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The Bank of Ghana said the banking sector remained strong with improved financial indicators, including robust earnings, portfolio quality, liquidity, and capital adequacy. This contrasts with the possible slowdown in economic activity which the central bank says could hit the domestic economy due to rising inflation, local currency depreciation and softening of both consumer and business confidence. Capital adequacy ratio The industry�s capital adequacy ratio (CAR) as measured by the ratio of risk-weighted capital to risk-weighted assets was 17.5 per cent in February 2014 compared with 18.2 per cent recorded in February 2013. The CAR was above the 10 per cent prudential and statutory requirements. Profitability Indicators of profitability for the banking industry showed some slowdown in banks� earnings performance for the period ended February 2014. The industry net interest income registered a growth of 40.4 per cent in February 2014, compared with 60.2 per cent growth in February 2013. The banking sector�s income before tax grew, in year-on-year terms, by 32 per cent in February 2014 compared with 76 per cent growth in February 2013. Similarly, the industry�s net profit after tax also grew by 28.3 per cent in February 2014 compared with 70.9 per cent growth in February 2013. Composition of banks� income Interest income from loans continued to be the main source of income for the banking industry and constituted 43.6 per cent of total income in February 2014 compared with 48.1 per cent in February 2013. Investment income share of total income was 31.6 per cent in February 2014 compared with the 25.9 per cent recorded in February 2013. The share of income from fees and commission declined to 13.5 per cent in February 2014 from 16.4 per cent in February 2013. Credit to enterprises As part of the report, the Bank of Ghana conducted Credit Conditions Survey which to gauge whether the banks were lending more, which sectors were benefiting and which types of loans were carrying the day. The report indicated that �credit stance on loans and advances worsened during the survey period with net tightening of credit for all loan types.� It said banks tightened credit on loans to enterprises as of March 2014 (it was 17.93 per cent as of January 2014 survey, compared with 19.75 per cent in the March survey round. Margins on average and riskier loans, high non interest cost and additional collateral requirements were the main contributing factors for the tightening of credit stance for enterprises. Other factors include deteriorating near term macroeconomic environment, monetary policy rate hikes and high cost of funds. Demand for loans � Enterprises Loans request for fixed investment and inventories and working capital showed decreases, while requests for debt restructuring increased. Large enterprises and SMEs demand for credit decreased and this reflected in decreases for all loan types, except on short-term. Mortgage Banks maintained tight credit position on loans to households for house purchase, despite improvements in non interest loan costs. Riskier loans and those with average risks attracted higher interest rates, in addition to heavier security requirements deterred applications for mortgages. Consumer credit Household access to consumer credit worsened on account of margin on average loans and security requirements. Banks tightened conditions for consumer credit as at the end of February 2014. The net tightening of credit stance for consumer credit was implemented through tightening of margins on average and riskier loans. Credit portfolio analysis Real total loans and advances of the banking industry grew, in year-on-year terms, by 19.4 per cent at the end of February 2014. The corresponding figure for the same period 2013 was 23.3 per cent growth. Credit to the private sector also grew by 18.9 per cent at end of February 2014 compared with the 20.5 per cent growth at the end of February 2013. Credit to the households also grew by 17.1 per cent in February 2014, compared with 35.9 per cent growth recorded in the same period in 2013. The composition of banks� credit portfolio by economic institutions showed that the Government and public institutions received 4.8 per cent of total credit at end February 2014, compared with eight per cent recorded in February 2013. Credit to private enterprises, however, accounted for 76.1 per cent of gross loans in February 2014, compared with 69.9 per cent recorded in February 2013. The share of household loans in gross loans decreased to 15.5 per cent in February 2014 from 17.1 per cent in February 2013, as those to public enterprises accounted for 3.6 per cent of gross loans and advances in February 2014, compared with five per cent registered in February 2013. The Commerce and Finance sector received the highest amount of credit, accounting for 25.1 per cent as at February 2014, compared with 27.6 per cent in February 2013. Credit allocation to the services sector, and Commerce and Finance sector constituted 50.1 per cent of total credit as at February 2014, compared with 55.4 per cent in February 2013. Credit allocation to other sectors, including Electricity, Gas and Water; Mining and Quarrying, and Construction improved while Manufacturing; Agriculture; Forest and Fishing; Transportation, Storage and Communication, and Miscellaneous declined during the review period. BANKING SECTOR STABILITY ANALYSIS � Balance sheets Total assets of the banking sector grew by 39.8 per cent to GH�39.13 billion as at end February 2014, compared with 23.7 per cent growth recorded in February 2013, the financial stability report said. Domestic assets component of total assets of GH�35.97 billion showed an increase of 38.5 per cent by end of February 2014, compared with 28.3 per cent growth recorded for the same period in 2013. Foreign assets of GH�3.16 billion also grew by 56.4 per cent in February 2014 as against 14.9 per cent decline for the corresponding period in 2013. Net loans and advances of GH�16.67 billion as at end February 2014 represented an annual growth of 36.6 per cent compared with 36.9 per cent growth recorded in February 2013. Banks� investment portfolio (bills and securities) rose, in year-on-year terms, by 49.7 per cent to reach GH�11.50 billion by the end of February 2014 as against a 24.9 per cent growth at the end of February 2013. The banking sector total deposits liabilities as at end February 2014 was GH�25.06 billion and showed an annual growth of 29 per cent compared with 20.4 per cent growth in February 2013. Banks� borrowings, however, registered an increase of 105 per cent to GH�5.37 billion in February 2014, compared with 39.1 per cent growth recorded in the same period in 2013. The growth in banks� borrowings was driven mainly by short term foreign borrowings. Paid�up capital of the banks also showed an annual growth of 10.9 per cent to GH�2.41 billion by the end of February 2014, compared with 31.6 per cent growth in February 2013. Shareholders� funds similarly expanded, in year-on-year terms, by 37.3 per cent to GH�5.87 billion at the end of February 2014 compared with a 36.1 per cent growth recorded in the same period in 2013. � Asset and liability structure Net advances constituted 42.6 per cent of banks� assets in February 2014 compared with 43.6 per cent in February 2013. The decrease in the share of net loans revealed a shift in banks� preference for investment in government bills and securities, which represented 29.4 per cent of banks� assets in February 2014 compared with 27.4 per cent in February 2013. Total deposits� share of 64 per cent of total liabilities at end February 2014 was lower than the 69.4 per cent recorded in February 2013 and showed banks� declining efforts at intermediation. Share of banks� investments Banks� investment in securities as a share of total investment decreased to 34.2 per cent in February 2014, from 48.9 per cent in February 2013. Investment in treasury bills as a share of total investment, however, increased to 62.8 per cent in February 2014, from 49 per cent in February 2013. Credit to deposits ratio increased to 73.5 per cent in February 2014 from 69.6 per cent in February 2013 and credit to deposit plus borrowings ratio however declined to 60.6 per cent in February 2014 from 61.4 per cent in February 2013. However, investments to deposit ratio increased to 45.9 per cent in February 2014 from 39.5 per cent in February 2013. Asset quality The non�performing loan ratio (NPLs) of the banking industry was 12.7 per cent in February 2014 as against 13.5 per cent in February 2013. Similarly, loan loss provision to gross loans also declined to 5.6 per cent in February 2014 as against 6.1 per cent in February 2013. The ratio of NPL net of provisions to capital of 10.1 per cent in February 2014 was also an improvement over the February 2013 position of 11.7 per cent. All the main indicators of loan asset quality, therefore, showed improvement in the quality of the banks� lending books, the Bank of Ghana said. Credit to the private sector contributed 89.4 per cent of the total banking sector�s non-performing loans at end February 2014, compared with 87 per cent in February 2013. The public sector, however, directly contributed 10.6 per cent to the total non�performing loans in February 2014 compared with 13 per cent in February in 2013. Commerce and finance sector accounted for the largest amount of the banking sector NPLs followed by services, manufacturing and construction. Electricity, Gas and Water sector accounted for the lowest amount of the industry�s NPLs. Conclusion and outlook The banking sector remains sound and solvent as evidenced by the financial soundness indicators of earnings, portfolio quality, liquidity, and capital adequacy. However, the continued decline in the performance of major macroeconomic indicators, namely inflation and the cedi�s depreciation against the major trading currencies (US Dollar, British Pound and the Euro) has resulted in marginal declines in banks� profitability.