Ghana Commercial Bank Limited (GCB.gh) 2018 Annual Report

We have extracted below the Chairman’s Statement from the 2018 annual report of Ghana Commercial Bank Limited (GCB.gh), listed on the Ghana Stock Exchange:

Introduction

It is indeed a privilege once again to welcome you, on behalf of the Board, Management and Staff of the Bank to this year’s Annual General Meeting (AGM). We are truly honoured that you found time to participate in this AGM. Ladies and Gentlemen, last year when we reflected on the future of the banking industry it was clear to us that given the increasing pace of Digitalization in banking globally, it was imperative that we leverage on our existing platforms and invest in cutting edge technology to rake in an increasing proportion of the business in the unbanked sector into the formal sector profitably. We recognised then that the competition for the unbanked sector was not limited to banks and other financial institutions but to a large extent included the Telcos. Clearly then, those banks that are able to leapfrog and leverage on their existing platforms, backed by appropriate investments, will have a greater share of the funds in the informal sector and this is particularly true of Africa. We identified this trend and embarked on initiatives and investments which will enhance our digital transformation.

Regulatory Developments

Ladies and Gentlemen, last year the banking sector witnessed significant interventions and reforms by the Central Bank, and it is appropriate that we update you on the status of Bank of Ghana (BoG) reforms. December 2018 marked the completion of the BoG comprehensive reform programme which among others raised the minimum capital of banks from GH¢ 120.00 million to GH¢ 400.00 million. Your Bank met the deadline and we are happy to inform you that as at the end of 2018 our Stated Capital was GH¢500.00 million, with Total Shareholders Funds of GH¢ 1.45 billion. Your Bank is resilient and has adequate capital to exploit our strategic objectives, and take advantage of market opportunities,while managing risk complexions associated with these initiatives.

As part of the reforms in order to pave the way for banks to play a critical role in the development of the private sector, the BoG sought to sanitize the industry and ensure that banks have adequate capital to support the risk they assume. In the wake of the exercise seven (7) insolvent banks had their licenses withdrawn and five (5) out of the 7 were assumed under Consolidated Bank Ghana Limited (CBG). These were uniBank Ghana Limited, Royal Bank Ghana Limited, BEIGE Bank, Construction Bank and Sovereign Bank. The resultant effect of the BoG aggregation is that CBG, in terms of potential balance sheet size, could become a major competitor to reckon with in the industry.

In order to enhance the governance protocols of banks, the BoG came out with clear guidelines and directives on: corporate governance for banks; fit and proper criteria for persons in financial institutions; guidelines for financial holding companies; and for mergers and acquisitions. In addition, the BoG issued guidelines and directives on Cyber and Information Security and Voluntary Winding Up of Regulated Financial Institutions.

These guidelines and directives place onerous responsibilities on Directors of banks, including making them responsible for ensuring that their banks maintain adequate capital for the risk they assume. Therefore, it is imperative that Banks provide appropriate training for Directors regularly to enable them remain abreast with the regulatory requirement and mandates.

In response to these directives, I’m happy to report that your Directors have successfully undertaken training in the following areas:

  • Strategy Risk and Reputation.
  • Corporate Governance.
  • Effectiveness and Performance in the Boardroom.
  • Digital Transformation.
  • Corporate Governance Certification modules.
  • Effective Enterprise and Risk Oversight.

Global Economic Outlook and Operating Environment

The events of the global economy during the year mainly the escalation of US-China trade tensions and the weaker than expected performance in the European and Asian economies resulted in global GDP growth of 3.6% as at the end of 2018, from 3.8% in 2017. As a result of the slowdown, global economic growth for 2019 is forecast to drop to 3.3%.

The developments in the global economy had its own impact on the Ghanaian economy. Ghana’s real GDP is projected at 7.6% in 2019 after a downturn in 2018. The growth is expected to come mainly from rising oil production, growing foreign direct investment, easier credit conditions and increased government spending.

Headline inflation trended downwards from 11.8% in December 2017 to 9.4% in December 2018; due mainly to relatively tight monetary policy stance maintained throughout the year by the BoG. Developments in the money market reflect an upward trend in interest rates at both the short-end and medium-term segments of the market. The 91-day Treasury bill rate moved up to 14.6% in December 2018, from 13.3% in 2017. Similarly, the 182-day instrument increased to 15.0% from 13.8%. Also, rates on the secondary bond market increased significantly in the year, reflecting tight financing conditions. Interbank lending rate, however, declined to 16.1% in December 2018, from 19.3% in the prior year. The Bank of Ghana policy rate dropped from 20% in December 2017 to 17% in December 2018. The global financial developments, in particular the strengthening of the US dollar, adversely impacted currency stability in emerging markets and frontier economies, including Ghana. In addition, due to increased domestic demand pressures, the Cedi depreciated by 8.4% to the Dollar in 2018, compared to 4.9% in 2017. However, the Cedi depreciated more moderately against the Pound and Euro by 3.3% and 3.9% respectively, compared with 12.9% and 16.2% depreciation in 2017.

The banking industry remains sound, liquid and well- capitalized, and optimally-positioned to translate the gains made from two years of far-reaching reforms in the economy. At the end of December 2018, total assets of the banking sector grew by 14.7% year-on-year to GH¢ 107.3 billion. Going forward, growth in industry assets is expected to increase as banks deploy their newly injected capital towards financial intermediation. The industry average for Capital Adequacy Ratio (CAR) improved to 21.9% at the end of December 2018, significantly above the prudential requirement of 10.0%. Asset quality also improved, with the industry Non-Performing Loans (NPL) ratio declining to 18.2% from 21.6% over the same comparative period.

Business Performance

The 2018-2022 strategy, premised on TRANSFORMATION THROUGH DIGITALIZATION is aimed at accelerating growth through the provision of first class banking solutions for our customers and optimizing value for our shareholders. Our focus on: process optimization, cost- efficiency, governance & risk management, talent and performance management, was aimed at achieving and sustaining memorable customer experiences. We entered 2018 with cautious optimism while focusing on growth opportunities as market conditions improved. We made significant progress in 2018, posting strong financial performance underpinned by the disciplined execution of the Bank’s strategy. Profit before tax increased by 35.6% to GH¢ 450.17 million in 2018 from GH¢ 331.98 million in 2017. The impressive profit performance was driven by solid revenue growth. Net interest income was up by 8.0%, from GH¢ 895.31 million to GH¢ 967.10 million. Net trading income went up by 121.0% to GH¢ 90.64 million from GH¢ 41.02 million whilst net fees and commission income also increased by 16.0% to GH¢ 197.60 million from GH¢ 170.30 million. This put us among the top three most profitable Banks in the industry for 2018.

However, high cost of operations continue to be a major challenge for the Bank. The Bank in 2018 posted a Cost- to-Income Ratio of 60.5% compared to the industry average of 53.5%. The Board acknowledges this adverse  factor which is due mainly to a number of legacy issues. Adequate measures have been put in place to ensure that our cost-to-income ratio falls below the industry average.

Our total assets recorded a growth of 11.4% from GH¢ 9.63 billion in 2017 to GH¢ 10.72 billion in 2018. Total deposit also went up by 19.6% to GH¢ 8.30 billion in 2018 from GH¢ 6.92 billion in 2017. This made GCB the number one Bank in deposit and asset size in the industry. The Bank’s equity recorded a growth of 19.4% from GH¢ 1.21 billion in 2017 to GH¢ 1.45 billion in 2018. Earnings per share increased by 38.2% from GH¢ 0.89 to GH¢ 1.23. The Capital Adequacy Ratio of GCB as at the end of 2018 was 22%, significantly above the prudential requirement of 10%.

The share price of GCB decreased to GH¢ 4.60 at the end of 2018 from GH¢ 5.05 at the end of 2017 representing a decline of 8.9%. This was consistent with the trend of share prices of other banks on the stock market. We believe that the strong performance of the Bank in 2018, coupled with the initiatives we have embarked on will make GCB shares attractive to investors and put its share price on an upward trajectory.

Against this impressive performance, we can report that the bank has enhanced operational excellence, improved on expenditure controls and put in place measures to support career and talent development. We have pursued our digital transformation agenda and we are far advanced in the launch of our mobile wallet which will no doubt increase our access to funds outside the formal banking sector. These initiatives have all been pursued within the construct of our business strategy.

Dividend

Our dividend policy seeks to provide shareholders with an adequate return on their investment while maintaining adequate plough back to sustain growth and shareholder value. Accordingly, the Directors propose a dividend of 30.00 pesewas per share amounting to GH¢ 79.50 million for the 2018 Fiscal Year.

Corporate Social Responsibility

Our commitment to society is non-negotiable and consistent with our policy to support society in the critical areas of Health, Education, Environment and Sanitation, we invested a total of GH¢ 5.62 million in communities in which we operate during the year under review.

Reflections on the Future

GCB is a well capitalised bank with a strong balance sheet. The future of banking belongs to those banks that can create new market space and successfully increase and defend their niche market.

We are cautiously optimistic that our transformation agenda, underpinned by digitalization, is the right strategic pathway. It will create new market space by securing a greater share of the unbanked market while consolidating our traditional banking space. Our focus will be geared to exploiting opportunities within our strategic framework as well as those that fall within our risk-return construct and enhances shareholder value. Ladies and Gentlemen, our mobile wallet which is in the offing has a refreshing focus. The banking landscape is changing rapidly and the competition is no longer limited to other banks, but the growing ascendency of various Telcos, who with their contemporary state of the art digital platforms have access to significant pool of funds.

This powerful strategic capacity of the Telcos, provides them with absorption capacity of customers, albeit at the rudimentary levels. Our strategy therefore is to focus on developing creative strategies to rope in and transition these new entrants into the higher levels of the financial pyramid by offering a wide array of financial services and opportunities over time. So, while they may be competitors, we shall view the Telcos differently; as potential “partners” at different ends of the banking spectrum, who efficiently on board new customers and thus broaden the potential banking space.

We are also cognizant of the fact their presence will be a predicate for the eventual acceleration of cash and transaction movement from the informal to the formal banking sector, thus fueling the growth of new financial consumers that only banks are best positioned to serve.

In pursuing this agenda, we recognize that the BoG has moved in with a very robust regulatory framework to govern banking business and to provide security for customer deposits. This is the challenge for banking going forward and I am happy to inform you that your Bank has developed the appropriate governance framework that is consistent with the prudential guidelines set by the central bank.

Appreciation

The year 2018 was a relatively successful year, but certainly challenging as well. I will like to place on record that we have been able to achieve these impressive results due to the loyalty of our customers and their trust in our brand, and the hard work of our management and staff , who have worked relentlessly to ensure “a great experience for our customers”. It is therefore with a deep sense of appreciation that I say a big thank you to our customers and the management and staff of the Bank. Ladies and Gentlemen, let me acknowledge Messrs. Deloitte & Touche, who replaced KPMG as the new auditors of the Bank. This year marks their first audit report for the Bank. We look forward to a fruitful relationship during their tenure. On behalf of the Board, I say a big thank you to our shareholders for the support they continue to give to the Bank.

Thank you so much for the opportunity to be of service.

Jude Kofi Arthur

Chairman