Fitch optimistic about Ghana’s banking sector recovery amid robust earnings

Fitch Ratings has expressed optimism about the recovery of Ghana’s banking sector, citing strong profits and improved capitalisation after the challenges brought on by the Domestic Debt Exchange Programme (DDEP).

The ratings agency forecasts a brighter outlook for the sector as economic stabilisation efforts gain momentum.

In its latest report, Fitch highlighted the critical role of high Treasury bill yields in driving bank profits over the past two years. The report stated: “High profits are driving a recovery in the banking sector’s capitalisation after the large losses imposed by Ghana’s DDEP.”

Impact of the Domestic Debt Exchange Programme

The DDEP, introduced in December 2022, aimed to restructure $4 billion of domestic debt to meet International Monetary Fund (IMF) conditions. However, the programme inflicted significant losses on banks, leaving many struggling to meet solvency requirements.

Despite these setbacks, Fitch predicts that most banks will achieve capital compliance by the end of 2025, even as regulatory forbearance measures expire. According to the report, the sector’s reliance on domestic deposits has been a stabilising factor, shielding banks from liquidity challenges seen in other markets.

“Solvency pressures stemming from Ghana’s default have not translated into heightened liquidity pressures. This is primarily due to the sector’s funding structure, which is dominated by domestic deposits,” the report noted.

Macroeconomic stabilisation and sovereign debt restructuring

Fitch attributed part of the banking sector’s recovery to the October 2024 Eurobond exchange, which bolstered access to international finance and eased local currency liquidity pressures. This development led to an upgrade of Ghana’s Long-Term Local-Currency Issuer Default Rating from ‘CCC’ to ‘CCC+’.

The report also highlighted expectations of further economic stabilisation in 2025, predicting improved GDP growth, declining inflation, and a stabilised exchange rate. It stated: “We expect macroeconomic volatility to reduce in 2025, with real GDP growth projected to increase, inflation forecast to decline, and the exchange rate expected to stabilise.”

Challenges remain amid progress

While Fitch acknowledged the sector’s recovery, it also highlighted ongoing vulnerabilities. The non-performing loan (NPL) ratio climbed to 22.7% in October 2024 from 18.3% a year earlier, according to the Bank of Ghana.

Fitch emphasised the importance of maintaining strict credit standards and effective recapitalisation efforts to address these challenges. The report concluded: “High yields on government securities will continue to strengthen banks’ capital positions in 2025, setting the stage for sustained recovery.”