What happened?

• Ghana’s Monetary Policy Committee raised the monetary policy rate (MPR) by 300bps to 22.0% yesterday in response to rising inflation and the recent sharp depreciation of the local currency.
• The central bank also increased the cash reserve ratio (CRR) to 15.0% from 12.0% which is planned to be implemented in a phased manner over the next three months as part of efforts to combat inflation.

Our Opinion

• While we understand the central bank’s need to mop up excess liquidity to tame inflation, we fear that banking sector growth and near-term profitability have been sacrificed in this decision.
• We estimate a liquidity crunch of about GHS 3.5b – GHS 3.9b to be created over the next three months due to the 300bps increase in CRR. This is likely to result in banks selling their treasury papers at a discount to fund the gap.
• Consequently, we expect non-funded income growth to deteriorate as secondary market yields remain unfavourable.
• In addition, we anticipate further NIM compression as cost of funding reprices much higher and faster in an environment where earning assets are broadly yielding negative real returns.
• The above notwithstanding, banks with significantly higher exposure to money market securities are likely to see NIMs remain robust.

How does this impact our valuation?

• All in all, we expect further decline in top line growth amid higher cost of equity which will have further adverse impact on valuations.