Published On:Thursday, September 02, 2010

By NEIL HARTNELL

Tribune Business Editor

THE Clearing Banks Association's (CBA) head yesterday told Tribune Business there was "a chance" commercial bank loan delinquencies could break the 20 per cent mark, adding that increasing uncertainties over the global economic recovery had prompted Bahamian institutions to extend their stress testing models "well into 2012".

Paul McWeeney, who is also Bank of the Bahamas International's managing director, told this newspaper that he and other Bahamian commercial banks were also expecting "a spike" in loan delinquencies at end-August due to borrowers diverting funds to 'Back to School' needs.

He added that it was now "just so hard to say" whether the Bahamian commercial banking industry had seen the worst of the loan delinquency surge, with 18.6 per cent of the sector's total loan portfolio - almost one in five loans - in default as at end-July 2010.

More importantly, non-performing loans - those 90 days past due - stood at more than one in 10 Bahamian commercial bank loans, having increased by $9.1 million or 1.5 per cent to $629.5 million at end-July, accounting for 10.1 per cent of all commercial bank credit.

Mr McWeeney told Tribune Business that all commercial banks were being "very aggressive" in seeking to ensure loans in arrears - between 31 and 90 days past due - did not slip into the non-performing category and create a "double whammy" for income statements and balance sheets.

Apart from having to take a top-line hit through not accruing interest on non-performing loans, he explained that Bahamian commercial banks also took a bottom line knock through increased loan loss provisioning.

As a result, during July 2010, the commercial banking industry boosted its loan loss provisions by $6 million or 2.6 per cent to $238.4 million. The ratio of provisions to total loan arrears and non-performing loans firmed to 20.5 per cent and 37.9 per cent respectively.

"There's a chance that will happen," Mr McWeeney said, when asked by Tribune Business whether loan delinquencies would breach the 20 per cent of portfolio mark. "It appears more real that could happen, because the growth [in arrears] has not stopped, just slowed, so the position could be reached in terms of defaults."

Asked whether the Bahamian commercial banking industry had seen the worst, Mr McWeeney added: "It's really just so hard to say. There's just such a mixed bag of indicators coming from the US. If you'd asked me two months ago, I would have said the worst is over......."

However, with signs that US economic recovery was not performing as expected, and sovereign debt crisis fears continuing to haunt Europe, Mr McWeeney added: "It's too hard to tell, and many banks have taken the conservative approach to stretch stress testing well into 2012.

"One comforting factor is that the banks continue to be well capitalised, and I'm very confident in the ability of the system to absorb this over the long-term. Just based on solvency alone, all the commercial banks exceed the prudential norms established by the Basle Committee and the ones established by the Central Bank for risk requirements.

"I'm confident the stress testing will show the banks have capital levels that will carry them through into 2012 easily. The equity levels are growing, and that fact alone should provide a high level of comfort."

The Central Bank report showed that total private sector loan arrears increased by $22.4 million or 2 per cent during July to hit a total of $1.164 billion, 18.6 per cent of the total commercial bank portfolio. Loans in arrears rose by $13.3 million or 2.6 per cent to $534.2 million, accounting for 8.6 per cent of all outstanding Bahamian commercial bank credit.

Mortgages account for 52 per cent of delinquent loans, with consumer credit and commercial loans making up the remaining 24.6 per cent and 23.3 per cent respectively.

Mortgage delinquencies expanded by $20 million or 3.4 per cent to hit $606.8 million in July, with the arrears category growing by $11.3 million or 3.5 per cent and non-performing up by $8.7 million or 3.2 per cent.

Commercial delinquencies increased by $2.1 million to $270.6 million, as a $1.4 million decrease in short-term arrears was outweighed by a $3.5 million increase in non-performing loans, while consumer loans grew marginally by $0.3 million to $286.2 million.

Consumer loans in arrears for 31--90 days rose by $3.5 million or 2.9 per cent, while non-performing fell by $3.1 million or 1.9 per cent.