The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Let’s not mince words: Everyone in the commercial banking industry knew that Bank of the Bahamas has been in trouble for some time. The only questions were the size of the damage, and how the Government would fill the ‘hole’.

The BISX-listed institution’s results, published over the weekend, came in where many in the know, including Tribune Business, had expected (this newspaper had itself estimated a loss of between $60-$80 million, the actual loss to investors coming in at near $69 million).

The writing has been on the wall for at least 12-15 months, certainly since Bank of the Bahamas’ 2013 year end. Tribune Business revealed earlier this year that the bank had experienced a major deterioration in the quality of its $469.08 million ‘good’ loan portfolio between 2012 and 2013.

Credit deemed ‘satisfactory risk’ had fallen by more than 50 per cent, from $331.401 million to $152.436 million, while ‘watch list’ credit almost doubled - from $86.063 million to $170.218 million. ‘Sub-standard, but not impaired’ loans increased by a similar amount - from $75.84 million in 2012 to $146.427 million at 2013 year-end.

Reading between the lines from Friday’s press conference and various releases detailing how the Government, as 65 per cent majority shareholder, was going to deal with Bank of the Bahamas’ bad loans, it appears that Central Bank of the Bahamas governor, Wendy Craigg, has been prodding the Christie administration for some time to clean up the mess.

Yet the Government, and Bank of Bahamas, appear to have been able to keep her at arm’s length until the situation ran into the buffers in the form of external auditors, Ernst & Young.

Tribune Business sources have disclosed that the accounting firm was refusing to sign-off on Bank of the Bahamas’ year-end 2014 audit, and give it an ‘unqualified’ clean bill of health, unless it provided for its growing pile of bad commercial loans.

As a result, Bank of the Bahamas increased its provisions for bad commercial (business) loans almost five-fold to $69.222 million. And of its $207 million-strong commercial loan portfolio, some $107.443 million - 52 per cent - is now non-performing or impaired.

Faced with this situation, the ‘good’ bank/’bad’ bank solution unveiled on Friday is probably the only thing the Government, stuck between the proverbial ‘rock and a hard place’, could do to secure Bank of the Bahamas.

The plan calls for $100 million (net $45 million) of bad commercial loans at Bank of the Bahamas to be transferred to Bahamas Resolve Ltd, in exchange for $100 million in ‘unsecured promissory notes’.

Bank of the Bahamas becomes the ‘good bank’, with a cleaner loan portfolio that might return it to profitability, while the problems with the ‘bad’ commercial loans are parked with Bahamas Resolve as the ‘bad’ bank.

From the Government’s perspective, creating Bahamas Resolve as a special purpose vehicle (SPV) is a neat trick, as it keeps the $100 million off its balance sheet and thus from adding to the national debt and fiscal hole, which would have attracted rating agency attention.

Yet, no matter how you cut it, the Bahamas Resolve ‘solution’ effectively represents the transfer of risk/liability for $100 million in ‘bad loans’ from Bank of the Bahamas and its shareholders (chiefly the Government) to the hard-pressed taxpayer. Good for the 35 per cent, 3,500 minority Bank of Bahamas investors, not the rest of us.

“It’s a transfer of wealth from the taxpayers to shareholders of the bank,” one high-level commercial banking industry source told Tribune Business yesterday.

“This is only a band aid. It’s smoke and mirrors, but it’s the only thing they could do. There isn’t much to fathom with this announcement. The taxpayer is stuck with $100 million of bad loans. The Government, being the taxpayer, has been burdened with debt that it has to repay.”

The banker added that the minority investors in Bank of the Bahamas “come out like bandits”, benefiting hugely from having been unburdened from the liability for these bad loans. And their investment has also been able to claw back some $55 million in retained earnings, and accrued interest, as a result of the deal.

Bank of the Bahamas’ shareholders can also take some solace in the price of their stock which, at $5.22 on BISX, is trading at almost three times’ the book or net asset value of $1.77 per share.

Still, the Government could not let Bank of the Bahamas fail. - it would have been the largest domestic failure in history. While all smaller depositors up to $50,000 would have been protected by deposit insurance, the institution’s collapse into insolvency - and that is where it was heading - would have bene felt far and wide.

While it would probably not have taken down the financial system and economy by itself, with a loan book just under the equivalent of 10 per cent of GDP, the ripple effects would have been felt throughout the Bahamas - especially in a country still recovering from the recession.

The normal solution for the situation in which Bank of the Bahamas finds itself in is for the shareholders to inject equity funding to recapitalise the bank. Yet the Government, as 65 per cent owner through the Public Treasury and National Insurance Board (NIB), was in no position to do so.

The Treasury has more than enough of its own cash flow problems to contend with, while it would be questionable if this was a prudent use of NIB money. The only other option was to find a buyer for the bank, and this would have involved accepting a price/valuation at the lowest possible. While it is understood that offers were received from the likes of A. F. Holdings (the former Colina Financial Group), all fell into the category the Government did not want to accept.

So Bahamas Resolve it is. What is important now is for a calm response from depositors, as their money remains safe, and a ‘run’ on the bank today - or at any time - is avoided.

Friday’s solution announcement was clearly times to coincide with the end of the four-month period in which Bank of the Bahamas has to file its year-end results, and negotiations went on to the last minute, as the financials were only signed-off by the bank’s directors the day before, October 30. The timing also appears designed to allow the dust to settle, the news to be digested, and calm (hopefully) to prevail.

This, though, disguised the PR chaos that unfolded beforehand. A 10am ‘briefing’ with Mrs Craigg and John Rolle, the financial secretary, was “merged” with a 2pm press conference at the Cabinet Office. Then the venue was changed to ‘out west’, and only six media questions allowed.

All of which created that impression that those involved were being less than forthcoming, and there were certain details not being disclosed.

For starters, it is unclear how the Government will be more successful in collecting on these bad loans than Bank of the Bahamas itself. Especially given the ‘success’ (or lack of it, witness the $500 million-plus real property tax mountain) it has enjoyed in collecting its own taxes.

While the decision to ‘outsource’ collection of the Bahamas Resolve loans to a private accounting firm is the correct one, that firm has not been named, and the funding and resources that will be provided to underwrite their efforts is unknown.

And collection will be difficult. Since these are commercial loans, they doubtless relate to troubled or failed businesses that cannot repay, meaning the accountants will have to try and realise the security/collateral for the credit. If this is real estate, the tepid economy and business-specific nature of the assets, will mean finding buyers is difficult.

There is no doubt that Bank of the Bahamas’ problems stem, in large part, from the recession and its aftermath, together with prolonged employment and the slow recovery. And its concentration on mortgages and commercial lending made it particularly vulnerable, as these were the two segments hardest hit.

Yet there were signs of growing political interference in the bank for a while, and questions were being aired privately about its governance. A director on the 2008-2012 Board told Tribune Business that loans were extended to PLP supporters under the 2002-2007 Christie administration, much of which were in default. Similar allegations have been made about certain loans extended under the last Ingraham administration

Then there was Mr Christie’s reappointment of the late Al Jarret as Bank of the Bahamas chairman, when it was common knowledge that he was behind on his mortgage with the bank (shades of Leslie Miller and BEC).

The recent re-appointment by the Government of the previous Bank of the Bahamas Board (minus two) raises only more governance questions, as does the vague promises of ‘management restructuring’ - as yet undefined - that were made on Friday. Are Paul McWeeney and his team to be made the ‘sacrificial lambs’? Surely the minority investors deserve Board representation?

And, given that Bank of the Bahamas’ results as late as the quarter ended March 31 this year were giving no indication of the scale of the $69 million provisions, several banking and private sector sources are now questioning whether it was ‘hiding’ the problem. Something drastic appears to have occurred in the past six months.

Industry insiders have long suggested that Bank of the Bahamas was late, and not conservative enough, in making loan loss provisions despite enduring a $3.75 million loss in 2013. That loss-making quickened in 2014. So why wait until the bitter end, with the last unaudited financials showing full compliance with all Central Bank of the Bahamas mandated ratios, and spring such a surprise on unwary investors.

With almost 82 per cent of Bank of the Bahamas’ overdrafts in trouble, and connected to non-accrual commercial and mortgage loans, questions also have to be asked if the bank was throwing ‘good money after bad’ and the soundness of its lending policies.

And why did Ernst & Young not spot that more than $38 million worth of non-performing loans were not classified as such in the 2013 financial statements?

Plenty of fodder for the annual general meeting (AGM) that should be upcoming soon. Time for the minority shareholders to grill management and Board - there is so much ammunition on so many fronts. Yet we’re forgetting..... the Bahamas does not have activist shareholders willing to fight for their rights. Pity. There could be some material here for a class-action type shareholder lawsuit. Don’t all rush at once, you attorneys.