The first deadline for the phased recapitalisation of Ghana’s banks was reached December 31, 2010 and the country’s banking industry regulator must be happy that so far all the banks have met their new capital targets.

The on-going recapitalisation exercise of all 26 banks in Ghana is set out in two phases and aims to dramatically improve the core capital of the industry from a previous minimum per bank of just GH¢10 million to GH¢60 million (US$40 million).

The first phase required that all majority locally-owned banks achieve a minimum core capital of GH¢25 million (US$16.6 million) by the end of 2010 and that all majority foreign-owned banks raise theirs to GH¢60 million (US$40 million) by that time. In the latter case though, two foreign banks that opened their doors in 2008, BSIC Ghana and Bank of Baroda, have up to the end of 2011 to recapitalise, having been given a special dispensation by the Bank of Ghana.

However, the other 10 foreign-controlled banks and the 14 majority Ghanaian-owned ones have all met their respective stipulated new capital targets.

Now though, comes the hard part. Over the next two years, the 14 Ghanaian-controlled banks will have to raise their own capital base to GH¢60 million, to complete the second phase of the recapitalisation exercise and bring them at par with their foreign counterparts.

For many of the Ghanaian controlled banks which are small to medium sized and that have only recently raised their capital to GH¢25 million, this means having to more than double their respective capital bases within a relatively short period. “We don’t have a difficulty as a bank in meeting the new capital targets. If you look at our audited financials for 2009, you will see that we have our stated capital at GH¢50 million already. So, all we need between now and 2012 is to top up with GH¢10 million. And we have a significant amount of funds in income surplus which we can transfer to our stated capital to satisfy the requirement,” Stephen Kpordzih, Managing Director of Agricultural Development Bank (ADB), told GB&F in an interview.

“We have a three year programme to increase our capital (from profit retention) to GH¢100 million. And we intend to do that by transferring another GH¢50 million from our income surplus account between now and 2012.” Kpordzih added.

Of the local banks that still need to raise new capital, only two, HFC Bank and UT Bank, are already publicly listed. Ghana Commercial Bank, another Ghanaian-controlled bank, is also publicly listed but does not need to raise new capital on account of the fact that it is one of the most heavily capitalised banks in the country with a capital base far exceeding GH¢60 million.

However, some of the other 11 local banks would desperately need to look for ways to meet their new capital targets to complete the second and final phase of the recapitalisation exercise. One of the most obvious  ways to do this would be to seek listing on the Ghana Stock Exchange.

But despite bank stocks being very popular among investors on the Ghana Stock Exchange, there are worries that the slump on the stock market over the past couple of years would discourage investors from buying into any initial public offers or rights issue.

“With the current situation facing the local banks, public listing is not the only option available to them to meet the new capital requirement. Private placement is one other option they could consider. In addition, the banks could also arrange for strategic investors from outside Ghana to take equity. Mergers and acquisitions could also be considered as another option,” said senior analyst, Collins Appiah of Gold Coast Securities.

“That notwithstanding, it is also important to note that a successful listing on the stock market would depend on the marketing strategy of the sponsoring broker,” he added.

It is instructive that there has not been any Initial Public Offer (IPO) since late 2008. The two local banks already listed may fret about the chance of a new share issue, especially in the face of the general poor liquidity in the economy resulting from the deliberate deflationary policies being implemented by both the Bank of Ghana and the government.

Like the Agricultural Development Bank, other local banks may also fall on their income surplus accounts from where funds could be transferred to meet the new capital requirement. However, this option would be easy for only local banks whose shareholders have not, over the years, pushed for dividend payout ratios that are detrimental to the growth aspirations of their banks.

In strict terms, banks categorizse their capital into two tiers, tier-1 and tier-2 capital. The tier-1 is the stated capital and the tier-2 comprises the income surplus and other reserves. Banking experts explain that the reason it is important to move capital from tier-2 (income surplus) to tier-1 (stated capital) is because shareholders can always ask for their funds to be distributed by way of dividends, if funds are left in income surplus account.

Where all options available to the local banks fail, the governor of the central bank, Kwesi Amissah Arthur, would be looking up to the next phase of recapitalisation to produce consolidation in the industry through a wave of mergers and acquisitions in order for local banks to meet the 2012 deadline.

“Consolidation is good because it creates a bigger platform, bigger liquidity and also better human resource capacity. The banking industry today is very thinly spread when it comes to human resource. What consolidation would do is to a large extent, minimise that (the thin spread of human resources) because there will be fewer banks in the market with diverse product base and we would be able to do the kind of deals that customers want us to do,” said Kpordzih.

He however, cautions that: “Proponents for consolidation think that it automatically brings a stronger balance sheet. But not necessarily, it depends on the variables you are consolidating. If you consolidate a weaker bank with a stronger one you may not end up with a stronger bank.”

“But it does not also mean that the combined effect may not be good, because it (consolidation) brings you network; it gives you delivery channels; it brings some kind of development orientation for infrastructure you may not have. So it is the net effect that really matters,” Kpordzih said.

Central bank governor Arthur warns that the deadline will not be pushed forward, despite some entreaties from some quarters who argue that a reduction in the number of local banks relative to foreign ones would adversely affect local entrepreneurship both within Ghana’s banking industry and within the other sectors of the economy, to the extent that Ghanaian companies tend to rely on indigenous banks for financial support.

Actually, the Bank of Ghana has already made a concession in this regard. The original plan for the on-going recapitalisation required that all banks raise their capital to GH¢100 million, which at the time (July 2007) was equivalent to US$100 million, but this was reduced after lobbying from local bank owners.

Despite the looming final deadline though, mergers and acquisitions remain unlikely, because the Ghanaian banks may not need them after all. It is instructive that there has not been an acquisition in Ghana’s banking industry since 1995.

Indeed a more recent proposed merger between The Trust Bank and Merchant Bank broke down despite the fact that they are both majority owned by the state-run Social Security and National Insurance Trust (SSNIT).

Where all options available to the local banks fail, the governor of the central bank, Kwesi Amissah Arthur, would be looking up to the next phase of recapitalisation to produce consolidation in the industry through a wave of mergers and acquisitions in order for local banks to meet the 2012 deadline.

More importantly though, it appears that most existing bank shareholders especially institutional ones that have the largest stake are still willing to put up substantial new capital and there are lots more who are lining up looking to use the opportunity to buy into the banking sector. This is for good reason. Dr. Sam Mensah, CEO of SEM Capital, an asset management company, points out that returns on equity in Ghana’s banking industry are still very high despite the fact that increased competition in the past few years has pushed up costs for the banks and macroeconomic instability has doubled the proportion of their non-performing loans to nearly 15% of their gross outstanding loans. Indeed returns on equity of over 30% are not uncommon among Ghana’s banks despite their travails, buoyed significantly by the very large spread - often around 20% - between the banks’ rates of interest payable to savers and their lending rates.

With big institutional investors still showing strong interest in buying into local banks, there is the strong likelihood that many of the local banks could escape having to go public or having to merge with each other.
“With the introduction of the new pension scheme, other fund managers beside, SSNIT which is the biggest institutional investor in the country, will come on board and possibly  buy into local banks that may be struggling to meet their capital requirement,”
said Appiah.

The Ghana Stock Exchange has been hoping that the recapitalisation would generate new public listings and the Bank of Ghana has been hoping that recapitalisation would create consolidation in the banking industry and thus reduce the pressure on the banks operating cost whose rise is primarily the result of human and material resources having been stretched thin by the sharp rise in the number of banks in Ghana thus rendering them inordinately expensive.

Of course, creative and aggressive banks always have the option of trying harder to bring into the formal banking sector the large portions of the Ghanaian population, estimated at more than 70%, who do not have bank accounts, and through successful cash mobilisation and increased profitability to raise their capital base.