The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bank of the Bahamas’ shareholders suffered a $68.747 million net loss for the year to end-June 30, wiping out its retained earnings prior to Friday’s $100 million bail-out.

The BISX-listed institution’s statements for its 2014 financial year reveal that the losses, driven by some $69.723 million in loan loss provisions, plunged the bank into an ‘accumulated deficit’ of $40.2 million at June 30.

That was before the announcement of the Government’s Friday bail-out, which has resulted in Bank of the Bahamas gaining $55 million in ‘special retained earnings’ post year-end, wiping out the $40 million-plus deficit.

Bank of the Bahamas’ balance sheet shows that its net equity (the piece of the bank owned by shareholders) had been slashed by 50 per cent year-over-year, from $142.168 million to $69.737 million.

Although the BISX-listed institution was not quite insolvent at its 2014 year-end, it was rapidly headed towards becoming ‘bust’ had those $100 million in commercial loans remained on its balance sheet.

“They would barely have made it,” one senior banking industry source, requesting anonymity, told Tribune Business when informed yesterday of Bank of the Bahamas’ financial results.

This impression is further reinforced by the fact that the Government used “a part of its Treasury deposits” to pay Bank of the Bahamas’ $1.1 million preference share payment that was due on July 21, 2014.

That payment, which sources told Tribune Business was late, came as a result of Central Bank concerns that Bank of the Bahamas should not use its increasingly scarce resources to pay the preference shareholders.

The greatest immediate threat to Bank of the Bahamas was that its $68.747 million net loss threw it into non-compliance with the capital and liquidity ratios mandated both locally and internationally.

The bank, which is 65 per cent majority-owned by the Government via the Public Treasury and National Insurance Board (NIB), was in non-compliance with four of the five key capital ratios set by the Central Bank of the Bahamas.

Some banking sources yesterday queried whether Bank of the Bahamas should have been allowed to continue operating while in non-compliance with Bahamian and international regulatory norms. It carried on outside these parameters for four months, until the ‘bail-out’ terms were agreed last week.

Thus to protect itself, the 3,500 minority shareholders and some 40,000 Bahamian depositors, the Government had little choice but to step in and ‘rescue’ Bank of the Bahamas.

It also had to prevent any systemic risk, meaning a greater ‘fall-out’ for both the banking system and wider Bahamian economy. Plus avoid any ‘run’ on the bank by concerned depositors, with the Government at pains on Friday to reassure that their monies were safe.

Paul McWeeney, Bank of the Bahamas International’s managing director, did not return Tribune Business calls seeking comment over the weekend.

However, the bank’s results, analysed by Tribune Business, reveal several issues that went unanswered at the ‘bail-out’ press conference, along with more questions. These include:

• To repair the $100 million ‘hole’ left in Bank of the Bahamas’ balance sheet through the transfer of $100 million worth of commercial loan assets to newly-created ‘bad bank’, Bahamas Resolve Ltd, the latter has issued the bank with $100 million in “unsecured promissory notes”.

According to Bank of the Bahamas’ financial statements, the transaction has generated $55 million in shareholder equity for the bank, after it gave Bahamas Resolve a net $45 million in bad commercial (business) loans in exchange for the $100 million of promissory notes.

These notes, which have various maturities up to 10 years, will pay Bank of the Bahamas interest at Bahamian prime minus 0.5 per cent(4.25 per cent).

In turn, Bank of the Bahamas has received a ‘Letter of Support’ (not a guarantee, due to the fiscal implications) from the Government. It has relinquished all rights to the non-performing commercial loans traded to Bahamas resolve Ltd.

• Questions will also be raised over Bank of the Bahamas’ governance and its management/systems, after the 2014 financials revealed that it ‘understated’ non-performing loans by almost $40 million in its previous financial year.

The financials state: “During the year the bank discovered an error in the ageing and classification of certain commercial and mortgage loans, where these certain loans should have been classified as past due.

“As a result of the loans past due 90 days or more, the bank’s non-accrual mortgage and commercial loans were understated in 2013 by $23.7 million and $14.7 million, respectively, and the provisions and equity reserves as a percentage of these non-accrual loans was overstated by 6.62 per cent.”

Bank of the Bahamas said that, as a result, its 2013 financials had to be revised to include a $611,312 increase in provisions - a sum it described as “immaterial”.

That may be so, but the failure to properly classify $38.4 million in non-performing loans will only further rattle investors and depositors, and raises questions as to why auditors Ernst & Young did not pick this up in 2013.

• Even with the Government’s support of $65 million in deposits, Bank of the Bahamas’ deposits were down $44 million year-over-year - from $723.214 million at year-end 2013 to $679.231 million.

This suggests that more than $100 million (around $109 million) of private depositors’ money fled Bank of the Bahamas during the 2014 financial year, due to a loss of confidence as concerns over the bank’s financial state swirled.

• Just 42 per cent of Bank of the Bahamas’s $750.418 million loan book was ‘performing’, meaning it was neither past due nor impaired, as at June 30, 2014.

• Bank of the Bahamas appears to be experiencing a major problem with its overdraft facilities, as 82 per cent of these were “subject to specific provisions” at year-end 2014.

The bank’s financials showed that out of $81.41 million in overdrafts ($60.089 million business, $20.32 million personal), some $63.936 million were “related to certain non-accrual mortgage and commercial loans).

The latter figure was a more than 100 per cent increase from the year-before figure, and raised major questions about the soundness/riskiness of Bank of the Bahamas’ lending practices, and whether it was throwing ‘good money after bad’ in extending overdrafts to troubled customers.

• Loan loss provisions for ‘bad’ commercial (business) loans increased almost five-fold in 2014, from $14.92 million the year before to $69.222 million this year.

• Non-performing, or impaired loans, collectively totalled $254.43 million at June 30, accounting for 38.52 per cent - more than one-third - of Bank of the Bahamas’ net credit portfolio. This sum accounted for 33 per cent of the bank’s total assets.,

Impaired loans include some $135.39 million worth of mortgages; $107.443 million in commercial loans (142.3 per cent increase over 2013); and $11.3 million in consumer loans.

• When it came to Bank of the Bahamas’ regulatory capital ratios, its Common Equity Tier 1 (CET); Total Tier 1 Capital, Total Capital of Risk Weighted Assets and the ratio on Total Tier 1 Capital to Total Capital were all below the Central Bank’s minimum requirements, due to the $69 million net loss in fiscal 2014.

The ratio were:

• Common Equity Tier 1: 5.2 per cent, compared to the necessary 8.5 per cent.

• Total Tier 1 Capital: 5.04 per cent compared to 11.7 per cent

• Total Capital of Risk Weighted Assets: 11.13 per cent to 17 per cent

• Total Tier 1 Capital to Total Capital 45.29 per cent compared to 75 per cent.

Mr McWeeney, in his message to shareholders, attempted to put a positive face on the bank’s recent travails, saying it had attempted to sell or ‘securitise’ its bad commercial loans over the six months to September 30, 2014, before settling with the Government on the Bahamas Resolve transaction.

Confirming that the deal had enabled Bank of the Bahamas to recover loan loss provisions and accrued interest on the $100 million in credit transferred to Bahamas Resolve, Mr McWeeney said the provisioning rise had stemmed from a more conservative approach to “vulnerable” loans and assessing the collateral that underpinned them.

Total operating income at Bank of the Bahamas was down 24.69 per cent or $12.3 million year-over-year, which Mr McWeeney blamed on a drop in net interest income associated with the non-performing loan rise.

Optimistic that Bank of the Bahamas will return to profitability in the “near term”, Mr McWeeney said its shareholder equity had been able to absorb the ‘hit’ from the $69 million net loss.

He added that, following the Bahamas Resolve deal, Risk Weighted Capital was back at 21 per cent and ahead of the Central Bank’s requirements.