The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bahamian commercial banks have seen their collective return on assets slump below 1 per cent due to the ‘bad loan’ crisis, which has seen them turn increasingly to Government bond investments.

Moody’s, in its analysis of the Bahamian economy, said near-15 per cent non-performing loan (NPL) levels reflected the industry’s reluctance to foreclose on residential mortgage defaulters due to low real estate values.

It again, though, suggested that the industry was at least partly to blame for its own predicament, referring to “aggressive lending practices” that were employed prior to the 2008-2009 recession.

And with new, qualified borrowers hard to come by, Moody’s said the commercial banks were increasing their investments in government paper as opposed to more lending - further depressing credit to the private sector.

“Increasing delinquencies and shrinking interest margins have put significant pressure on banks’ profitability, sending the system-wide return on assets into the sub-1 per cent territory,” Moody’s said.

“Credit to the private sector remains depressed, as banks are increasing holdings of attractively priced government paper while they clean up their loan books. Amid weak economic performance and high unemployment levels, non-performing loans (NPLs) are elevated and rising, reaching 14.8 per cent in the 2015 first quarter.

“Chronically high NPLs may, to some extent, also be tied to the banks’ aggressive lending practices prior to the 2008-09 recession. With mortgages accounting for the bulk of arrears, high NPLs also reflect the banks’ reluctance to foreclose on residential assets amid low real estate valuations.”

Moody’s said there was little prospect of a rapid increase in credit growth in the near term, with the Government’s financing demands and foreign direct investment (FDI) set to “crowd out” tourism sector lending.

“Going forward, we expect that credit growth will be anemic as public funding and foreign direct investments crowd out financing opportunities in the tourism sector,” the credit rating agency added.

“However, given the banks’ adequate capitalisation, low level of interconnectedness and ample liquidity, we believe that the risk of a banking crisis remains moderate and manageable.”

Elsewhere, Moody’s said exchange controls had created a “captive investor base” for the Government’s local bond offerings, with the National Insurance Board (NIB) holding around 60 per cent of its local currency debt.

This, in turn, had helped to create a favourable schedule for when the Government’s debt principal will mature, with some 54 per cent not due to be returned to investors for at least 10 years.

“Despite the large increase in the debt ratio, the Bahamas’ debt structure remains favourable and mitigates some of the risks inherent to a sizeable debt burden,” Moody’s said.

“Although the Government’s external debt has increased in recent years, debt remains predominantly denominated in local currency and held domestically.

“Owing partly to the existing capital controls, the Government has a captive domestic investor base in the form of local banks and the National Insurance Board, which holds about 60 per cent of government domestic debt,” it added.

“This investor base has helped the Government extend its maturity profile beyond 10 years.

“The Bahamas’ maturity profile is favourable, with over 80 per cent of government debt maturing in more than five years, and 54 per cent in more than 10 years.

“Given this long maturity profile, amortisations tend to be low. Therefore, while the Bahamas has run large fiscal deficits, its overall financing requirements remain below those of other Baa-rated peers”

Only 6.8 per cent, or $263 million, of the Government’s more than $3.87 billion local currency debt is due to mature in the next two years.

Some $467 million, or 12.1 per cent, will mature in two-five years’ time, with $1.059 billion (a further 27.3 per cent) coming due in five to 10 years’ time.

Moody’s, though, warned that the Bahamas was unlikely to match economic growth rates achieved prior to the 2008-2009 recession unless it addressed its structural weaknesses in the energy and other industries.

“Going forward we expect the Bahamian economy to post higher growth rates than in recent years, supported by stronger tourism flows and continued foreign investment into the tourism sector,” It added.

“Particularly following the opening of Baha Mar, we consider that the economy could grow between 2 per cent and 2.5 per cent in 2016 and 2017. After this initial boost, growth would begin to converge towards rates closer to 1.5 per cent, which we consider to be the Bahamas’ potential growth rate.

“Growth is unlikely to match the rates posted prior to the global financial crisis (the 1998-2007 average was 2.8 per cent) unless several structural rigidities are addressed.”