IMANI Alert: Ghana's State-Owned Agric Development Bank must go public to avert collapse.

IMANI's Emmanuel Buadi Mensah researches

Introduction

IMANI feels compelled to speak on the contentious issue of a state bank going public not because it did so when other state-dominated banks and private banks were going through similar phases, albeit under dubious circumstances, but primarily because in the case of Agricultural Development Bank (ADB), the times simply do not favour continuous state-ownership, so there really is no option than for it to go public. To be sure, the government is cash-strapped and cannot bail out ADB in crisis without implications. Any attempt to do so implies that government would have to borrow or use tax revenue to rectify the bank's books. This will put the 'bail-out cost' on the books of government. This runs counter to the Medium Term Debt Strategy of removing the debt of State Owned Enterprises, SOEs from the books of government, and also reiterated in the conditions of the IMF program.

The Issue
In creating the Agricultural Development Bank, ADB's future in a competitive environment, the bank must position itself to attract and retain customers through expanded asset base, product differentiation, competitive pricing, marketing and brand promotion. To achieve this ADB is proposing to list its shares on the stock market. Having received the approval of the Securities and Exchange Commission (SEC), the bank is expected to offload about 100 million shares to the public with the hope to give out 75% of the bank and raise about GH¢200 million to increase investments in its core operations of financing Agricultural related activities and more.

The Unfounded Misconception
The Bank has operated since its establishment as a state owned enterprise with current shareholding structure of 51.8% by Government of Ghana through the Ministry of Finance and 48.2% by the Central Bank of Ghana. Between the years 2009 and 2013 the bank has exhibited respectable growth in revenues, assets, deposits and profits. First, from 2009 to 2013 the bank's revenue more than doubled. It grew from 117 GHC million in 2009 to 316 GHC million representing a compound annual growth rate (CAGR) of 28%. In the same period net profit grew significantly from 13 GHC million to 70 GHC Million, reflecting a CAGR of 54%. Likewise assets and deposits grew by 22% and 26% respectively.

Despite the growth recorded in revenue and other indicators, capital constraints have had an adverse impact on profitability and capital adequacy levels. The bank recorded, on average, capital adequacy ratio of 11.6% for the years under consideration, which is marginally above the Central Bank requirement of 10%. This suggests that the bank is struggling with raising the needed capital for investment and operations.

This is happening at a time when most peers of the bank have improved their capital adequacy through increases in stated capital by raising equity funding. This puts ADB at a competitive disadvantaged position. Despite its competitive disadvantage, the Bank has delivered good performances in recent years and it is projected to maintain sustainable growth with additional capital injection.

This has motivated the decision of the bank to initiate an IPO. For instance the proposed capital injection is expected to increase capital adequacy from the current average of 11.6 percent to 16.6% in 2016. Also total loans and advances are expected to improve by 11.7%.
The failure of the bank to acquire this capital injection will lead to a situation similar to that of Merchant Bank and its subsequent sale to questionable equity financial organizations.

Restructuring ADB
In an effort to prepare for the listing, the bank is restructuring in order to meet standard practice. One of such activities is the acquisition of a new office complex. Per the information available to IMANI, the bank went into an agreement with a private estate agency to construct a new office on a property provided by the Bank. As apart of the agreement ABD is to own parts of the property.
ADB is reported to have sold the old head office complex, which if true, in our opinion, could have some economic merit which the bank must explain. Considering the facts enumerated, the debate on the ADB deal should be framed around the counterfactual question of what could happen to ADB without the needed capital injection rather than the sale of old office.

Counter Arguments
Some staff of the bank have called for the dismissal of the MD and board over the intended listing exercise. There are fears that ADB is on sale. The fact is that the bank is seeking capital injection from the public and thus the people of Ghana have been invited to take ownership of the bank by acquiring shares and by so doing investing their money directly in the bank. This is more promising than the sale of Merchant Bank under bizarre circumstances to some unknown organizations.
There are also fears that the IPO will lead to retrenchment of staff. It is important to note that the present restructuring underway in the bank will lead to the reallocation of resources. Hitherto powerful and influential individuals and departmental units are more likely to lose their influence, thus, the attempt to stop the right thing from happening. And of course, going for an IPO means the bank will have to get rid of unnecessary cost elements that may include some form of rationalization of staff and other operational units in order to conform to global industry standards. ADB is a typical state owned company, therefore, the resistance is to be expected.

Although the bank has reported some non-performing loans up to the tune of GHC260 million, the alternative to an IPO is for ADB to be sold out like the Merchant bank. The ideal thing to do in the midst of this struggle is for the bank to turn to the stock market to raise the needed capital.

The Way Forward
With current rate of Non-Performing loans, the bank may find itself in unsustainable position without capital injection and restructuring. Predictably, if the bank fails, government would want to bail it out or sell it out like Merchant Bank. To be sure, the government is cash-strapped and cannot bail out ADB in crisis without implications. Any attempt to do so implies that government would have to borrow or use tax revenue to rectify the bank's books. This will put the 'bail-out cost' on the books of government. This runs counter to the Medium Term Debt Strategy of removing the debt of State Owned Enterprises, SOEs from the books of government, and also reiterated in the conditions of the IMF program.

Going forward, we argue that the ADB should go public with relish as this will put the bank in a competitive position and increase its operation efficiency. It will also prevent imminent unsustainability and free government books. Finally, the proposed IPO will give Ghanaians the opportunity to own the bank and improve the corporate governance of ADB. This is conclusively a better deal than allowing its books to deteriorate and as result trigger a murky sale like the case of Merchant Bank. Nevertheless, ADB must come forward and explain clearly to Ghanaians the issue of the Old head office space and ensure that the strategic vision of the bank is maintained and fully implemented.