The Tribune

By DR JONATHAN RODGERS

Drastic action is still requured at Bank of the Bahamas. In March 2012, I wrote an article exposing the fact that the Bahamas was experiencing a housing crisis. In the same article, I predicted a ‘small cap’ retail banking crisis, and this is exactly what the Bahamas is experiencing at this very moment. The purpose of this article is to outline why this bank must not be allowed to fail, and what exactly needs to be done to avoid failure.

Any collapse of Bank of the Bahamas would result in a cascade of events that can only be described as a category five economic tsunami. The exact sequence of the cascade would be a severe economic recession, failure or withdrawal of other banks from the market, a sovereign debt crisis and, finally, a devaluation of the Bahamian dollar within eighteen months.

Additionally, there would be extremely unpleasant social and political consequences that, in combination with the economic tsunami, would result in a loss of public and private wealth, and a massive exodus of both wealth and human capital from the shores of the Bahamas. In the aftermath of this coming tsunami, there would be a gross reduction in the standard of living of all Bahamians, which might lead them to wonder if they were still living in the Bahamas or what might seem like a new country called Bahati or Bahmacia.

The clear and present danger that Bank of the Bahamas poses to all Bahamians requires that an immediate solution must be found to save this deeply troubled entity that is now a pathetic shadow of its former self, The Bank of Montreal. The reasons Bank of the Bahamas’ problems are multiple and systemic in nature, but this article will offer some common sense solutions that can possibly save the bank and prevent any economic tsunami.

Five Point

Resuscitation Plan

Five things need to happen within the next three months. First, the entire executive staff and Board of Directors must step down and be replaced by those who have the necessary experience and expertise in banking, especially a bank in a crisis mode.

The present team is totally responsible for the demise of the bank and, in any first world country, by now would have either voluntarily or involuntarily been made to step down.

Second, there must be a complete overhaul of the bank’s operational and corporate governance infrastructure so that it can become compliant with the necessary and required guidelines and regulations as mandated by the Central Bank.

As a public company, the bank needs to become compliant with the guidelines and regulations of the Securities Commission, so that all pertinent material information, which might influence the price of Bank of the Bahamas’ shares, is made available to all shareholders and the general public.

Third, the bank must be downsized because not only is it losing money on the banking side, but it is suffering from operational inefficiencies associated with the fact that the bank is overstaffed and over branched, both of which are contributing to its woes.

Fourth, the bank must be rebranded and develop a new strategic plan that will allow it to become once again economically viable and profitable. The success of a bank is directly related to the public’s confidence in its image, as well as the perception of the bank’s stability and solvency.

Fifth, and most important, Bank of the Bahamas needs to be recapitalised to the tune of $450 million. This amount of money would, to a large extent, compensate for the impaired assets (bad loans) and provide new funds that the bank could then lend out in order to become profitable.

The Government, as the majority shareholder of Bank of the Bahamas, has always exercised its rights to determine the make up of, not only the Board of Directors, but also the executive management. The Bahamian public is now waiting to see what measures the Government will take, in it’=s capacity as the major shareholder, to stabilise Bank of the Bahamas.

To-date, the Government has responded with a plan named Bahamas Resolve, which removed $100 million of bad loans from BOB’s balance sheet. However, this amounts to a net $45 million of bad assets, which in turn only represents 10 per cent of the estimated impaired loans, and thus will only provide temporary relief for the troubled bank.

A review of Bank of the Bahamas financial statements shows that it lost $3 million in 2012, $72 million in 2013 and $4 million in the first quarter of this year. It is projected to continue to lose more money in 2015. All of this would imply that the Government needs to take further action as the Resolve Plan, although helpful, can only be described as remedial in the short-term and not curative in the long-term. Given that the Government is highly indebted and has severe cash flow problems of its own, where will the money come from to save the bank, the interest of the minority shareholders and, ultimately, the Bahamian economy?

The Recapitalisation Plan

In my opinion, there are four options - or combinations of options - that I would humbly offer the Government for their consideration. The success of all of these solutions is predicated on the Government first implementing the ‘five point resuscitation plan’ previously described. All of the proposed options would result in the creation of $450 million that would be required to recapitalise Bank of the Bahamas.

The first is to issue a bond for $450 million, the proceeds of which would solely be used for the capital infusion into Bank of the Bahamas. There is an argument to be made that this would increase the national debt and might lead to a downgrade in the sovereign credit rating of the Bahamas.

However, as reported by Standard and Poor’s, if the Government cannot contain this problem then there will be a credit downgrade. Thus the Government is in a ‘catch 22’ position but, on balance, any decision made by the rating agencies to give the Government some breathing room would be determined by their assessment of its credibility, and ability to skillfully manage a problem of this magnitude. I believe that the implementation of the ‘five point plan’ would clearly demonstrate to the rating agencies that the Government has what it takes to manage this banking crisis and avoid a credit downgrade.

The second solution would be to monetise the debt. In this scenario, Parliament would have to pass an emergency Act that would allow the Treasury to print up to $450 million of new money.

The arguments against monetisation of the debt are based on the concerns related to inflation. However, inflation only occurs when the supply of money outstrips the demand for money. The banks, for the most part, effect changes in the money supply through the creation of bank loans. Given the decline in bank lending over the past four years, as manifested by the glut of liquidity in the banking system, the demand for money is greater than the supply of money.

Thus the infusion of the $450 million into Bank of the Bahamas would not cause any significant inflation until the the supply for money outstripped the demand. At this point in time, this would indicate an overall increase in the price of goods and services which, in turn, would indicate an upbeat economy, and that would be good for Bank of the Bahamas, the Government and all Bahamians.

The third solution would be for the Government to sell its 65 per cent interest to the public for $450 million in the form of a convertible bond. Such a bond would have a coupon that would pay 3 per cent interest bi-annually, and offer bondholders the option to convert to equity after a specific period of time.

In such an arrangement, the purchasers of the convertible bonds would receive interest payments for a three-year period, then have the option to convert their holdings into equity (shares) in Bank of the Bahamas, at a pre-determined price, or receive full payment for the principle of the amount paid for the bonds.

In many ways this would be the ideal scenario, as Government would receive a net inflow of funds, there would be no increase in the national debt, and government’s future capital injections into the bank would be limited to the bi-annual coupon payments. Furthermore, if these convertible bonds were floated on BISX, there would be some upside potential for purchasers of the convertible debt to benefit from potential capital gains opportunities.

The fourth option would be for the Government to sell its entire 65 per cent stake to another entity, such as a conglomerate made up of the other retail banks, the A. F. Holdings group, Sunshine Holdings or one of the newly-formed gaming entities.

There are two economic reasons why this would not be a good idea. First, even though it would be in the best interest of the other retail banks to buy the Government’s share in Bank of the Bahamas, for a variety of reasons which are beyond the scope of this text, they would not entertain this option. The other groups would only buy at a deep discount, meaning $100-$150 million, which would not be enough to achieve the objectives previously outlined.

The second reason is that if any of the above potential buyers were to purchase Government’s shares, this would do nothing to change the gross asymmetry of wealth that exists in the Bahamian economy, because it would simply represent a transfer of wealth from one wealth centre to another. However, if all Bahamians have the opportunity to buy shares then this will help to lessen the wealth asymmetry and simultaneously exit Government from a business it probably should not have been in in the first place.

The fifth option would be for the Government to buy out the existing minority and preference shareholders, stabilse the bank and then sell it at a later date. If the minority and preference shareholders are made whole at $5 and $1 per share respectively, this would cost the Government about $170 million. Resolve could be expanded to cover the required funding or ,alternatively, options one or two that were previously mentioned could be utilised to cover the needed extra funding required.

I sincerely believe that any one or combination of these options, if implemented immediately, would have at least a 90 per cent chance of achieving a successful outcome. The Government is presently holding all of the cards, and it is my sincere hope that they play the right ones, otherwise we will all be washed away by the coming economic tsunami and the whole house of cards will come tumbling down.