As a result of the restructuring of the national debt, Ghanaian banks’ capital will decline, according to Fitch
According to Fitch Ratings, Ghanaian banks may experience severe pressure on their capitalization as a result of the restructuring of local-currency (LC) state debt.
When banks replace their current debt with new bonds that have lower coupons and longer tenors, according to Fitch, they will experience significant economic losses.
This might result in significant capital shortages at some banks, but we anticipate that regulatory forbearance will lessen the effect and allow banks to continue complying with minimum capital standards.
Despite regulatory forbearance, the two Ghanaian banks that Fitch rates have sizable capital reserves that should support their ratings during the LC debt exchange.
The beginning of the LC debt swap on December 5 coincides with Ghana’s efforts to obtain IMF assistance.
Fitch downgraded Ghana’s Long-Term Local-Currency Issuer Default Rating (IDR) to “C” from “CC” as a result, describing it as a distressed debt exchange.
The debt exchange is voluntary, according to Ghana’s Ministry of Finance, but we anticipate banks to participate, especially since the risk-weighting for the old bonds will increase to 100% from 0% and because banks that don’t participate won’t be eligible for liquidity support from Ghana’s recently established financial stability fund. Ghanaian banks
According to data from the Bank of Ghana, Treasury Bills make up 15% of the securities held by the banking system but are not included in the restructuring.
We predict that banks swapping old LC government bonds will experience a net present value loss of around 50% based on the coupon rates and tenors of the new bonds and assuming a 20% discount rate.
This would seriously reduce the capitalization of the financial sector.
However, we anticipate the authorities to relax regulatory capital requirements so that banks can still maintain minimum capital ratios and to permit flexible accounting treatment to considerably minimize losses. Ghanaian banks
The formal response date for holders of LC government bonds, which was originally set on 19 December, has now been extended to 30 December.
A further extension of the deadline and perhaps an easing of the terms, which would lessen the losses imposed on creditors, are possibilities given Fitch’s assessment that there is significant disagreement to the terms of the exchange.
The government announced plans to restructure its foreign sovereign debt on December 20, 2022, increasing the strain on banks’ capital. Ghanaian banks
Payments on a subset of foreign debt, including Eurobonds, commercial term loans, and the majority of bilateral debt, have been suspended, though specifics have not yet been disclosed.
According to Fitch, this marks the start of a sovereign default process, and as a result, Ghana’s Long-Term Foreign-Currency IDR was downgraded to “C” from “CC”.
Fitch rates two Ghanaian banks with Nigerian ownership:
Having a Long-Term IDR of “B-“/Stable and a Viability Rating (VR) of “ccc,” Guaranty Trust Bank (Ghana) Limited and United Bank for Africa (Ghana) Limited are both financial institutions in Ghana.
We believe these banks’ VRs should be able to withstand both the LC and foreign-currency debt restructure, in addition to impending asset quality deterioration due to the effects of severe currency depreciation, extremely high inflation, and significant interest rate increases. This is because these banks’ sovereign debt portfolio compositions, ample capital buffers, and good headroom on other rating factors. Ghanaian banks
Our belief that help from the banks’ Nigeria-based parents is likely to be offered, if necessary, is what motivates the two institutions’ Long-Term IDRs. We don’t anticipate that Ghana’s debt restructuring will change the owners’ perspective on this. Due to parental financial assistance, foreign-owned banks, which make up nearly half of the assets in Ghana’s banking system, may be better equipped than local banks to deal with the extremely stressful operating conditions.
About Author
