Banking sector solvent despite declines in financial soundness indicators

The Bank of Ghana says the banking sector remained solvent despite declines in the financial soundness indicators within 2022.

According to the January 2023 Banking Sector Development Report, the banking sector’s performance largely reflected spillover effects of the macroeconomic challenges during 2022.

It further said assessments of the banking sector going forward indicate that the implementation of the Domestic Debt Exchange Programme will impact performance of the sector.

In view of this, the BoG has announced some safeguards to be rolled out once the programme commences to ensure the continuous stability of the sector.

Capital Adequacy Ratio

The industry’s solvency position, measured by the Capital Adequacy Ratio (CAR) of 16.6% in December 2022, was higher than the prudential minimum of 13%.

But it declined from 19.6% in December 2021.

The decline in the CAR was attributed to losses on mark-to -market investments of banks as well as an expansion in the risk-weighted assets of banks because of the depreciation of the Ghana cedi and growth in actual credit within the year.

Liquidity Indicators

The industry’s liquidity position also remained strong with improvements in the core measures, following the 600 basis poinys increase in the CRR requirement to 14.0% within the year.

The ratio of core liquid assets (mainly cash and due from banks) to total deposits increased from 29.7% in December 2021 to 38.8% in December 2022, while the core liquid assets to total assets ratio increased to 27.7%, from 20% over the same comparative period.

The ratio of broad liquid assets to total deposits, however, declined to 88.8%, from 98.2%, while the broad liquid assets to total assets ratio declined to 63.5%, from 66.1% over the review period.

The decline in the broad liquidity measures partly reflects the significant decline in investments during the review period.