Banking Reforms So Far: Topmost Issues On The Minds Of .

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Banking reforms so far:topmost issues on theminds of bank CEOsAugust 2019www.pwc.com/gh

Table of contentsPwCCSP’s message2GAB CEO’s message4Tax Leader’s message51Economy of Ghana72Survey analysis123Banking industry overview354Total operating assets395Market share analysis446Profitability and efficiency567Return to shareholders648Liquidity699Asset quality79Appendices842019 Ghana Banking Survey1

CSP’s messagetheir banks thus far, as well as thechallenges and opportunities thatthey foresee.Highlights of thebanking sectorreformsVish AshiagborCountry Senior PartnerBackground to thisyear’s surveyLast year, we obtained and sharedwith you insights from bankexecutives on how banks intendedto deploy increased capital obtainedin compliance with the new capitalrequirement directive issued byBank of Ghana (BoG). This year’ssurvey, a build-up on last year’ssurvey, is premised on the widerbanking sector reforms beingdriven by BoG with an overarchingobjective of modernising andstrengthening the banking sectorto adequately support economicgrowth and transformation. In thisregard, our 2019 Ghana BankingSurvey (GBS 2019) has beenthemed “Banking reforms so far:topmost issues on the minds ofbank CEOs”.The banking sector reforms dateback to 2017, when BoG embarkedon a comprehensive reform agenda,with the objective of cleaning up thebanking industry and strengtheningthe regulatory and supervisoryframework for a more resilientbanking sector. Our survey soughtto obtain insights from bank CEOsand other top executives on theimpact the reforms have had onPwCPerhaps, one of the most significantcomponents of the banking sectorreforms is the new minimum capitaldirective issued on 11 September2017. The directive requireduniversal banks operating in Ghanato increase their minimum statedcapital to GHS400 million by theend of 2018.Following the deadline forcompliance, the changes in thebanking sector have largely gone inthe direction expected – decreasein number of banks – althoughthe impact may not have been assignificant as first thought. Thetotal number of banks currentlyoperating as universal banks inGhana stands at twenty-three (23).In effect, the number of banks hasshrunk by eleven (11), representing a32% decline from the 34 banks thatoperated as universal banks priorto the coming into effect of the newminimum capital directive.Out of the eleven (11) banks thatexited the market following theissuance of the new minimumcapital directive, three wereassessed as insolvent by BoG andhad their licenses revoked evenbefore the deadline for compliance.These are: UniBank Ghana Limited(UGL), The Beige Bank (TBB) andThe Royal Bank Limited (TRB).Sovereign Bank Limited (SBL) andThe Construction Bank Limited(TCB) had their banking licencesrevoked for obtaining them byfalse pretences through the use ofsuspicious and non-existent capital,according to the Bank of Ghana.The remaining six have had to eitherexit the market or merge with otherbanks for various reasons, includingthose related to the new minimumcapital requirement: Heritage Bank Limited (HBL) andPremium Bank Ghana Limited(PBG) had their licences revoked.The reasons provided by BoG forthe revocation of their licenceswere insolvency in the case ofPremium bank and questionablesource of capital for Heritagebank. Bank of Baroda (BoB) “closedshop” and exited the market ontheir own volition also for reasonsrelated to the new minimumcapital requirement. BoG approved three mergersinvolving six banks, effectivelyaccounting for three more exits.The approved mergers are: 1.First National Bank & GHL BankLimited, 2. Energy Bank & FirstAtlantic Bank and 3. Sahel Sahara Bank & Omni Bank.Subsequent to the new minimumcapital directive, BoG and theGovernment have undertaken somecomplementary actions aimed atconsolidating the expected gainsfrom the bank recapitalisationexercise and supporting a widerfinancial sector clean-up andtransformation. Whilst someof these were covered in ourGBS 2018, we have noted someadditional ones that were initiatedafter the publication of our GBS2018 report. These include: Directive for Voluntary Windingup of Banks and SpecialisedDeposit taking Institutionsissued in September 2018. Cyber and Information SecurityDirective- issued in October2018. Directives for Forex Bureaux inGhana- issued in October 2018. Finalisation of CorporateGovernance Directive 2018issued in December 2018. Creation of Ghana AmalgamatedTrust (GAT) Plc as a Special2019 Ghana Banking Survey2

CSP’s messagePurpose Vehicle (SPV) to supportthe capital requirement ofselected banks- January 2019.Impact of reforms sofar: Views from CEOsand other top bankexecutivesBroadly, the outcome of our surveysuggests that, out of the severalreforms and emerging trends seenin the banking sector over thelast couple of years, the capitalrequirement directive; the fullimplementation of the minimumcapital directive; and issues relatingto digitisation have had the mostimpact on the banking business inGhana.Indeed, our survey results indicatesthat about 82% of respondentssurveyed included the capitalrequirement directive in their topthree most impactful reforms. Thefull implementation of the minimumcapital directive also attractedsame level of priority from about73% of respondents, whilst about45% of respondents ranked issuesrelated to digitisation as part oftheir three most impactful reformsthus far. This observation, as notedfrom our discussions with the bankexecutives, was underpinned bya number of factors, key amongstwhich include: The need to undertake significantprocesses and systems changesto achieve upgrades in the areasof stress testing, counterpartyrisk and capital managementinfrastructure, all in a bid to meetthe capital requirement directive. The expanded capital baseof banks achieved throughthe implementation of theminimum capital directive,coupled with an increase in thevalue of the single obligor limiton the back of increased networth of banks following theinjection of additional capital.PwCThis, according to our surveyrespondents, has placed banks inthe position to partake in biggerticket transactions, which has thepotential of expanding the assetbase of banks and increasingtheir profitability. The view that investingsignificantly in technology andcreating agile businesses overthe medium term (i.e. digitisation)will be crucial for meetingcustomer demands and growingprofitability.Also, we noted that more than 80%of the banks surveyed expect theperformance of the economy tohave the greatest impact on theirperformance in the medium term,with about half of the respondentsexpecting various Governmentinitiatives to drive revenue growthgoing forward. In contrast, bankscommonly have a less optimisticview of the impact of regulations ontheir business, believing they wouldmostly lead to an increase in thecost of their operations.A detailed discussion on our surveyfindings is presented in section 2 ofthis report.supervision and compliance acrossthe industry in order to consolidateand sustain the gains made so far.Going forward, banks will have toproperly streamline the variousaspects of their businesses, ifthey are to effectively managethe potentially complex web ofoperational efficiency, liquidity andrisk management issues, whilstmaintaining a desired level ofprofitability. Market research andstrategy formulation, restructuring,digitisation, systems and processimprovement, data and analyticsand risk management representsome of the key activities banksmay undertake to help achievetargets around profitability, liquidity,risk management, asset growth,capital adequacy, etc. Our FinancialServices Industry Group has awealth of knowledge and experiencein these areas and are alwaysavailable to share our expertisewith banks, investors and otherinterested stakeholders. Do contactus on 0302 761 500.Happy reading!ConclusionWith the deadline for complyingwith the new minimum capitalrequirement now behind us,the uncertainty that plaguedthe banking sector during theimplementation period seems tohave waned significantly. Amidstall the changes, compliance withvarious reforms, and a reduction inthe number of banks with universalbanking licences, Ghana’s totalbanking sector operating assets(based on participating banks)increased by 11.3% (from 2017)to GHS80.64 billion indicating aresilient sector.Having initiated most of the reformsseen in the sector over the last twoyears, we expect BoG will takethe necessary steps to enhance2019 Ghana Banking Survey3

GABCSP’sCEO’smessagemessageThe CEO’s message –Ghana Association of BankersDaniel Ato Kwamina MensahChief Executive Officer,Ghana Association of BankersGhana’s Financial Services sectorhas attracted a lot of attention in thelast few years. Beginning with theBanking Sector, the Regulator (Bankof Ghana), took steps not only toaddress the risks in the sector butalso prepare existing banks for thegrowth expected in the Ghanaianeconomy. Bank of Ghana’s newCapital Requirements Directive(CRD) increased the minimumregulatory monetary capital foruniversal banking licence holdersand became the focus of most bankexecutives until the end of 2018.After the capital raise, what is next?What are bank executives thinkingabout now after having met theCRD directive? Even more broadly,what are the things that are topof mind? I believe that this year’ssurvey will provide some furtherinsights into how banks intend toplay their primary role as financialintermediaries on a bigger scale.Like most Ghanaians, bankexecutives should be interestedin the growth of the Ghanaianeconomy. Economic growthpresents opportunity to lend andalso mobilise deposits. Increasingly,banks are positioning to play inbusiness sectors that before now,they did not have a chance toparticipate.adequate burden on the banksaround risk management.Aside risk management, thereare other regulatory steps beingtaken by the Bank of Ghanaaround corporate governance,cybersecurity, payment systems etc.which I believe bank executives willspend some of their time dealingwith.Let me finally touch on technology,an area which is top of mind formost bank CEOs in my view.In a few years, I anticipate thedigitisation of most bankingactivities. Fintechs will change howtraditional banking business lookstoday. The Government has takensome proactive steps with thepassing of the Payment SystemsAct and the Bank of Ghana hasalready taken steps on regulation.To conclude, my choice of threebroad topics that will occupy theminds of executives are (1) theeconomy, (2) risk management andregulatory requirements, and (3)technology. Let us see what thesebank executives have to say. Enjoyreading this report.I mentioned in my message to the2018 Survey that risk managementcan no longer be the only expectedoutcome (an afterthought) ofbanking activities. With experiencefrom the past, I would think thatbank executives will place greatfocus on risk management. Beyondthe regulatory requirements onmanaging risks, banks will seekto create robust systems aroundassessment of risks if they do nothave them already. Regulationin itself will continue to place anPwC2019 Ghana Banking Survey4

CSP’sTax Leader’smessagemessagePerformance has been and still is at the heart of numerous conversationsregarding the banking sector. Debates around banks’ profitability, nonperforming loans and corporate governance have been approached indifferent angles. But what does performance really mean for a bank from atax perspective? Also, is the change in accounting treatment for lease likelyto impact banks’ performance in 2019 from a tax perspective?1. Tax performance of banks in 2018George KwatiaTax Leader,PwC GhanaIt is well-known that the Government is generally considered as an importantbut special “shareholder” as it may partake in the sharing of profit withoutequity stake. Out of the pot of profit an entity makes from its operations,Government is paid through corporate income tax and only the remainingcould be shared among equity stakeholders in the form of dividends. Forexample, if 25% of the net profit (before tax) of a business is payable tothe State by way of corporate income tax, only the remaining 75% can beavailable for distribution to the “real shareholders”. The payout ratio to theGovernment (tax payable over profit before tax), also known as the EffectiveTax Rate or (ETR) is a good metric to measure bank’s performance from a taxperspective. Ordinarily, the lower the ETR, the better the entity is managingits income tax affairs.Based on our analysis, the banking sector in 2018 is to pay a little over32% of the industry profit (i.e., profit before tax) to the Government with theremaining 68% available for distribution to the typical equity holders.Although there is an increase in the sector’s distribution of its profits to theGovernment in the past five years (from 25% to 32%), our studies show thatthe banking sector’s ETR has been constant at around 32% in the past threeyears. The chart below shows historical analysis of ETR within the bankingindustry.Figure 1: Historical analysis of ETRwithin the banking 2018As mostly profitable banks pay corporate income tax and national fiscalstabilisation levy, further analysis indicates that profitable banks paid anaverage of 35% of their 2018 profits to Government. In other words, the ETRfor profitable banks is about 35% with an interquartile range (“IQR”) betweenPwC2019 Ghana Banking Survey5

TaxCSP’sleader’smessagemessage30% and 35% against 30% to 34% in 2017. The chartbelow shows banks that recorded the highest ETR in2018.Figure 2: Banks with highest ETR in 2018 ETRADB83%FAMBL43%SG-GH41%0%50%100%This leads to the obvious question as to whether bankswith an ETR below 30% are highly performing and thosewith an ETR above 35% underperforming from a taxperspective. The answer to this is not that simple.For profitable banks, a lower ETR may seem appealingwhilst a higher ETR may indicate underperformance.However, an ETR further away from the IQR may raiseadditional questions; especially when ETR fluctuatessignificantly year on year.For example, the Agricultural Development Bank (“ADB”)may appear to be the most underperforming bank basedon its ETR of 83% in 2018 (meaning ADB paid 83% of itsprofits to the Government as income taxes). However, atrend analysis indicates that the bank’s ETR in 2017 was44% and 2015 and 2016 were loss making years. Hencethe high ETR in 2018 may be impacted by historicalyears’ performance.Based on the above, it could be argued that profitablebanks with an ETR close to the lowest quartile of 30%in 2018 may be performing at their best from a taxperspective.2. Potential tax impact ofchanges in accounting treatmentfor operating leasesEffective 2019, the accounting treatment for operatinglease has changed. How this may impact banks froman income tax perspective is a key concern from 2019.The impact of this change might be more expressed forbanks with significant property rentals for their networkof branches and ATMs.the new leases standard that came into effect from 1January 2019 changes the accounting treatment appliedby lessees (i.e., tenants/renters) based on the defunctIAS 17.Initially under IAS 17, lessees needed to classify theirleases as either finance or operating. If the lease wasclassified as operating, then the lessees did not showlease asset and lease liability in their balance sheet butjust the lease expense for the period was reported inthe profit or loss account. Under finance leases, lesseeswere required to recognise the total lease value as partof their capitalised tangible assets and recognise anequivalent liability at the start of the lease period.The introduction of the new IFRS 16 standard requirescompanies to record operating leases as both liabilitiesand assets on their balance sheets just like the financeleases with exemption for certain short-term leases andleases of low-value assets.Based on IFRS 16, banks would be required to presentleased assets arising from leases of properties astangible and depreciable assets. The depreciation of thelease asset and the interest on the liability is recognisedin the income statement over the lease term, similar tothe treatment of finance leases.Banks with material off-balance sheet leases applyingIFRS 16 may report higher assets and liabilities whichcould affect their regulatory compliance requirements.While this change in the accounting treatment requiresthe capitalisation of operating leases, the incometax treatment for operating leases may not change.This means banks will still be required to deduct theannual rental payment from their assessable incometo obtain the taxable income and withhold tax on leaserental payments. Further questions on application ofwithholding tax on the imputed interest charge shouldbe carefully considered.The difference in accounting and tax treatments is likelyto cause some temporary differences. The deferredtax effect is going to be calculated from the differencebetween the accounting deductions (depreciation andinterest/finance cost) and the annual rental payment asper the Income Tax Act. If the accounting deductionsexceed the tax releases, this will result in deferred taxasset and vice versa.I hope you found this brief information helpful.The newly published accounting standard IFRS 16 –PwC2019 Ghana Banking Survey6

1Economy of Ghana

1 Economy of GhanaAccording to the IMF, global economic growth, which peaked at 4.0% in 2017, hasweakened to 3.6% in 2018. Key amongst the reasons assigned to the weakening of theglobal economic growth in 2018 areUS-Chinatradetensionstighter creditpolicies inChinaweakenedconsumerand businessconfidence in theEuro areafinancial tighteningand monetary policynormalisation in thelarger advancedeconomiesThe IMF also projects global economic growth to slow down further to 3.3% in 2019 onthe back of the expectation that the weakness noted in 2018 will persist into the first halfof 2019.(Source: World Economic Outlook– April 2019)1.1. Macroeconomic performanceGross Domestic ProductThe Ghana Statistical Service (“GSS”) in September 2018 completed a GDP rebasingexercise which resulted in an expansion of the Ghanaian economy by 24.6%. Provisionalestimates from the GSS indicate a real GDP growth rate of 6.3% for 2018 which is lowerthan the growth of 8.1% achieved in 2017.Distribution of real GDP growth by economic 6.3%7.6%(Source: Provisional 2006 to 2018 Rebased Annual Gross Domestic Product, April 2019, GhanaStatistical Service; **Projected real GDP growth rates, 2019 Budget Statement and Economic Policy)PwC2019 Ghana Banking Survey8

1 Economy of GhanaThe 2019 Budget Statement and Economic Policy projects a GDP growth of 7.6% for 2019,which is expected to be driven mainly by Government initiatives including the One DistrictOne Factory (1D1F); One District One Warehouse; Planting for Food and Jobs; and plans toreduce rice importation by 50% by end of 2019.The structure of the economy in 2018 remained fairly consistent with the trend noted overthe preceding couple of years as Industry continued to marginally expand its contribution tototal GDP, although the Services sector remained the largest contributor to GDP. As noted inthe table below, the GSS estimates the contribution of the Services sector to GDP in 2018 at46.3%, whilst the contribution of Industry and Agriculture are estimated at 34.0% and 19.7%respectively. The expansion in the contribution of Industry to total GDP is largely attributed toan increased production in upstream oil and gas in 2018.Percentage distribution of GDP by economic (Source: Provisional 2006 to 2018 Rebased Annual Gross Domestic Product, April 2019, GhanaStatistical

Bank of Ghana (BoG). This year’s survey, a build-up on last year’s survey, is premised on the wider banking sector reforms being driven by BoG with an overarching objective of modernising and strengthening the banking sector to adequately support economic growth and transformation. In this regard, our 2019 Ghana Banking Survey (GBS 2019) has been themed “Banking reforms so far: topmost .

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