OREANDA-NEWS. Renaissance Capital, the leading emerging markets investment bank, has initiated coverage of the Ghanaian banking sector and three listed banks: Ghana Commercial Bank (GCB; BUY, TP GHS3.44, current price GHS3.05), Ecobank Ghana (EGH; HOLD, TP GHS4.34, current price GHS4.24) and CAL Bank (CAL; HOLD, TP GHS0.59, current price GHS0.57).

Lead-authored by Adesoji Solanke and co-authored by Nothando Ndebele, the report says that Ghana has a relatively small banking sector that has been growing rapidly, at an average YoY asset growth rate of 32% pa over the past seven years. With the conclusion of a regulator-driven capital-raising drive in FY12, Renaissance Capital sees no significant near-term risks to the growth outlook and believes sector assets could double in four years.

According to Renaissance Capital’s research, the Ghanaian banking sector is highly profitable, delivering 9M12 return on equity (RoE) of 28%. The three banks Renaissance Capital looked at, namely GCB, EGH and CAL, have delivered eight-year average RoE of 22%, 39% and 20%, respectively, with the high-interest-rate environment in which the banks operate being key to this delivery, according to Renaissance.

Yields on the government’s three-year fixed rate note averaged 15% between January 2006 and June 2012, in a range of 12-24%, while the prime lending rate has ranged between 19% and 29%. On the funding side, while the Firm noted that savings interest rates are significantly higher in Ghana than in other Sub-Saharan Africa countries, savings accounted for just 18% of total deposits in November 2012. These factors have helped the banks to deliver higher NIMs over time relative to SSA peers, the Firm notes.

As Renaissance expects loan growth to outpace NPL growth in 2013, this should lead to a fall in NPL ratios, the Firm says in its initiation report. Nonetheless, the Firm notes that the strong loan growth cycle it expects over the next few years could pose new asset quality challenges in three-to-four years, especially for those domestic banks whose risk management standards are not comparable with those of the larger domestic and foreign banks. External shocks to the Ghanaian economy – such as weak commodity prices, particularly for oil and gold, poor cocoa harvests, or a drop in portfolio flows or remittances – are also a risk to asset quality.

The report also covers the operations of four Nigerian-owned banks in Ghana, specifically Zenith Bank (Bank (HOLD, TP NGN25.4, current price NGN21.4), United Bank for Africa (UBA; BUY, TP NGN8.4, current price NGN8.60), Guaranty Trust Bank (GTBank; BUY, TP NGN28.7, current price NGN24.90) and Access Bank (HOLD, TP NGN12/6, current price NGN10.3). In an industry with 27 operators, the Nigerian subsidiaries have low rankings, with Access Bank now the largest, ranking 8th by assets, following its acquisition of Intercontinental Bank Ghana, while GTBank is the smallest of the Nigerian-owned banks in Ghana under Renaissance Capital coverage, at 18th by assets in FY11. UBA was the most profitable in FY11, with RoE of 27%, while Access Bank had the lowest FY11 RoE, at 9%, due to its excessive capitalisation levels (60% CAR), Renaissance notes.

Renaissance Capital thinks that, as domestic competition increases in Ghana, there is scope for the Nigerian banks to gain more market share via innovation; however, it does not expect a material improvement in their contributions to the profit-before-tax of their parent banks, which ranged between 3% and 6% in FY11.

With regard to the macro environment in Ghana, Renaissance expects 6.5% GDP growth in 2013, helped by a strong recovery in oil production, a relatively stable exchange rate after a volatile 2012, and average inflation of 9-10%.