Banks’ capital to weaken on sovereign debt restructuring – Fitch

Ratings agency, Fitch, has warned that Ghanaian banks could face significant pressure on their capitalisation due to the restructuring of local-currency (LC) sovereign debt.

According to the UK-based rating agency, it believes banks will suffer large economic losses when they exchange their existing debt for new bonds with lower coupons and longer tenors.

It explained that “this could lead to material capital shortfalls at some banks but we expect regulatory forbearance to mitigate the impact, enabling banks to remain compliant with minimum capital requirements”.

It however said “the two Ghanaian banks [GT Bank Ghana and UBA Ghana] rated by Fitch have sizeable capital buffers that should help their ratings withstand the LC debt exchange, even disregarding regulatory forbearance”.

The LC debt exchange, launched on 5 December, comes alongside Ghana’s efforts to secure IMF support.

Fitch said it views it as a distressed debt exchange and downgraded Ghana’s Long-Term Local-Currency Issuer Default Rating (IDR) to ‘C’ from ‘CC’ as a result.

Banks to participate in debt exchange programme

The Ministry of Finance had stated that the debt exchange is voluntary but Fitch said “we expect banks to participate, particularly as the risk-weighting for the old bonds will be increased to 100% from 0%, and non-participating banks will not be eligible for liquidity support from Ghana’s newly created financial stability fund. Treasury Bills, which account for about 15% of the banking system’s securities according to Bank of Ghana data, are excluded from the restructuring”.

Banks to suffer NPV loss of 50%

Based on the coupon rates and tenors of the new bonds, and assuming a 20% discount rate, it continued that “we estimate that banks exchanging old LC government bonds will suffer a net present value loss of about 50%”.

This it said would significantly erode banking system capitalisation. “However, we expect the authorities to allow flexible accounting treatment to significantly reduce losses, and to ease regulatory capital requirements so that banks can still meet minimum capital ratios”.