The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Commonwealth Bank yesterday predicted it would be unable to recover 95 per cent of its Value-Added Tax (VAT) input payments, given that ‘exempt’ revenue streams form the bulk of its income.

Ian Jennings, the BISX-listed institution’s president, told Tribune Business that net interest income’s exemption from the way commercial banks’ VAT liability will be calculated meant the industry would only recover a small portion of its input tax payments.

“The rough estimate we have is that about 95 per cent of the VAT paid on our inputs is non-recoverable,” Mr Jennings revealed to Tribune Business.

While he declined to place a dollar figure on that estimate, it is likely VAT will cost Commonwealth Bank and its shareholders a multi-million dollar sum, probably in the low seven-figure range.

The financial impact will probably not be too dissimilar to the $5 million additional expense imposed on the institution during its 2014 financial year via the turnover-based Business Licence fee that was introduced in the past fiscal year.

Explaining why such a high percentage of Commonwealth Bank’s VAT ‘input’ payments will be unrecoverable, Mr Jennings explained: “Net interest income is exempt from the calculation.

“They they were proposing was to do it as a percentage of VAT-able against total income, which is the percentage you can recover. Our fees are a very small percentage compared to overall revenue.”

Savings and loan products are treated as VAT ‘exempt’, meaning that while consumers will not be charged the 7.5 per cent levy on these, the banks are unable to recover the tax they pay on associated ‘inputs’.

Only commercial bank fees, such as those for ATM cash withdrawals and other charges, will be ‘VAT-able’ - meaning that consumers will be charged the tax, and banks can recover associated ‘input’ tax payments.

However, fee-based income forms a smaller percentage of Bahamian commercial banks’ incomes and revenue streams.

This is illustrated by Commonwealth Bank’s own financial statements for the first nine months of 2014, which show that its $77.34 million in net interest income accounted for 88.8 per cent of its total $87.086 million total income. In contrast, the ‘VAT-able’ fees and other income came to a relatively miniscule $5.738 million.

Mr Jennings, though, said that with the first VAT returns still being processed, it was too early to assess the tax’s impact on consumers and the commercial banking industry.

“We’re coming up to do the first return, so it’s too soon to make any definitive assessment around the impact on consumers and how easy it is to do a return,” Mr Jennings told Tribune Business.

“We continue to work with the Ministry of Finance to dot the ‘is’ and cross the ‘ts’. We’ve not had too much feedback so far, but were not anticipating too much until customers receive their statements and see the impact. Once you introduce something new there’s a lull, and then issues arise.”

Speaking after a 2014 in which Commonwealth Bank’s net income increased 6 per cent year-over-year, rising $3 million to $53 million, Mr Jennings revealed that its bottom line performance had “turned out better than anticipated”.

He added that the BISX-listed institution had anticipated a greater impact from the new $5 million Business Licence fee, which it did not have to contend with in the 2013 comparative year.

“We’re very pleased,” Mr Jennings said. “It was hard work, but it was team work. Nothing comes easy in business. There are slow signs of improvement, but nothing dramatic. It’s a long, hard road.”

The Commonwealth Bank chief said the institution had been able to control cost and loan delinquencies/write-offs, while also being aided by low deposit rates stemming from the $1 billion-plus excess liquidity in the commercial banking system.

“Our lending in the second half of the year was better than the first half,” Mr Jennings told Tribune Business. “It was marginally better.

“We did see a small [lending] spike in December. There were certainly some last-minute purchases before VAT, and we saw it most with auto loans.

“Receivables grew, and we grew our loan book by close to 3 per cent. We’ve been a little bit below that, flat in the previous two years. It’s a slow improvement, but better than during that period.”

Commonwealth Bank’s ‘180-day write-off’ policy for non-performing loans helped keep its non-performing credit to 5.8 per cent of its loan portfolio, well below the industry’s 16.1 per cent average.

Its loan loss provisions fell by $3.4 million year-over-year, while charged-off loans fell by close to $6.5 million to $28.4 million. There were some $55.5 million worth of loan impairments on Commonwealth Bank’s balance sheet at year-end, a year-over-year increase of $1.2 million.

Mr Jennings added that Commonwealth Bank had seen a slight increase in mortgage and commercial loan delinquencies during 2014.

These, though, are all secured by real estate, and account for a relatively small proportion of its loan book given that its main concentration is consumer credit.

Elsewhere, Mr Jennings told Tribune Business that Commonwealth Bank’s preference share capital was now fully compliant with the global requirements established by the Basle accords.

Via two separate exercises in 2013 and 2014, Commonwealth Bank had achieved an almost-100 per cent ‘roll over’ of its existing preference share investors into the new, Basle-compliant securities.

Of the previous $85 million preference share capital, some $81.6 million remains on its books, with a minority of large investors electing to instead by paid-out via a total $3.4 million in cash.

Looking ahead to 2015, Mr Jennings said: “As far as our crystal ball can tell us, we see pretty much the same. Competition is rough and rough. They’re all [other banks] coming into the consumer market because of higher delinquency rates in mortgages and consumer loans.”

In common with other businesses, Commonwealth Bank is awaiting the employment impact from Baha Mar’s opening, while also hoping for a boost from lower oil prices and associated energy costs.