By NEIL HARTNELL
Tribune Business Editor
CIBC FirstCaribbean believes the factors that drove a 74.8 per cent first quarter profit increase will remain present throughout 2015, even though Value-Added Tax (VAT) will grow its Bahamian subsidiary’s operating expenses.
Marie Rodland-Allen, CIBC FirstCaribbean International Bank (Bahamas) managing director, confirmed to Tribune Business via e-mail that it was unlikely to recover “the majority” of its VAT input payments.
This did not impact the bank’s first quarter results, as that period closed at end-January, well before the March 2 deadline for CIBC and others to file their returns for that month. VAT, though, will impact the bank’s operating expenses for the final three quarters of its 2015 financial year.
“Much like the other financial institutions, we believe that we, too, will be unable to recover the majority of VAT input payments,” Mrs Rodland-Allen told Tribune Business.
“However, it is still early days yet, given that the VAT was only introduced at the start of this year. But, by our assessment, we are in a similar position to the other commercial banks, and this will have an impact on our operating expenses.”
Mrs Rodland-Allen’s confirmation comes after Ian Jennings, Commonwealth Bank’s president, last week told Tribune Business that his institution estimated it will be unable to recover 95 per cent of its VAT ‘input’ payments.
This is because ‘exempt’ revenue streams form the bulk of Bahamian commercial banks’ incomes. Net interest income is exempted from the way their VAT liability will be calculated, meaning the industry will only recover a small portion of its input tax payments.
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.
Mrs Rodland-Allen did not place a dollar figure on how much ‘unrecoverable’ VAT inputs are likely to cost CIBC FirstCaribbean’s Bahamian subsidiary, not the proportion that it might be able to claw back.
Whether the impact is ‘material’ seems doubtful, given CIBC FirstCaribbean’s sheer scale, and VAT ‘input’ costs are unlikely to derail a recovery in the bank’s financial performance that appears to be occurring region-wide.
“What the first quarter showed is the bank is starting to demonstrate a strong recovery in its financial performance, but we still have a distance to go,” Rik Parkhill, its regional chief executive, told Tribune Business in a phone interview.
Net income for the three months to end-January 2015 jumped from $15.388 million to $26.919 million region-wide, aided in no small part by a 48.5 per cent or near $15 million year-over-year fall in loan loss provisions.
“I think our loan loss expense has declined in the first quarter, so that’s a positive sign,” Mr Parkhill said. “But the non-performing loans themselves remain high.”
He distinguished between retail (personal, households) and corporate lending in his analysis of CIBC FirstCaribbean’s non-performing loans, describing it as “a tale of two solitudes in the Bahamas and the region”.
Non-performing corporate credit, Mr Parkhill explained, was starting to improve as the private sector restructuring pace quickened and new investors came into troubled businesses, recapitalising them with equity and taking out old debt.
“On the retail and personal side, we still have challenges there,” the CIBC FirstCaribbean chief conceded. “The number of non-performing mortgage loans in the Bahamas and elsewhere continues to show increases, quarter-over-quarter, year-over-year.
“They are not substantial increases, but are still moving up. Until there’s a substantial decline in unemployment, it’s still going to be the story.”
CIBC FirstCaribbean’s segmented first quarter results show how the continued difficulties being experienced by individuals and households are holding back its overall financial performance.
While its wholesale (business) and wealth management banking units delivered operating profits of $10.853 million and $5.092 million, respectively, CIBC FirstCaribbean’s retail unit produced a $5.83 million region-wide operating loss for the three months to end-January 2015.
This continues the trend experienced in its 2014 financial year, when the loan loss provisions drove the retail unit to a $115 million-plus operating loss, with the Bahamas accounting for $61.4 million - or more than half - of this sum.
Mrs Rodland-Allen, meanwhile, disclosed that the Government had asked Royal Bank of Canada (RBC) to develop a revised Mortgage Relief Plan that aims to secure buy-in from the rest of the commercial banking industry.
CIBC FirstCaribbean would support any programme that is designed to help persons’ homes from being repossessed,” she told Tribune Business via e-mail.
“We therefore support the idea of the Mortgage Relief Plan, and we look forward to giving our input into the plan, which the Government has asked RBC to develop.”
Mortgage relief, a key pillar of the Christie administration’s 2012 election campaign, proved a major flop in its first guise. Billed as assisting 1,000 troubled homeowners, it ended up assisting less than five - with the Government and banks pointing fingers at each other for the failure.
Still, there was little disguising Mr Parkhill’s optimism that the worst is now behind CIBC FirstCaribbean, following a 2014 impacted by goodwill write-downs and increases loan loss provisions to account for falling collateral values and a much slower than anticipated regional economic recovery.
“The trends you’ve seen in the first quarter will be repeated through the year,” Mr Parkhill told Tribune Business.
“I don’t want to deny there are challenges, particularly in terms of a slow economic recovery, but I think we’ve turned the corner in terms of financial performance, and my hope and belief is it will get stronger.”
Mr Parkhill’s graduated enthusiasm also contrasts with last week’s Toronto Globe & Mail article, which showed just how the Caribbean is dragging down the global results for its three Canadian parents - CIBC, Royal Bank and Scotiabank.
According to the article, CIBC FirstCaribbean’s $835 million worth of gross impaired loans accounts for 58.4 per cent of the total $1.43 billion incurred by its Canadian parent.
As for Royal Bank, the region accounts for 40.4 per cent or $800 million of its $1.98 billion gross impaired loan book. Finally, Scotiabank’s bad Caribbean credit totals 35.2 per cent, or $1.5 billion, out of its $4.26 billion in gross impaired loans.
These statistics, and associated losses and reduced profits, explain why the three Canadian-owned banks have been desperate to consolidate and reduce costs in the Bahamas and elsewhere.
This has been achieved by bringing regional back office operations together in one jurisdiction, often at the expense of job cuts in the Bahamas and elsewhere.
Further consolidation is probably just a matter of time, as speculation persists about the number of Bahamas branches and jobs that Scotiabank, in particular, might slash as part of its region-wide restructuring plan.
The Globe & Mail article also pointed out that it would take a decade to sell all the distressed properties in the Bahamas at this nation’s traditional pace of real estate sales, emphasising how structural and long lasting this nation’s housing and mortgage crisis may turn out to be.