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An Introduction to Ghana’s Treasury Market

Levar Hewlett, founder and CEO of Arrancar Investments, gives us a few pointers on how to invest in Ghanaian t-bills, notes, and bonds.

Levar Hewlett, the founder and CEO of Arrancar Investments, has a wealth of experience in asset management, commercial credit, and corporate trade credit insurance. Africa’s debt capital markets are his current area of focus.

Here, he answers some of my questions on ways to invest in Ghanaian government securities.

Ryan Hoover: What are Ghana’s most accessible and attractive fixed income investments?

Levar Hewlett: The most accessible would be government treasuries, which Ghanaian citizens can purchase for as little as GHS100.00 (roughly $21.00) and currently offer yields ranging from 16.1% for a 91-day treasury bill to 21.0% for a two-year fixed note.

Unfortunately, foreigners are not legally allowed to purchase Ghanaian treasury bills on auction. They are restricted to treasuries with maturities of two years or longer, and must purchase a minimum of GHS100,000 (roughly $21,000.00). But they are permitted to buy them on the secondary market, which is reasonably active.

Ryan: How does one go about purchasing Ghanaian treasuries?

Levar: Purchasing treasuries on the primary and secondary market is done through a licensed Ghanaian broker such as IC Securities, Databank, or SAS Ghana.

But local and foreign investors can also get exposure to these instruments through a number of local funds.

Databank’s MFund is probably the easiest way for retail investors to invest in Ghanaian government securities. It’s a money market fund with a very low minimum invest amount – GHS50.00 – and it currently offers a yield exceeding 19.0%.
First Fund is an open-ended money market fund which invests in money-market instruments, including Bank of Ghana treasury bills and bonds, high-quality corporate bonds, commercial papers and certificates of deposits.
HFC Future Plan Trust is a collective investment scheme whose main objective is to invest mobilized funds in short-term money market securities. It invests in bonds, debentures, fixed deposits, treasury instruments and commercial paper. The fund is open to all individuals and institutions who can afford the required minimum contributions. Parents can also invest in trust for their children and dependents.

Ryan: How do the yields on Ghanaian treasuries compare to the interest rates on savings products at local banks?

Levar: Yields on t-bills, notes, and bonds are considerably more attractive than interest rates on savings accounts. As of September 2016, interest rates on local savings accounts ranged from 1% to 12%, which was much lower than the 17.2% rate of inflation at the time. Meanwhile, the yields on treasuries were 22% to 24.75%, which gave investors an ample premium to cover inflation and currency risk.

Yields on treasuries have dropped sharply since September, but inflation has, too. It’s currently 13.3%. So, there remains the potential for a positive real return on investment compared to the negative real return on savings accounts, whose nominal interest rates have quite a rigid ceiling.

Ryan: The high rate of inflation suggests that there may be significant currency depreciation over the next year or two. Do you have any tips for investors on how to evaluate whether Ghanaian treasuries are worth the currency risk?

Levar: There are two key drivers of Ghana’s inflation. There are demand pressures, which are driven by high fiscal deficit financing and exchange rate pass-through. And there are cost pressures, which are driven by hikes in utility tariffs, ex-pump prices of petroleum products, and low productivity in the real sector of the economy.

In the last 12 to 24 months, Ghana’s inflation has been largely driven by cost-side pressures rather than forex pressures as the Central Bank already maintains a tight monetary stance to contain the forex and demand-side pressures. At the moment, the monetary policy rate stands at 26%. Following a sharp depreciation of the Ghanaian cedi against the US dollar in 2014 ( about 32%), the monetary tightening cycle embarked upon between 2015 and 2016 has ensured a slower rate of depreciation by 15.6% and 9.6% respectively.

Cost-push pressures have, however, elevated inflationary pressures since 2015, as the 59% and 67% hike in electricity and water tariffs in December 2015 heightened inflationary expectations. The tax measures implemented in 2016, higher prices of petroleum products, and a 15% upward adjustment in public transport fares in the first quarter of 2016 added further momentum to inflationary pressures. As a result, inflation surged to a peak of 19.2% before retreating gradually toward the end of 2016 to a level of 15.4% in December 2016 as these cost-side pressures eased.

If you take a five-year average of annual depreciation of the cedi versus the dollar, you obtain a 17.3% average depreciation rate. Therefore, for a non-resident investor to bypass forex risks on Ghanaian bonds, the acceptable coupon rate for medium term debts must not be below 17%.

Levar Hewlett has provided financial oversight helping to ensure the long-term viability of multi-million dollar portfolios. In 2017, he founded Arrancar Investments, an investment company focusing on asset management of individuals and real estate opportunities. Levar holds a master’s degree in Finance and an Investment Certificate from Johns Hopkins University, Carey Business School (JHUCBS) and is currently pursuing another master’s degree in Real Estate and Infrastructure at JHUCBS. In his spare time, Levar enjoys spending time with family and friends, traveling, and playing competitive lacrosse. You can contact him at: Levhewlett@gmail.com.

Ghana’s Best 5 Stocks of 2013

Ghana investors will probably pinch themselves after reviewing their portfolios’ 2013 performance.

In spite of a breathtaking 19% drop in the value of the local currency, the market still surged almost 45% in US dollar terms, ranking it among the world’s best.

Which companies notched the most impressive performances? Let’s take a look-see.

Ghana investors will probably pinch themselves after reviewing their portfolios’ 2013 performance.

In spite of a breathtaking 19% drop in the value of the local currency, the market still surged almost 45% in US dollar terms, ranking it among the world’s best.

Which companies notched the most impressive performances? Let’s take a look-see.

The Ghana Stock Exchange’s 5 Best Performers of 2013

5. Ghana Commercial Bank +90.5% (+135.2% local currency)

With a share price that nearly doubled in US dollar terms, GCB made sure investors had something to celebrate during its 60th anniversary. Ghana’s most prominent bank grew profits 51% during the first nine months of 2013.

How did it do it? Well, customer deposits increased more than 10%. This gave the bank lots of low-cost capital to lend, which it chose to deploy primarily in government securities.

The downside is that the bank now has an unsettling amount of government securities sitting on its balance sheet. These could be at risk if the government should find itself unable to service its growing debt load. Management would do well to diversify its lending portfolio into retail, small business, and corporate loans.

4. Mechanical Lloyd +105.1% (+153.3% local currency)

One of Ghana’s largest auto dealers, Mechanical Lloyd holds the rights to sell BMWs, Fords, and Massey Ferguson tractors throughout the country. In recent years, it has expanded its repair and workshop operations, helping to smooth earnings.

But the company struggled in 2013. Sales slumped roughly 11% during the first nine months of the year. Increased finance charges hit the company hard, too. The result? Profits fell 38.6%.

The company looks to be in expansionary mode, though, having borrowed nearly 20 million cedis through September. This, plus the fact that the stock still trades at less than half its book value is likely why investors believe performance will rev up again soon.

3. CAL Bank +108.9% (+157.9% local currency)

While Ghana Commercial Bank is big, conservative, and (dare I say it?) a bit sleepy, CAL Bank is young, aggressive, and quickly becoming a major national player.

Its strategic focus is to provide long-term commercial loans, and increasingly to small businesses. The approach has certainly borne fruit. Earnings through the first three quarters of 2013 jumped 113%, and the bank’s asset base is 40% larger than it was one year ago.

CEO Frank Adu maintains that the bank has no plans to “jump on the pan-African bandwagon,” and with just 19 branches throughout the country, it would appear that CAL still has plenty of room to grow at home.

2. Enterprise Group +217.2% (+291.7% local currency)

The Ghana Stock Exchange's performance reflects vibrant Accra — Photo by World Bank

In the US, we’re accustomed to seeing insurers make very little profit on underwriting. They derive their earnings from investing the float, instead.

Most African insurers, however, are in a much more enviable position. They make a healthy profit on their investments and on their underwriting, too.

Take Ghana’s oldest insurance company, for example. During the first nine months of 2013, Enterprise Group kept over 17% of the premiums it collected from clients after paying re-insurers and claims.

And it made a tidy profit from its investments. In total, the company’s earnings are up 196%, yet the company still trades at a PE ratio of less than six.

1. PZ Cussons Ghana +255.5% (+338.9% local currency)

It’s been a good few years for Ghana’s consumer goods companies. Sales at PZ Cussons Ghana, which distributes soap, cosmetics, pharmaceuticals, and small appliances, jumped 16% during its 2013 fiscal year and 46% in its first quarter of 2014.

The market responded by scarfing up shares of the stock. Its share price rocketed more than 400% at one point.

Unfortunately, with Ghana’s devaluing currency and rising competition, importers like PZC must sell more and more just to keep earnings moving in the right direction. Shrinking margins forced the company to report an earnings loss during the first quarter.

The stock now trades at nearly 21x trailing earnings, a demanding valuation given the challenging environment.

Your Turn

Which Ghanaian stock will top the charts in 2014? Let us know your predictions in the comments!

The Ghana Stock Exchange Is Crushing It (And Here’s Why)

What’s gotten into the Ghana Stock Exchange?

The MSCI Ghana Index has soared of late. It’s now 37% higher than it was at the beginning of the year. Think about that. That’s 37% in just over two months!

Let’s see what’s behind the rally and which stocks have done the most to drive the market higher. The following is a countdown of the top seven performing Ghanaian stocks and their US Dollar-adjusted gains.

What’s gotten into the Ghana Stock Exchange?

The MSCI Ghana Index has soared of late. It’s now 37% higher than it was at the beginning of the year. Think about that. That’s 37% in just over two months!

Making the surge all the more impressive is the fact that the Ghana Cedi depreciated against the US Dollar by over six basis points during the same time period.

To figure out what’s behind Ghana’s bull run, I enlisted the help of my friend, Harrison Tettey-Fio.

Harrison Tettey-Fio, Snr. Securities Officer, Standard Chartered Bank – Ghana

I attribute the market’s performance to two factors.

First would be the listed companies’ stellar operating performance during 2012. Of the 16 companies that have reported 2012 results so far, only one has recorded a loss. This has generated a lot of interest; especially in banking stocks, which drive much of the trade volume on the GSE.

The second factor is the implementation of pension reforms which have resulted in more pension fund assets being allocated to Ghanaian equities.

Combine these two factors with the limited float available on the market, and you have a recipe for strong performance.

Let’s dig a little deeper to see which stocks have done the most to drive the market higher. The following is a countdown of the top seven performing Ghanaian stocks and their US Dollar-adjusted gains.

7. CAL Bank (CAL:GN) +41.2% (P/E Ratio: 3.9, DivYield: 4.9%)

Shares of this mid-tier bank exploded to a four-year high after it announced 2012 earnings that far surpassed local analysts’ expectations. Net income more than tripled on the back of a 106% increase in net interest income.

A dramatically larger lending book propelled the earnings growth. This bears watching because loans to customers now outstrip customer deposits, which means that interest margins will likely be under pressure going forward. Having so much of its asset base tied up in loans also raises concerns about the bank’s liquidity. Bulls will note, however, that the non-performing loan ratio has dropped to an impressive 5%.

6. Ghana Oil Company (GOIL:GN) +42.6% (P/E Ratio: 18.7, DivYield: 1.5%)

It’s not an oil driller, but this operator of Ghana’s second largest network of fueling stations sure did hit a gusher in 2012. The company recorded earnings growth of 32% thanks to a 30% sales increase.

GOIL’s newly appointed CEO has led a renewed push into the ship and aviation fueling markets in addition to carrying out a well-received re-branding exercise.

5. SG-SSB (SG-SSB:GN) +44.9% (P/E Ratio: 15.2, DivYield: 5.6%)

A subsidiary of France’s Societe Generale, this bank also crushed its previous year’s results. Earnings soared 34% on a 50% increase in lending and a 37% larger deposit base. Tech upgrades and cost efficiencies resulting from a new centralized office should keep profitability strong in the years ahead.

4. FAN Milk (FML:GN) +46.4% (P/E Ratio: 22.5, DivYield: 3.8%)

One of my personal favorites, this ice cream purveyor delighted shareholders with an earnings gain of nearly 44% for 2012.

I mean, really, what’s not to like about a company that employs at risk youth on bicycles to sell frozen treats to a population with rising income in a place as hot and humid as Accra? Oh, did I mention that the company has zero long-term debt and churns out wads of cash?

More, please.

3. Ghana Commercial Bank (GCB:GN) +46.7% (P/E Ratio: 9.2, DivYield: 2.3%)

Ghana’s most ubiquitous bank celebrates its 60th anniversary this year and has fittingly posted blowout stock price gains to mark the occasion.

Thanks to a recent development that freed up a huge chunk of the bank’s assets that had been previously been tied up in an ill-fated loan to the Tema Oil Refinery, GCB is back in the lending business. Over the most recently reported 12 months, it nearly doubled its loan book.

Much of the new lending has been directed to the retail sector, specifically government workers who comprised the bulk of GCB’s customer base and were recently awarded a 20% pay increase.

2. Ecobank Transnational (ETI:GN) +49.1% (P/E Ratio: 5.3, DivYield: 4.3%)

Shareholders of ETI, Africa’s largest bank in terms of geographic footprint, cheered its 48% profit boost through the first nine months of 2012. But that might be only the start of the fun.

CEO Thierry Tanoh recently announced that he expects customer deposits to grow 20% in 2013 as the bank rolls out its operations throughout the Sub-Sahara. He also forecast annual revenue gains of 15% between now and 2015. That’s not bad for a company that trades at a paltry 5.3x trailing earnings.

Looking for exposure to ETI but don’t have a Ghanaian brokerage account? Consider the South Africa-based NedBank Group (NDBKY:US), which holds the rights to a 20% stake in the company.

1. Benso Oil Palm Plantation (BOPP:GN) +78.9% (P/E Ratio: 6.6, DivYield: 2.7%)

I remember being at a complete loss as to what an “oil palm” was when I first came across this company. Palm oil, it turns out, is an edible oil and an increasingly popular substitute for trans-fats. It also serves as a decent biodiesel.

BOPP shares soared when its parent company, Wilmar International, announced that it would soon open West Africa’s second-largest palm oil refinery in Ghana. The development should widen BOPP’s profit margins.

In spite of its nearly 80% price gain, the stock still trades at less than seven times trailing earnings.

Are You a Ghana Bull?

So, the Ghana bourse has had quite the run-up, but, as we’ve seen many of them still trade at attractive valuations. Do you invest in Ghana? If so, let us know what you think the remainder of the year holds in store in the comments!

[Disclosure: I own shares of FAN Milk, Ghana Oil Company, and Ghana Commercial Bank.]

How to Invest on the Ghana Stock Exchange

Ranking Ghana’s Best Banks

Investing In Ghana’s Booming Banks

Stock Showdown: Ranking Ghana’s Best Banks

Last week we crunched the numbers of some Nigerian banks, analyzing their profitability, growth, risk, and value to separate the gems from the junk.

I hope you got as much of a kick out of the exercise as I did, because we’re going to do the same thing again today. Only this time, we’ll be covering eight of the largest banks from Nigeria’s neighbor to the west — Ghana.

Remember that this quick and dirty survey of the industry is only the first stage of analysis. It’s intended to separate the contenders from the pretenders – not to provide me with a buy decision.

With that said, let’s put eight of the Ghana Stock Exchange’s biggest banks through their paces.

1. Profitability

If you’re in the market for a bank stock, chances are you’d prefer one that actually makes money.

Return on Assets (ROA) measures how effectively management deploys the assets under its control. I’ve calculated ROA as after-tax profits from continuing operations divided by average assets. Then, because bank earnings can be inconsistent, I averaged the ROA from the most recent five fiscal years.

To calculate a score, I divided the range between the most profitable bank and the least profitable one into deciles. The banks with ROAs in the highest decile were awarded 10 points. Those in the lowest decile scored just one point.

Here’s how they stacked up:

[table id=26 /]

2. Growth

Profitability is great, but Africa’s best banks are constantly growing their assets. They’re tapping new market segments, expanding into new territory, or acquiring smaller competitors. And because the banking industry is particularly conducive to building economies of scale, a larger asset base generally translates into greater profitability.

To measure which banks are growing the fastest, I simply annualized the growth of each bank’s total assets over the most recent five fiscal years.

Here’s what I found:

[table id=27 /]

3. Asset Quality

A bank’s challenge is to lend as much money as possible for the best return possible. In their zeal to do so, some banks end up lending valuable assets to some rather uncreditworthy customers. When these customers default, the loans must be written down to zero – a bad thing for profitability AND growth.

One of my favorite ways to measure a bank’s asset quality is to determine how much of the loan portfolio isn’t performing as planned. I do this by dividing non-performing loans by total loans. A lower ratio implies a lower degree of risk in the bank’s loan book.

Look here to see which banks are Ghana’s most conservative lenders:

[table id=28 /]

4. Value

Investing, of course, is all about value. The most profitable, fastest growing, well-managed bank in Ghana can end up losing you money if the price you pay for it is too dear.

When evaluating bank stocks, I take a close look at price/book ratios. Book value is simply the difference between a bank’s assets and its liabilities. Stocks with low price/book ratios generally have less downside risk. The lower a price/book ratio gets, the less risk there is of the bank disappointing the market and the greater potential there is for it to outperform expectations.

I prefer the price/book ratio over the price/earnings ratio for bank stocks. Why? Because bank earnings can be erratic. Thus, the P/E ratio for a bank coming off a particularly good or bad year will be skewed. Assets, on the other hand, are much less volatile and relatively easy for an accountant to value.

[table id=29 /]

5. Dividend Yield

Dividend yield is a function of both profitability and value. Generous dividends also suggest a confident management team. Dividend cuts typically wreak havoc on a stock’s share price. Therefore, most banks won’t raise dividends beyond a level they believe they can sustain.

[table id=30 /]

Winner, Winner, Chicken Dinner!

Now let’s put all the scores together and count them down from worst to first.

8. Ghana Commercial Bank – There’s not an easy way to spin this. Venerable GCB got smacked around by its younger smaller cohorts. It performed relatively well in Price/Book ratio, but considering that 15% of its loan book is shaky, I wouldn’t bother paying 2x book value for it.

7. Standard Chartered Ghana – Easily the most profitable bank in Ghana, SCB commands a very high price tag. It’s Price/Book ratio is well above 4! But a relatively juicy dividend may lure some cautious investors.

6. UT Bank – The industry’s fastest grower is well worth watching, especially if it cleans up its assets and initiates a dividend. Until then, it remains one of the riskier banks in the group.

5. Ecobank Transnational – This fast-grower with continent-wide reach is trading at a very attractive valuation. It’s only weakness in the showdown was its low ROA, which is likely a by-product of its rapid expansion.

4. HFC Bank – A nearly pristine loan book combined with a reasonable P/B ratio gave this obscure bank a solid showdown performance. But its relatively low ROA and growth rate kept it out of serious contention.

3. CAL Bank – A sky-high dividend yield and a P/B ratio that suggests that its accountant believes it’s worth 50% more than the stock market does put this small bank in the upper echelon. Its small size kept it out of second place.

2. SG-SSB – This bank is profitable, cheap, and pays a very attractive dividend. But the subsidiary of Societe Generale doesn’t seem to have an eye for growth.

1. Ecobank Ghana – The local subsidiary of ETI, Ecobank Ghana’s strengths are its profitability and squeaky clean loan book. It doesn’t have much potential for geographic expansion, but it’s not huge and has room to spread its wings in Ghana’s rapidly expanding economy. Factor in a reasonable P/B ratio and a dividend yield of nearly 8%, and I think this bank merits a very long look.

[table id=32 /]

What Do You Think?

Does Ecobank Ghana deserve to be head and shoulders above the rest of the field? Which bank stock do you think is the best bargain? Let me know your thoughts in the comments!

[Disclosure: As of publication date, I am long CAL Bank and Ghana Commercial Bank.]

How to Invest on the Ghana Stock Exchange

Ghana’s Booming Banks

Where to Invest Now: Africa’s Cheapest Stock Market

Much has been made of Africa’s rapid economic growth. And it truly is remarkable. The IMF projects that seven African economies will grow faster than 8% this year, and six of the top ten fastest-growers economies in the world will come from the continent.

Unfortunately, investing solely on the basis of growth forecasts often ends in disappointment. Rapid economic growth doesn’t necessarily translate into awesome stock market returns.

To get a true sense of where investment opportunity lies, we need to combine growth’s yang with the yin of value.

The table below lists the IMF’s projected GDP growth for the home countries of 10 of Africa’s most prominent stock exchanges. I’ve included the United States, too, just for kicks.

Note that the growth figure is a weighted average of the IMF’s forecast for each year between now and 2017. Because predictions are generally less accurate the further you look into the future, the more distant years are weighted less than those that will soon be upon us.

Africa’s Rapid Growth
[table id=15 /]

Those are some pretty impressive growth rates, aren’t they? Especially when viewed in comparison with the United States.

Based on the above, it would be tempting to conclude that we should all be opening Zambian brokerage accounts.

Ghana Stock Exchange — Photo by World Bank

Unfortunately, investing solely on the basis of growth forecasts often ends in disappointment. Rapid economic growth doesn’t necessarily translate into awesome stock market returns. In fact, studies show there is no correlation between the two.

Just look at China. According to the IMF, China’s economy expanded by a cumulative 64.8% over the past five years. So, if stock market returns were correlated with GDP growth, the China 25 Index should have knocked the lights out during that time frame. Instead, it only managed an anemic 13.1% (2.5% annualized).

So, we need to temper our excitement over growth rates with a keen focus on value.

To do so, I’ve put together average Price/Earnings ratios for ten of sub-Saharan Africa’s most important stock exchanges in the table below. The ratio is an average of the 10 largest domestic companies traded on each exchange. I’ve also included the S&P500 for giggles.

African Stocks’ Deep Value
[table id=17 /]

Namibia looks pretty cheap, doesn’t it? You can pretty much buy $1 dollar’s worth of Namibian earnings for half of what a dollar’s worth of S&P500 earnings costs. In fact, even after years of relative stagnation, the S&P500’s P/E ratio remains higher than every single African index.

But Namibia and Botswana may be cheap, in part, because they just aren’t growing very quickly.

So to get a true sense of where investment opportunity lies, we need to combine value’s yin with growth’s yang.

To do that, I simply divided the above P/E ratios by the GDP growth rates of their respective home countries. The resulting Price/Earnings/Growth ratios are listed below.

Putting Growth and Value Together
[table id=16 /]

Based on this quick analysis, the Ghana Stock Exchange offers the most compelling opportunities for Africa investors thanks to its combination of deep value and rapid economic growth.

Does this sound right? Let us know which market you think offers the best overall value in the comments!

Category: Ghana Stock Exchange

An Introduction to Ghana’s Treasury Market

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