The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bank of the Bahamas needs to increase its capital base by $30 million to meet global regulatory requirements, with its Board now assessing “various options” to achieve this.

Renee Davis, the BISX-listed institution’s newly-appointed managing director, conceded that it was currently non-compliant with the minimum regulatory capital levels demanded by the Basle III reforms dealing with worldwide banking industry regulation.

She told shareholders at Friday’s annual general meeting (AGM) that Bank of the Bahamas’ Board had made “no final decision” as to how it would raise the extra funds, while acknowledging the bank’s non-compliance with key Central Bank of the Bahamas’ capital ratios.

The revelations came after Bank of the Bahamas sought shareholder approval at the AGM to “reclassify” $80 million worth of unauthorised preference shares to ordinary, voting shares (equity).

The resolution, which ultimately passed, prompted questions from some minority shareholders as to why the reclassification was necessary.

Darron Cash, the former FNM chairman, queried whether the switch to $80 million worth of unissued ‘ordinary shares’ was intended to pave the way for a rights offering to shareholders.

“Is it the Board’s intention within the next 36 months to offer a new tranche of common shares for sale?” Mr Cash asked Mrs Davis and the bank’s chairman, Richard Demeritte.

“As a part of the restructuring plan of the bank, there is a need for the bank to meet its regulatory capital ratios,” Mrs Davis said. “As many of you know, we are deficient relating to various ratios...

“The bank is reviewing various alternatives to recapitalise the bank. A final decision has not been made, as we are considering various alternatives at this point.”

Mr Demeritte, the former auditor-general, said Mr Cash was really asking if the bank planned to hold a rights issue, where all existing shareholders would be invited to subscribe for more Bank of the Bahamas shares in proportion to their existing holdings.

“I cannot confirm or deny whether that will be done,” Mr Demeritte said. “The bank is looking at various alternatives as to how it looks at recapitalising itself.

“No final decision has been made or approved by the Board of Directors.”

It was then that Mrs Davis revealed how much extra capital was required to bring Bank of the Bahamas into compliance with the worldwide regulatory standard set by Basle III.

“In order for us to be in compliance with Basle III, there will be an additional $30 million required to bring the bank’s capital in line with regulatory requirements,” she told shareholders.

That is with respect to Basle III. It is unclear whether more than $30 million will be required to bring Bank of the Bahamas into compliance with the Central Bank’s capital ratios.

Bank of the Bahamas has been in non-conformity with two key capital ratios for at least six months, with the breaches dating back to at least its end-June 2015 financial year close.

Its results for the six months to end-December 2015 reveal that the bank’s Tier 1 Capital, as a percentage of total risk weighted assets, now stands at 10.95 per cent compared to the 12.8 per cent minimum.

This represents a further decline from the 11.06 per cent at end-June 2015. The other problem ratio continues to be Tier 1 capital as a percentage of total capital, which is now at 63.45 per cent compared to the minimum 75 per cent

Mrs Davis’s confirmation that Bank of the Bahamas needs to be recapitalised will come as no surprise to informed observers, given the more than $100 million in collective net losses it has incurred over the past three years.

This resulted in the bank’s $100 million ‘bail out’ by the Government, its 65 per cent majority shareholder, via the Bahamas Resolve transaction.

However, given that Bank of the Bahamas continues to incur quarterly losses, and its balance sheet ‘red ink’ exceeds the bail out ‘write back’ by almost $20 million, further action is inevitable.

With its accumulated deficit (total losses) standing at $74.348 million at end-December 2015, either more ‘bad’ loans have to be removed from the bank’s balance sheet, or it will have to be recapitalised through the injection of new equity capital.

Mrs Davis had earlier explained that the bank needed to “reclassify” the $80 million worth of unissued preference shares because Basle III no longer recognised these securities as part of a bank’s capital base.

“Under the Basle III regulations, preference shares are not considered part of regulatory capital,” she told the AGM.

“The reclassification is to ensure our capital base remains in compliance with regulatory capital. They [preference shares] will not meet the requirements of Basle III.

“If, at any point in time, the bank wishes to issue capital in the future, the bank will have the necessary shares to do so. We are reclassifying the preference shares to common shares.”

Shareholders approved the Government paying $3.185 million worth of dividends, on their behalf, to investors in Bank of the Bahamas’ preference shares during the 2015 financial year.

These payments should normally be made by the bank, but Mrs Davis said the Government had stepped in via the Public Treasury because of the $74 million accumulated deficit.

“The reason for the Government continuing to pay the preference shares is because if the bank failed to live up to its obligations to the preference shareholders, those preference shares in their entirety can be recalled, meaning the bank would have to pay them out,” she explained.

Bank of the Bahamas had $27.616 million worth of preference shares outstanding at end-June 2015, accounting for more than half its total $49.239 million share capital. Whether the bank could suddenly afford to pay them all out is unlikely.

Mrs Davis later admitted that the two-month extension obtained by Bank of the Bahamas for publication of its 2015 annual financials was done so it could achieve a ‘non-qualified’ audit from Ernst & Young.

The bank’s financial statements were published just two days before New Year’s Eve, rather than by the normal four-month deadline of October 31, 2015.

Mrs Davis said the extension gave Bank of the Bahamas extra time to convince Ernst & Young it should be treated as a ‘going concern’.

“The audit this year was delayed really because we had to address some key concerns with our auditors,” she revealed.

“When you look at the bank’s financial statements, there’s a note which speaks to the Government giving its support to Bank of the Bahamas......

“The discussion we had with our auditors was really surrounding the Government’s commitment and willingness to be a partner with Bank of the Bahamas. There were discussions relating to that, and we all agree with the conclusions and notes you see in the financial statements.”

Shareholders approved the preference share “reclassification” resolution, which will convert eight classes of 10,000 shares - worth $10 million each - into $80 million worth of common shares.

The bank’s Articles of Association and Memorandum of Association are both to be amended to reflect this change, and the Companies Registry and financial regulators duly informed.

Given that the Government, via the Public Treasury and National Insurance Board (NIB), owns 65 per cent of Bank of the Bahamas’ total equity, and more than 51 per cent of voting stock, no resolution was in danger of being defeated.