Banking Sector Financial Soundness and Stock Returns in Ghana

Abstract

The emergence of the financial crisis in the past years together with the movement of international capital flows poses a significant threat to the financial soundness of the banking sector, stock market, and the economy. This adds up to other fundamental problems such as banks' inability to provide long-term capital and the long-term volatility of Ghana’s financial sector. Accordingly, this study examined the effect of banking sector financial soundness (CAR, CLASL, CLATA CD, NPL, ROA, and ROE) on stock returns (GSECI and GSEFSI) as well as the causality between them. Pertinent to that, the quantile regression approach and conditional causality in quantile are utilised from January 2011 to December 2022 in the Ghanaian context. The study found the banking sector's financial soundness indicators to have both positive and or negative effects on the quantile distributions of GSECI and GSEFSI. In addition, CAR was found to have a forecasting ability on the GSEFSI, while CD had a forecasting ability on both the GSECI and GSEFSI. Regulators and policymakers should enhance CAR, CLATA, and CD to positively impact stock returns and also address the negative effect of CLASL through improved lending practices and risk management. Additionally, policies should be implemented to control inflation and boost economic activity to mitigate their negative impact on stock returns. Finally, regulators and policymakers should develop dynamic strategies by continuously monitoring financial indicators to adjust to changing economic conditions and improve market confidence.