Banks do not work like other listed companies, and the ratios you would use on a brewery will mislead you on a bank. A bank's inventory is money, its product is risk, and its balance sheet is the business itself rather than a support for it. Analysing one requires a different set of questions.
This matters in Ghana because financial stocks are a heavy weight in the market — enough that the exchange publishes a separate index for them. If you own Ghanaian equities, you very likely own banks.
Why normal analysis fails on a bank
Three habits to unlearn:
- Debt is not a warning sign. Customer deposits are liabilities. A bank with large liabilities is a bank with lots of deposits, which is the raw material of the business. Debt-to-equity ratios, read conventionally, make every healthy bank look alarming.
- Revenue is not the top line you think. The meaningful figure is net interest income — interest earned minus interest paid — plus fee income. Gross interest income on its own tells you little.
- Profit can be managed through provisions. Banks set aside money for loans they expect to go bad. That judgement materially affects reported profit, and it is a judgement.
The five numbers that matter
1. Net interest margin
The spread between what the bank earns on assets and what it pays for funding, expressed against its interest-earning assets. This is the core profitability of banking.
A widening margin usually means lending rates are repricing faster than deposit rates — common when policy rates rise. A narrowing margin means the opposite, or that competition for deposits has intensified. Track it over several years rather than judging a single figure.
2. Cost-to-income ratio
Operating expenses divided by operating income. It measures how efficiently the bank runs. Lower is better, and the direction of travel matters more than the absolute level — a ratio drifting upward year after year indicates costs growing faster than the business.
3. Non-performing loan ratio
The share of the loan book where borrowers have stopped paying as agreed. This is the most important single indicator of lending quality, and it moves with a lag: loans issued in a boom go bad in the downturn that follows, so a rising NPL ratio is often telling you about decisions made two or three years earlier.
Read it alongside the coverage ratio — how much has been provisioned against those bad loans. High NPLs with thin coverage means losses are still to be recognised.
4. Capital adequacy
Regulatory capital against risk-weighted assets, set against the minimum the Bank of Ghana requires. A bank close to its minimum has two unattractive options: stop growing, or raise capital. Raising capital usually means issuing shares, which dilutes existing shareholders — so thin capital is a direct risk to your holding even if the bank never fails.
Check the disclosed ratio against the regulatory minimum in the annual report, and look at the trend.
5. Return on equity
Profit after tax against shareholders' equity: how productively your capital is being used. Compare across the listed banks and against the bank's own history. A high ROE achieved by running thin capital is less impressive than the same ROE on a well-capitalised balance sheet.
The sovereign connection
This is the feature of Ghanaian bank analysis that has no equivalent in most developed markets. Banks here hold substantial portfolios of government securities — treasury bills and bonds. That creates a direct link between the state's finances and bank shareholders:
- High government yields boost bank income. A bank can earn a solid, low-effort return by buying government paper rather than lending to businesses. This props up profits.
- It also crowds out private lending. If the government pays well for risk-free money, the incentive to underwrite a small business loan is weak. Good for short-term bank profits, less good for the wider economy.
- And it concentrates risk. A bank heavily exposed to sovereign paper is exposed to anything that affects the value of that paper.
So when you read a Ghanaian bank's results, establish how much of the profit came from lending and how much from holding government securities. The segment and interest-income notes in the annual report will tell you. A bank earning most of its money from treasury bills is, in effect, a fund holding government debt with a branch network attached — a legitimate business, but not the same thing as a lender.
See treasury bills in Ghana for how the yields themselves are set.
Reading the index as a sector signal
The GSE publishes a Financial Stocks Index alongside its Composite Index, both based at 1,000 points from 31 December 2010. Because they share that base, the distance between them measures how financials have fared against the broad market since then.
When the financial index diverges from the composite, something sector-specific is happening — rate moves, regulatory change, or credit quality. We cover the mechanics in the GSE indices explained and the rate channel in interest rates and stock markets. Current levels are on the live GSE board.
A practical review sequence
- Pull the last three to five annual reports from the bank's own website or its GSE filings.
- Build a small table: net interest margin, cost-to-income, NPL ratio, coverage, capital adequacy, ROE — one column per year.
- Look only at the direction of each line. Levels tell you where the bank is; trends tell you where it is going.
- Read the credit risk note properly. It is where lending problems are disclosed first.
- Split the income between lending and securities. Ask what happens to profit if government yields fall.
- Check the dividend against earnings and against the capital position — a bank paying out heavily while capital is tight is making a choice you should notice. See dividend yield.
- Only then look at the valuation. For banks, price-to-book is usually more informative than price-to-earnings, because the book value is the business. See market capitalisation explained.
Warning signs
Rapid loan growth. A bank growing its loan book far faster than peers is either winning market share or lowering its standards. The difference shows up two years later in the NPL ratio.
NPLs rising while provisions do not. Losses are being deferred rather than avoided.
Capital ratios drifting toward the regulatory minimum. Anticipate a capital raise and the dilution that comes with it.
Profit increasingly dependent on securities income. Fine while yields are high. A vulnerability when they are not.
Frequent changes of auditor or finance director. Not proof of anything, and worth noticing.
In short
Ignore the debt ratios, focus on margin, efficiency, loan quality, capital and return on equity, and always establish how much of the profit is lending and how much is government paper. Track five years of trends rather than one year of levels. For a general grounding in the statements themselves, see analysing financial statements.
