2017 Ghana Banking Survey - PwC
2017 GhanaBanking SurveyRisk-based minimum regulatorycapital regime: what it meansfor banks in GhanaAugust 2017www.pwc.com/gh
Contents PwC-A message from our CSP2-A message from theExecutive Secretary of GhanaAssociation of Bankers4-A message from our TaxLeader61Ccapitalisation of banks82Survey Findings103Overview of the economy244Overview of the bankingindustry285Quartile analysis306Market share analysis427Profitability and efficiency508Return to shareholders589Liquidity6210Asset quality68AList of participants73BGlossary of key financialterms, equations and ratios75CList of abbreviations76DOur profile77EOur leadership team822017 Ghana Banking Survey1
A message from ourCSPwhich all banks currently operating inthe industry would be expected to fullycomply with the new regulation.Vish AshiagborCountry Senior PartnerThat we chose for this year’s bankingsurvey a theme that focuses onbank capital – in particular, riskbased minimum regulatory capital – is,itself, not surprising. For almost a yearnow, the industry has been buzzing withnews of an imminent increase in theminimum stated capital from the currentGHS120 million. Many senior bankexecutives have granted interviews in themedia and commented on the pros andcons of such an increase in bank’s capital,and the possible impact on the future ofthe industry and its capacity for financialintermediation. The commentary runon the subject has had as many sides ascommentators. At different points overthe period, the industry’s regulator, Bankof Ghana (“BoG”), has been compelledto make some pronouncements on thematter.While different amounts – ranging fromGHS150 million to about GHS800 million– have been bandied about in the mediaby various sources, the central bank itselfhas not given a clear signal as to (1)what the new minimum stated capitalwould be, and (2) the time frame withinPwCThe first time in the last decade wherebanks in Ghana were required to raisetheir minimum regulatory capitalwas in 2008. The regulator increasedthe minimum regulatory capital fromGHS7 million to GHS60 million. Theindustry was put on a two-track race tocompliance: banks with majority foreignownership had two years, and bankswith majority local ownership were givena more lax time frame of five years. Thefact is, all banks that were in operationat the time managed to meet the newcapital requirement before the respectivedeadlines.Some industry analysts at the timecriticised the central bank for itsapproach, expressing views that theindustry had missed a golden opportunityto achieve market consolidation. Thesepersons cited the example set by theCentral Bank of Nigeria (CBN), which,in one sweep, reduced the number ofbanks in operation in Nigeria from 89to 25, and in the process also createdsome Nigerian-owned regional (andeven global) banks. There were stillothers – both operators and analysts/commentators – that played the “local,protectionist” card, and protested againstany attempt to force the industry toconsolidate.Now, we see the same story beingreplayed. Though BoG has not shownits hand regarding the new minimumregulatory capital and timeframe forcompliance, various industry analystsand commentators have already takenpositions in the arena of public debate,with each school of thought extollingthe benefits of adopting one approach oranother.Whatever decisions that the central banktakes with regard to the new level ofminimum stated capital, in our view, theyshould be informed by a certain ultimateobjective that the central bank targets,which hopefully would be indicative ofthe future that the regulator envisagesfor the sector. However, with the centralbank having – within the past year anda half – issued four new bank licences,it does not seem to us that marketconsolidation is a primary or criticalfocus for the central bank at least, notimmediately.An equally interesting element of theongoing conversation on bank capital isthe regulator’s indication of its intentionto require the industry to adopt a riskbased approach to capital management,in accordance with the principles ofthe Basel accord. The current bankinglegislation -Banks and Special DepositTaking Institutions Act, 2016 (Act930)- makes reference to this accord.Of particular interest is the expectedrequirement for banks to, at all times,maintain a capital buffer that reflectsthe level of risk inherent in their assetportfolio. Additionally, the Act no longerallows BoG to extend the single obligorlimits of banks which is determined bythe level of capital.In light of these expectations of thebanking industry, we have been askingourselves some key questions, includingthe following: Is the banking industry ready andcapable of implementing suchcomplex approaches to capitalmanagement? Is BoG itself well equipped to ensureeffective supervision, based on thisapproach? How will the implementation of sucha capital management regime impacton the real economy of the country? In particular, given that Ghana’seconomy has a significant presence2017 Ghana Banking Survey2
of micro and small scale privatesector players, whose structuresand operations are, predominantly,informal, what impact on economicgrowth will the implementation ofsuch a regime of capital have?To see what players in the industry think,we posed some of these questions to theindustry’s senior executives in this year’ssurvey. In particular, we tried to establishthe industry’s general readiness for theimplementation of this new approach tocapital management. We asked industrychieftains to tell us if they have thetalent, data, structures, processes, andtechnology that will support a smoothtransition to such a complex approach tocapital management.The feedback received generally paintsan image of an industry not quiteready for the implementation of theproposed risk-based method of capitalmanagement.The survey reportprovides responses, but I would piqueyour interest with a few notable results.For instance, when asked about having adetailed plan for the implementation ofa risk-based capital regime, a majorityof respondent banks noted that they donot; however, they hastened to add thatthey had initiated discussions internallyto produce and implement such plans.master the art of keeping their ships on aneven keel, this new capital managementregime may lead to banks being overlycautious resulting in suppressed creditgrowth. It would be helpful that BoGpays attention to this possibility, as it“partners” the government in its roleas the central bank to help create anenabling environment supportive ofrapid business and economic growth.Our Financial Services Industry Groupand the banking survey team will bepleased to engage with stakeholdersthat are eager to learn more or sharetheir own thoughts with us. Do contactus using the details provided on the backcover of this report.Follow us on @PwCGhanaWhat is most instructive about banks’perceptions of likely impact of atransition to a risk-based capital regimeis that no single bank has considered oris considering mergers and acquisitionsas a route to enhance capital resources.Indeed, almost three-quarters ofrespondent banks envisage that theirincremental capital requirements undera risk-based capital regime would notexceed 25% of their current levels. About40% expect to adjust their portfolio mixto optimise capital requirements, withregulatory capital management.Inthe short-term, as banks go through atransition phase during which they try toPwC2017 Ghana Banking Survey3
A message from theExecutive Secretary of GhanaAssociation of BankersThe developing world is cautious aboutimplementing Basel II and Ghana isno exception. Is the current minimumregulatory capital regime not risk based?Certainly it is and perhaps the concern isthe extent to which the current regimeis risk sensitive to the activities of thefinancial institutions which expose themto various types of risks. This is one of theissues Basel II is expected to improve onwhen implemented in Ghana.D. K. MensahExecutive Secretary, Ghana Associationof BankersThe Basel Accord is a set of bankingregulations put forth by the BaselCommittee on bank supervision,which regulates finance and bankinginternationally. Basel II attempts tointegrate Basel capital standards withnational regulations, by setting theminimum capital requirements offinancial institutions with the goal ofensuring capital adequacy of banks.Unlike the first accord, Basel I, wherefocus was mainly on credit and marketrisks, Basel II introduces operationalrisk considering that many failuresand difficulties experienced by banksin history were not only attributable tocredit and market risks but largely tooperational risk.The developed world now talks aboutBasel IV but Ghana is yet to adoptBasel II. Is the wait worth it and haveall the concerns that led to the delaysin implementation been resolved,well contextualised in the Africanand more importantly the Ghanaianbanking environment? Is the expectedimplementation year of 2018 ideal andare the key players (the regulator and thebanks) ready?PwCThe definition of regulatory capitalremained unchanged and refers to thetotal capital a bank holds based on therisks it is taking. Regulatory capitalcould be tier 1 or tier 2 with the possibledisallowance of some capital componentitems by regulators for instance the caseof “credit risk reserve” in Ghana whichcan only be used with the prior approvalof the regulator.Since the awareness creation on BaselII in 2008, led by the regulator, theGhanaian banking industry has gonequiet on the implementation of Basel II.Officials of many financial institutionshave indicated their readiness forimplementation, but the problem isthat these claims of readiness in manyinstances are self-declared and have notbeen tested or independently verified.The survey will try to assess the statusof readiness by the key players especiallythe financial institutions, the factorslikely to drive the implementation,benefits, issues and challenges expected.Some of the benefits expected fromthe implementation of Basel II includeexplicit supervisory review with acomprehensive recognition of credit riskmitigations and enhanced risk sensitivity.Others relate to the flexibility offeredby Basel II, with different approachesavailable to measuring risks, and the factthat it has addressed market disciplineand included operational risk in theassessment of capital adequacy.The implementation of the Basel IIAccord will come with challenges whichinclude; the need to build long andreliable database to run sophisticatedrisk assessment models, the need tobuild supervisors’ capacity to assess,validate and monitor the use of thesesophisticated models, competitiveness ofbanks and access to credit by Small andMedium Sized Enterprises – SMEs.Many of the banks have alsoexpressed concerns as to whether theimplementation of Basel II will resultin the cancellation of the currentstatutory reserve requirements whichwere largely introduced to ensure bankswere protected and limit distributionsto shareholders without sufficientlyproviding for the risks the banks faced.Some are of the view that if the industrywill be implementing Basel II soon, whythen the need for the current industrywide calls to increase the minimumcapital for all banks?If the outcome of some of the currentfund raising activities undertaken bysome banks in the country is anythingto go by, there is a strong indication thatbanks will struggle to raise additionalcapital especially the locally ownedbanks. Given these expected challengesin raising funds, will the expectedincrease in the minimum capital enhancethe consolidation prospects and reducethe number of banks operating inGhana? It is unlikely to affect foreignowned banks. Larger capitals will inno doubt enhance the ability of banksto underwrite bigger transactions andsupport economic growth but will itbe fair to the local banks? Should theregulator take a relook at the licensingregime for banks once again?In conclusion, a more risk sensitiveregulatory capital regime will providesome benefits to the financial sector.However, the implementation challenges2017 Ghana Banking Survey4
and experiences from those who havealready implemented Basel II shouldbe considered by the regulator indetermining the best and most suitableframework for Ghana. The industry isexpectant and we believe the key actorswill play their roles well to ensure asmooth implementation.PwC2017 Ghana Banking Survey5
A message from ourTax Leaderunderlying ownership has changed bymore than 50%. Any unrealized capitalgain (excess of market value over bookvalue) is taxable at 25%. However, wherethe realization results in a loss, the lossmay be deductible against income of thebank that incurred the loss.George KwatiaGeorge Kwatia is the tax leader in PwCGhanaIncrease in minimumregulatory capital– theTax and regulatoryimplicationsHistorically, banks in Ghanahave raised additional capitalthrough private placements.Other options available tobanks include, but not limited to, mergersand conversion of earnings retained tostated capital. The tax implications willdepend on the option used by the banksto meet the proposed minimum capitalrequirements.Corporate income tax(“CIT”) implicationsWhether recapitalization is achievedthrough private placements or throughconsolidations, a bank’s assets will bedeemed realised where there is a changein underlying ownership of a bank bymore than 50%. As an illustration, if abank has 100 issued shares and needsto issue 150 new shares to an entirelynew shareholder then the assets of thebank will be deemed realised since thePwCHowever, restrictions may apply tosubsequent deductibility of tax losses,bad debt and finance cost incurred bythe bank prior to change in underlyingownership.The mere transfer of shares does notcome with any associated CIT obligationsfor either the transferor or the transferee.Capital gains tax (“CGT”)implicationsShareholders of the target bank will notbe required to pay CGT on gains relatedto the swap of their shares for the sharesof the acquiring bank, based on theargument that they will be acquiringa replacement asset (shares of theacquiring bank).Value Added Tax (“VAT”)implicationsThe issue of shares as a vehicle forconsolidation is not subject to VAT,as that is not a taxable supply. Also, ifthe consolidation is achieved throughtransfer of assets rather than transferof shares, VAT would not be applicablegiven that the assets of the target bankwill be transferred as a going concernand not as a piecemeal transfer of assets.bank has a valid WHT exemptioncertificate.Stamp duty implicationsfor additional capitalDepending on the amount involved, thestamp duty applicable to the additionalcapital to be raised will range from0.25% to 1% of the additional sharecapital. The stamp duty is payable aspart of the process to register the relatedinstrument(s) with the Lands ValuationBoard.The new capital will also be subject to astamp duty of 0.5% when documentationrelated to the additional capital is filedwith the Registrar General’s Department.The 2017 budget statement proposesa two-year stamp duty waiver forinvestments in the financial services. Ifthis is passed into law, the banks shouldget relief from payment of stamp dutyrelated to the additional capital theyhave to raise.For the other taxes discussed above, acase could be made by industry to thegovernment to get exemptions from theother applicable taxes. This will helpmake the recapitalisation process lesspainful.Withholding tax (“WHT”)implicationsDuring the consolidation process, 3%WHT may apply on the value of the assetbeing transferred, unless the receiving2017 Ghana Banking Survey6
Relevant tax developments for banksRepeal of VAT on fee-based financial servicesIn January 2015, the Government implemented VAT charges on fees levied byfinancial institutions for certain services. However, this was criticised by manyindustry players due to cost and administrative burden the implementationput on financial institutions and their customers. In April 2017, this VATrequirement was abolished.Compliance with transfer pricing regulationsThe Ministry of Finance has indicated that the GRA pursues compliance withTransfer Pricing (“TP”) Regulations 2012 (LI 2188) which became effective inSeptember 2012. The banking industry is not exempted from TP regulations.Typical arrangements subject to the TP Regulations include management andtechnical service payments, financing arrangements (including guarantees)with related parties and components of employee compensation packagepriced at sub-market interest rates. Under the TP Regulations, taxpayerswho have related party transactions are required to maintain sufficient andrelevant documentation to demonstrate compliance with the ‘arm’s length’requirement. In addition, annual TP returns are required to be filed and bankscan be subjected to audit by the GRA.PwC2017 Ghana Banking Survey7
1Capitalisation of banksIntroductionn recent years, banks in Ghanahavebeenimprovingtheircapital management practices tomeet the challenge of growingcapital requirements. The increase incapitalisation – which has often beenregulator-driven – has generally beenthrough organic earnings growthand fresh equity injections. Given thecurrent prudential regime, banks wouldnot have had a meaningful chance tomanage capital requirements throughmanaging risk-weighted assets and otheroptimisation efforts. We think this isabout to change.directive to commercial banks to increasetheir capital to a minimum of GHS7million as part of measures to strengthenthe capital base of the Ghanaian bankingindustry. In 2008, the regulator furtherannounced an upward revision of theminimum capital of banks to GHS60million in a bid towards making banksmore resilient against unforeseen orexpected losses. In real terms however,the minimum capital of GHS60 millionhas significantly eroded as the cedi todollar parity has declined from less than1 to almost 4.5 times. Moreover growthof earnings retained has slowed downbecause of the deterioration in assetquality.up the capital base in order to bettercontain shocks. To this end, in February2017, the regulator gave indicationsthat the minimum regulatory capitalwill be further raised, the exact amountand deadline are yet to be officiallyannounced.The Bank of Ghana has in the recentpast directed banks in Ghana to increasetheir capital substantially in line with theemerging risk dynamics in the bankingindustry. In 2003, the regulator issued aThe current level of capitalisation in theindustry raises some concern because therisk exposure of banks both locally andglobally is on the rise and there is a needto mitigate this exposure by buildingThe proposed capital requirement isunique in some sense, as it obliges banksto, in addition to the minimum capital,hold a buffer level of capital that reflectsthe inherent risks in their portfolio.IPwCIt is the view of industry analysts that theupward revision of minimum regulatorycapital requirements would help banksto better contribute to the growth of theeconomy as they would have the capacityto invest into real sectors of the economy.With good underwriting practices, bankswill be better placed to underwrite biggercredits to other sectors of the economy.2017 Ghana Banking Survey8
This is new in our market and it has thepotential to significantly improve thecapital management practices of banksin Ghana.The conceptof risk-basedcapitalRisk-based capital requirement seeksto ensure that bank capital adequatelyreflects relevant risks to which the bankis exposed. Having a risk-based capitalregime ensures that financial institutionshave sufficient capital on hand towithstand losses while maintaining a safeand efficient market. It protects financialinstitutions, investors, depositors andthe economy as a whole.Theimplementationof risk-basedcapitalrequirementsin otherjurisdictionsOver time, financial industry regulatorsappear to have come to the consensusthat the b
B Glossary of key financial terms, equations and ratios 75 C List of abbreviations 76 D Our profile 77 E Our leadership team 82 Contents PwC 2017 Ghana Banking Survey 2 Vish Ashiagbor Country Senior Partner T hat we chose for this year’s banking survey a theme that focuses on bank capital – in particular, risk-based minimum regulatory capital – is, itself, not surprising. For .
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