stood at GH¢4.3bn, GH¢0.8bn above the GH¢3.5bn it earned in 2019.
Each of the 21 banks covered in this review posted a net profit after tax in 2020, with the net profit margins ranging from 0.5 percent to 48.1 percent. The industry net profit margin stood at 29.1 percent, an improvement on the 2018 outturn of 28 percent.
Return on Equity and Assets
Return on equity, which shows how well banks produce profits from employing shareholders’ funds, improved marginally in 2020, rising by 20 basis points from the prior year to 19 percent.
In 2018 return on equity was 17.1 percent.
Return on assets, which compares net profit to the stock of assets, also improved by 20 basis points, as it increased from 2.8 percent in 2019 to 3 percent in 2020. In 2018 return on assets stood at 2.6 percent.
Banks grew revenue by 17.9 percent to GH¢14.8bn in 2020. Although this growth is 580 basis points below the growth of 23.7 percent in 2019, it is a remarkable figure given the pandemic. It is also significantly better than the 8 percent growth recorded in 2018 amid the shake-up of the sector by the regulator.
Net interest revenue—the money banks earn from investments and loans less the interest they pay on deposits and borrowings—is traditionally the biggest source of industry revenue. As such, its growth tends to drive the growth of total revenue. Twenty-twenty was no different, as net interest revenue grew by 22.3 percent to GH¢10.6bn, while non-interest revenue grew by 8 percent to approximately GH¢4.1bn.
Although total revenue was resilient to the rough operating environment which the pandemic precipitated, there was a marked effect of the pandemic situation on fees and commissions revenue, which grew at a considerably lower rate of 5.1 percent (to GH¢1.9bn) in 2020 as against 14.6 percent in 2019. This can be explained by weak growth in the volumes of loans and fee-based transactions, as well as some fee waivers which the industry granted to customers—like that for mobile money transactions in the initial months of the pandemic.
Trading revenue—the other key non-interest revenue stream—grew by 12.2 percent (to approximately GH¢2bn), underperforming its growth of 34 percent the year before. Trading revenue is the money banks make from trading financial instruments like currencies, bonds, and derivatives.
Other operating revenue—which comprises incomes from miscellaneous sources including rent, sale of property, and dividends—increased by 1 percent to GH¢296.1m. This virtually flat outturn cannot be pinned on any specific factor as this element of total income is usually unpredictable from year to year.
Total Non-Interest Expense
The components of non-interest expense are personnel costs, provision for loan losses, depreciation and amortization, and other operating expenses. Usually, in an economic downturn—such as the one experienced in 2020—when business activity slows, banks see a rise in credit defaults and bad loans, which they partially offset through charges, known as provisions, on their revenue.
This development was the key driver of non-interest expense last year, as banks increased provisions for credit losses by 33.4 percent (to GH¢1.3bn), reflecting an expected growth in problem loans. In sharp contrast, loan loss provisions increased by just 2 percent to approximately GH¢1bn in 2019.
Despite the spike in credit loss provisions, total non-interest expense grew at a slower rate in 2020 (14.6 percent) compared to 2019 (17.4 percent). This reflected tight control of the other components of expense, which rose by 11.7 percent in 2020 compared to 20.1 percent in 2019.
Thanks to this, the industry efficiency ratio—which measures the cost incurred (apart from interest expense) to produce a cedi of revenue—improved to 58.8 percent from 60.5 percent in 2019.
The stock of assets as at December 2020 was GH¢144.8bn, up GH¢21.5bn or 17.5 percent from the previous year. Of the GH¢21.5bn added to assets, GH¢14.6 billion—that is, two-thirds—was added to debt securities, reflecting a flight to safety as banks adopted a cautious stance on lending given the elevated credit risks linked to the economic slowdown. By the end of December 2020, banks held GH¢64bn worth of debt securities—mostly government instruments—approximately 30 percent more than they held at the end of 2019.
Banks enjoyed strong deposit inflows, with growth in deposits of 21.6 percent (to GH¢102.8bn) in 2020. These inflows were channelled largely into debt securities, driving the rise in assets.
From the balance-sheet perspective, the impact of the pandemic-induced economic disruption was most significantly felt in the sharp fall in the growth rate of loans and advances to 7.9 percent in 2020 from 37.3 percent in 2019. As at December 2020, the value of outstanding loans and advances was GH¢41.4bn, up by GH¢3bn from the previous year. On the contrary, in 2019, loans and advances increased by GH¢10.4bn to GH¢38.4bn.
The factors behind the subdued growth of loans and advances were weaker demand owing to the economic slowdown and restricted supply as credit risks heightened.
On the back of the robust earnings, banks added GH¢3.9bn to shareholders’ equity, equivalent to an improvement of 20.7 percent over the prior year. This growth lifted shareholders’ equity to GH¢22.6bn in December 2020.