By NEIL HARTNELL
Tribune Business Editor
Bahamian credit unions have concentrated more than two-thirds of their lending in “small scale consumer purchases”, with the sector’s delinquency ratio ending 2013 some two percentage points higher than international benchmarks.
The Central Bank of the Bahamas’ annual financial sector stability report, released late on Friday, said the overall economic climate meant that key indicators of the credit unions’ health “showed signs of weakening” in 2013.
The sector is the second largest deposit taker in the Bahamas, after the commercial banks, and it has relied ever-more heavily on small-scale consumer loans to grow its loan/asset base. These now account for 72.5 per cent, or more than two-thirds, of the industry’s total loans.
“The majority of the credit was extended for small-scale consumer purchases (72.5 per cent), while mortgages/land purchases and revolving lines of credit accounted for smaller shares of the credit extended, at 20 per cent and 7.3 per cent, respectively, with agriculture, education, small and medium-sized enterprise development and other ‘miscellaneous’ loans holding the remaining 0.2 per cent,” the Central Bank report said.
The findings highlight the increasing tendency of Bahamian deposit-taking institutions, both commercial banks and credit unions, to focus on high-yielding (greater interest rate) consumer loans.
These are often secured by salary liens, and have proven popular among institutions scarred by non-performing mortgage loans they have been unable to realise security on, due to a depressed real estate market and, in some cases, questionable appraisal values.
But, while banks and credit unions would argue that this is not their role, and that they have to protect depositor monies, the Central Bank report again shows how lending is concentrated against the Bahamian economy’s productive areas - chiefly private sector business projects and expansions.
Institutions are also shying away from the mortgage market due to the absence of qualified buyers, negatively impacting real estate, construction and a whole host of spin-off industries.
“Given that loans extended to members by credit unions are the largest category of assets, any deterioration in the quality could significantly impact the stability of the sector,” the Central Bank warned.
“In assessing the quality of assets, the delinquency ratio for the credit union sector stood at 7 per cent in 2013, which is above the 5 per cent international benchmark, while the ratio of loan loss allowances to gross loans increased to 4.9 per cent from 4.2 per cent in 2012 - indicating a slight rise in loan delinquency levels.”
Still, aided by increased interest income and reduced operating expenses, the credit union sector’s total profitability rose by 53.3 per cent to $6.9 million in 2013. Its return on assets (ROA) and return on equity (ROE) rose by 0.5 and 4.7 percentage points respectively, hitting 2.1 per cent and 17.9 per cent.
Bahamian credit unions grew their collective loan portfolio by 13.2 per cent, or $26.4 million, to $227 million in 2013, with the latter number accounting for 69.3 per cent of their total asset base. The increase was driven by loans to credit union members.
The credit union industry closed 2013 in a far better position than the commercial banks, which saw total loan arrears increase by $101.7 million or 8.1 per cent to hit $1.352 billion in 2013.
That outpaced the previous year’s 3.5 per cent growth in bad loans, and the Central Bank blamed the increase on “the deterioration in one entity’s loan portfolio” - although it did not name the institution.
Non-performing loans, meaning credit that is more than 90 days past due, increased by $98.4 million or 11.4 per cent to $966 million by year-end 2013, accounting for 71.4 per cent of the total.
“The deterioration in overall credit quality was led by commercial arrears, which surged by $83.1 million (30.7 per cent) to $353.9 million, extending the previous year’s 5.5 per cent contraction - in line with the observed weakness in business conditions,” the Central Bank said.
“The dominant mortgage component, at 54 per cent of the total, also rose by $31.4 million (4.5 per cent) to $730.9 million, whereas consumer delinquencies fell by $12.9 million (4.6 per cent) to $267.4 million.”
The Central Bank report revealed that collective commercial bank profitability had fallen a long way from heights seen pre-recession, and in 2010-2011.
Industry net income dropped by a further $9 million, or 6.1 per cent, to hit $139 million in 2013. Interest rate spreads dropped by 48 basis points to reach 6.85 per cent, albeit a level still relatively high by global standards.
Yet the Central Bank report showed that commercial banking industry return on assets (ROA) had fallen by more than a percentage point from the 2.5-2.75 per cent highs achieved in 2008, and again in 2010-2011, slumping to 1.43 per cent in 2013.
And the plummet in return on equity (ROE) was even more pronounced, dropping from 15 per cent in 2010, and 14 per cent in 2008 and 2011, to reach just over 2 per cent in 2013.