The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Scotiabank (Bahamas) is expecting a “flat to lower” net income performance for 2013, its managing director yesterday revealing that new loan volumes dropped 7 per cent year-over-year for 2012.

Kevin Teslyk told Tribune Business that balance sheets across the Bahamian commercial banking industry were set to “shrink” further over the next 12 months, due to the difficulty in finding new lending prospects and the high liquidity/low interest rate environment.

While Scotiabank (Bahamas) had seen a 10.7 per cent year-over-year increase in its 2012 bottom line, Mr Teslyk said this was almost entirely due to a reduction in loan loss provisioning.

Loan loss impairments dropped by more than $10 million or 22.7 per cent, something the Scotiabank (Bahamas) chief said reflected the fact that many delinquent residential and commercial non-performing were already fully provided for.

“We basically came in right on what our plan was,” Mr Teslyk said of the 2012 results. “It was a tough year to project, and as all organisations do we had to be flexible and adjust throughout the year, but the net income at the end of the day was about what we expected. Our provisioning levels were about what we planned.”

Noting that the $33.049 million bottom line for 2012 was still well below Scotiabank (Bahamas) peak years, when it was achieving profits “north of $50 million”, Mr Teslyk said the institution’s capital base left it well-placed to ride out any further economic storms.

He told Tribune Business that Scotiabank (Bahamas) Tier 1 and Tier 2 capital ratios stood at 27 per cent and 32 per cent, respectively, well in excess of the Central Bank of the Bahamas’ minimum requirements. The regulator’s Tier 1 requirement is 17 per cent.

Explaining the more than-$3 million increase in Scotiabank (Bahamas) bottom line, compared to the $29.868 million achieved in 2011, Mr Teslyk said: “It was entirely as a result of lower provisions for credit losses.

“The apparent large increase year-over-year has to do with timing in provisioning - it’s all timing relating. A portion of that is in also in relation to us not having to take provisions on one large commercial account, which we did in 2011.”

Mr Teslyk explained that the loan loss provisioning ‘timing’ reflected the fact that many delinquent, non-performing loans were already 100 per cent provided for by the bank.

Scotiabank (Bahamas), in common with the other commercial banks, had “accelerated” its provisioning over the three years between 2009-2011, when the full impact of the economic crisis became apparent.

As a result, most delinquent residential mortgages were now fully provided for by the bank, with any recovery (and potential feedback into income) coming when these properties were eventually sold.

“The bulk of the provisions on the mortgage portfolio were taken in the first three years of the crisis,” Mr Teslyk told Tribune Business.

“We’re still at elevated [loan loss provisioning] levels, but are not going to see that kind of acceleration; we should see a levelling off.”

And, while warning that an external shock, such as oil price spikes, or a renewed surge in delinquencies, could see loan loss provisions heading northwards once again, he added: “We don’t anticipate getting back to 2011 levels in 2013.”

Elsewhere, Scotiabank (Bahamas) saw interest income drop by 2.2 per cent to $119.251 million, from $121.975 million in 2011, due to reduced loan volumes and returns on investment securities.

By the same token, interest expense also fell by 25.5 per cent to $11.91 million from $15.997 million, due to a reduction in balance sheet deposits coupled with the high liquidity/low interest rate environment.

Mr Teslyk said commercial banks were now pricing deposits in line with Treasury Bills, and were reducing the amount they held on the balance sheet due to the lack of new lending opportunities.

Reflecting these issues, Scotiabank (Bahamas) year-end 2012 balance sheet showed a 2.5 per cent decline in deposits from $1.947 billion to $1.898 billion. Total loans and advances to customers were flat at $1.488 billion, compared to $1.498 billion at year-end 2011.

Looking ahead, Mr Teslyk indicated he was still looking at a three-five year recovery period for the commercial banking sector, with much riding on Baha Mar and its anticipated impact on job creation throughout the Bahamian economy.

Acknowledging that Scotiabank (Bahamas) current net income levels were well short of the “north of $50 million in peak periods”, he added of 2013: “It’s all going to come down to what a couple of large commercial accounts do for us, as well as the residential mortgage portfolio, and if we see a more challenging year in terms of delinquencies and repayments.

“To the extent that the mortgage portfolio stays the same we will see a repeat, but if it gets more tight we might see reduced profitability this year.”

The anemic economic climate, coupled with tighter lending requirements, also meant that new lending opportunities were hard to find.

“The trends continue to be downwards in new lending, particularly on the retail and small business side, and to a lesser extent on the commercial side,” Mr Teslyk told Tribune Business.

“It’s harder to originate new credit. There’s been no big shift, but gradually, month-over-month, we’ve been seeing a decrease. You can see that over the last year, new credit volumes were down 7 per cent year-over-year to our customers. That’s over one fiscal year.

“If that repeats in 2013, net interest income revenues will be down by a similar amount, and there’s little room for interest expense to come down.”

While commercial lending opportunities might arise, the Scotiabank (Bahamas) chief said these were hard to predict.

“I would say it’s going to be a flat to a lower year in 2013 in terms of net income, and we will continue to see balance sheets shrink in the next 12 months,” Mr Teslyk told Tribune Business, adding that this was counterbalanced by the bank’s strong capital base.

He added that Scotiabank (Bahamas) was ranked fourth out of all Caribbean banks by a Banker magazine survey, achieving the same position when it came to capital strength and seventh in terms of assets.