By NEIL HARTNELL
Tribune Business Editor
The value of property assets used to secure Bahamian commercial bank mortgages has fallen by up to 30 per cent, prompting the International Monetary Fund (IMF) to call for this nation to develop “real estate price indices”.
The Fund, in its assessment of the financial services industry’s stability, warned that the absence of “reliable” mechanisms to measure movements in Bahamian real estate prices made it difficult to judge whether banks had adequate collateral for their mortgage loans.
This, it added, had further implications for commercial banks when it came to judging whether they had set aside enough provisions for problem mortgage loans. The IMF said almost 15 per cent of mortgage loans were non-performing as at March 2012 – a ratio that, based on Central Bank of the Bahamas data, has changed little over the past year.
“High non-performing loan (NPL) rates on mortgages (14.9 per cent at March 2012) partly reflect bank reluctance to foreclose on properties, as house recovery values are low,” the IMF report said.
It contrasted this with the much lower 7.8 per cent non-performing loan ratio for consumer credit, noting that this was aided by Bahamian commercial bank policies of writing-off these loans once they pass the 180-day delinquency threshold.
Noting that banks with a larger share of the Bahamian mortgage market had higher non-performing loan rates, the IMF added: “Provisioning rates similarly vary from 23 per cent to 126 per cent, with higher rates for those banks that have a higher share of consumer loans.”
While conceding that the non-performing loan situation did “not pose an immediate threat” to the Bahamian commercial banking industry, the Fund noted that the Central Bank of the Bahamas had “pushed banks to be more aggressive in their collateral valuation practices, including accounting for the time cost of recovery”.
And the IMF added in its report: “Moreover, although mortgage collateral values are estimated to have fallen 20–30 per cent, stress tests applied conservative haircuts of up to 60 per cent, and worst-case scenarios assume no offset from collateral. The tests indicate that banks’ very high capital ratios represent a significant buffer, although extreme credit shocks would pose challenges for those banks with weaker capital positions.
“There is some degree of uncertainty on the overall evolution of house prices, since reliable indices are not available and there are relatively few transactions on which to base firm judgments. Hence, monitoring would be enhanced by the development of real estate price indices.”
The Bahamas Real Estate Association (BREA) has moved to tackle this issue by starting to use its Multiple Listing System (MLS) to produce quarterly reports on market activity. The report provides data on the value and number of properties sold across the islands, plus number and value of listings, but some have argued that it still fails to generate a complete market picture because the MLS only features around 25 per cent of total listings.
Meanwhile, unveiling the results of the liquidity and solvency ‘stress tests’ it conducted on Bahamian commercial banks, the IMF said that in the most extreme scenario presented, the sector’s non-performing loan levels would double to hit 25 per cent of all existing credit.
“Of five scenarios tested, the one involving a combined shock to tourism revenues and oil prices would have the most severe impact,” the IMF said. “This would lead, in the worst-case outcome, to an increase in already-high non-performing loans of almost 100 per cent….
“In the worst-case scenario, aggregate non-performing loans reach 25 per cent of total loans and represent a substantial drag on profits through reduced net interest income and increased provisions. Therefore, this scenario has a considerable impact on banks’ capital.”
Such an outcome is highly unlikely, and the IMF conceded that the Bahamian commercial banking system would be able to withstand a shock of such magnitude. It added: “Even under this scenario, the system’s capital adequacy ratio would remain above the regulatory trigger of 14 per cent.
“Nevertheless, there are pockets of vulnerabilities, and some banks with higher non-performing and lower capital, including a large bank, would breach the regulatory 14-per cent benchmark.”
The IMF said a 100 per cent increase in non-performing mortgage loans would push only one bank below the Central Bank’s 14 per cent capital adequacy trigger threshold, and all would remain above the international 8 per cent Basle minimum.
Elsewhere, the IMF report said the Bahamian commercial banking industry’s return on assets (RoA) was “at the top of the range” for the Caribbean, although return on equity (RoE) was in line with the regional and Caribbean average.
The industry, the Fund added, had enjoyed an average net interest income of 5.5 per cent during 2007-2011, despite the recession. And, as a consequence of the downturn and reduced credit demand, coupled with the Government’s increased borrowing requirements to fund its fiscal deficit, public sector securities have doubled their share of bank total assets.
Domestic credit growth in the Bahamas fell from a peak of 14.3 per cent in 2006 to just 1 per cent in 2011, and the IMF noted: “The composition has shifted towards credit to the public sector, as the Government expanded securities issuance to fund its fiscal needs.
“Holdings of government securities and loans to the public sector have increased to 14 per cent of total bank assets in 2011 from 7 per cent in 2006. More than 80 percent of total public debt is domestic, and [two-thirds is] held to maturity by commercial banks, public corporations, and pension funds.”
Further analyzing the growth in the Government securities market, the report added: “The stock of Bahamian government securities has grown substantially since 2007, reaching 45 per cent of GDP in 2011. Onshore commercial banks are the largest holders with 32 per cent of outstanding volume at end-2011.
“Commercial banks have absorbed 58 per cent of net issuance since 2007. Foreign private capital markets absorbed another 39 per cent as the government issued two large external U.S. dollar bonds in 2008 and 2009.”
The IMF said deposits and equity accounted for 71 per cent and 18 per cent, respectively, of commercial banking funding. Loans/credit accounted for 75 per cent of industry assets at end-2011, with 41 per cent of these residential mortgages.
Still, the Fund said the Bahamian commercial banking industry’s total non-performing loan ratio of almost 13 per cent at end-March 2012 was above the Caribbean average, having more than-tripled in less than five years from 3.8 per cent in June 2007. Mortgages accounted for 55 per cent of non-performing loans, with commercial/business loans generating a further 24 per cent.
“Delinquencies remain high at 19 per cent of total loans, and delinquencies greater than 180 days have increased, indicating deterioration within non-performing loans,” the Fund added.
Due to the excess liquidity in the system, the IMF report said commercial banks had “stopped actively bidding for fixed-term deposits”, with interest margins widening since 2010.