Q3 earnings: What to expect from Ghanaian banks

Analysts at Databank are optimistic about the upcoming third-quarter earnings for Ghanaian banks, expecting some improvement in performance. However, they acknowledge that the results will likely remain subdued on a year-on-year basis. Afua Mensa-Bonsu, Senior Analyst for banking at Databank, shared insights on the sector's outlook for CNBC Africa. Looking back at the second quarter of 2020, Ghana's economy experienced a contraction, with real GDP declining by 3.2 percent. This downturn had a noticeable impact on the banking sector, leading to a decrease in interest income due to cautious lending practices and a slowdown in non-interest income from reduced trade activity. Moreover, the MPL (Non-Performing Loans) increased by 120 basis points to 15.7 percent. Despite these challenges, there are signs of economic recovery, with the central bank reporting an uptick in consumer and business confidence indices for the first two months of Q3 2020. This positive trend is expected to benefit the banking sector in the upcoming quarter. The reopening of borders has already resulted in a 29 percent increase in total imports, totaling around $8.3 billion. This surge in economic activity is anticipated to drive credit expansion and boost revenues from non-interest income and net-assured credit for banks. Additionally, a more robust loan portfolio and increased interest income are expected to support the sector's performance. However, there is a looming concern regarding potential increases in impairments stemming from the lingering effects of the COVID-19 pandemic on borrowers. Despite this, the banks maintain strong capital buffers, with an average capital adequacy ratio of 21 percent, which will provide support. Overall, analysts anticipate a stronger quarter-on-quarter growth in Q3 compared to Q2, but a modest year-on-year growth due to the persistent impact of the pandemic. In terms of asset quality, there may be a slight deterioration expected, but the strong capital buffers of the banks should mitigate any significant impact on profitability. The recent financial sector cleanup and recapitalization led by the Bank of Ghana have bolstered the resilience of Ghanaian banks, providing a solid foundation to weather potential challenges in asset quality. However, the financial stock index has experienced an 18 percent decline year-to-date, reflecting investor concerns amid uncertainties surrounding the COVID-19 pandemic and the upcoming general elections. While positive financial results in Q3 may drive trading volumes and activity for banking stocks, these may not necessarily translate into higher stock prices. The cautious sentiment among investors is influenced by the prevailing uncertainties in the external environment. Looking ahead to the full-year outlook for Ghanaian banks, analysts expect stability in stock prices with a cautious approach towards the remaining months of the year.