By NEIL HARTNELL
Tribune Business Editor
The Central Bank will likely disappoint many Bahamian consumers through its refusal to counter rising bank fees with price controls, despite increases as high as 43 per cent on “a significant number of services”.
The regulator, unveiling its survey of commercial bank charges for the six months to end-June 2016, said direct intervention through mechanisms such as price controls would only create further distortions that negatively impact consumers.
The survey, reflecting previous comments by Central Bank governor, John Rolle, said improved consumer protection and financial literacy were the best safeguards to concerns over increased bank fees, and promised to “strengthen” these areas.
“An analysis of data compiled over the last six years showed that banks have raised fees on a significant number of the services charged and, in some cases, introduced new categories of fees on existing facilities,” the Central Bank said.
“However, there have been a few instances where fees have been adjusted downwards, particularly for those which are considered high volume services.
“While the current framework reflects structural factors impacting the domestic financial sector, the sector would benefit from initiatives on several important fronts.
“This includes strengthening practices and codes on financial literacy and consumer financial protection, which the Central Bank will pursue under its strategic focus on the sector. It is, however, believed that a direct response through price controls would introduce adverse distortions in the sector.”
The Central Bank’s declining of price controls is unlikely to be welcomed by many Bahamians, who believe commercial banks had imposed disproportionate and unwarranted new fees and increases in a bid to regain some of the profitability lost due to the sector’s $1 billion-plus pile of non-performing loans.
The publication of the six-month survey’s findings is probably at least a partial response by the Central Bank to such public concerns, and may reflect a desire by the regulator to show it is addressing them.
However, the regulator said it was not responsible for regulating bank fees, while the industry body, the Clearing Banks Association (CBA), did “not determine or influence charges”.
The Central Bank admitted that the only protection Bahamian consumers have is the Banks and Trust Companies Regulation Act and the CBA’s Code of Conduct, yet these only stipulate that institutions inform customers in advance of fee changes.
The survey acknowledged that fee income is “the second most important source of revenue” for Bahamian commercial banks after the interest earned on loan repayments.
“While fee setting is driven by profitability targets, they also reflect the banks’ focus on compensating for other structural gaps in their revenue streams,” the Central Bank survey acknowledged.
Over the 11 years from 2005-2015, the survey found that the industry’s net interest margin had grown by an average 4.4 per cent per annum, rising from $355.4 million to $541 million over the period.
When combined with commission and foreign exchange earnings income, the industry’s gross earnings margin had grown by an annual average of 4.2 per cent between 2005-2015, also peaking at $511.7 million in the latter year.
Fee income, though, had expanded at a slightly higher rate over the same 11 years, growing the fastest by 4.8 per cent per annum, although the $111.3 million generated in 2015 did not represent the peak - $120.3 million achieved in 2008, just before the global recession.
The Central Bank said that as a percentage of the commercial banking industry’s retained earnings, fee income had averaged 19.9 per cent between 2005-2015, growing at an annual rate of 0.3 per cent.
This, again, was not markedly different from the average 0.2 per cent growth in net interest margin, and 0.7 per cent contraction in commission and fee income, exhibited over the same period.
The Central Bank, though, conceded that the higher growth rate for fee income “coincides with the significant increase in non-performing loans as a percentage of total loans”.
“Given the concerns raised by several segments of the public regarding the commercial banks’ fees, in an environment where banks operating costs as a percentage of total assets have been relatively stable, with a few exceptions, the Central Bank’s upcoming work programme on bank fees will target consumer protection and financial literacy, in terms of best practices which banks should follow on client relationships,” the survey said.
“The Bank will also advocate for structural reforms in the domestic credit market to improve the quality of lending decisions and reduce resulting costs from borrower defaults.”
The survey acknowledged that “key” to this latter initiative is the long-heralded creation of a Credit Bureau, adding: “Realisation of the domestic Credit Bureau will also have benefits for improved lending decisions that reduce banks’ exposure to losses from loan defaults, and permit more transparent and tailored setting of charges on credit facilities according to the risk posed by each customer.
“Continued progress on payment systems’ reforms is also a priority to provide more residents with lower cost electronic alternatives to cheque writing/cashing and cash withdrawals. Recommended intervention to address other structural constraints which impact costs will also remain high on the Central Bank’s work agenda.
“The Central Bank will also review, where recommended, taxation policy reforms which can be identified to optimise the Government’s intended revenue targets for the domestic financial sector, while minimising downstream impacts on services pricing.”
When it came to the fees themselves, the Central Bank noted that over the six-month period to end-June 2016, the average per cheque cashing fees had increased 43.26 per cent to $1.69.
‘Stop payment’ order fees also rose 17.14 per cent to $22, while the average monthly maintenance fee for accounts where there had been no activity for six months grew 16.78 per cent to $5.26.
“With regard to business checking accounts, it was observed that fees levied on these balances did not vary widely from those of personal accounts,” the survey found.
“A breakdown of the fees assessed showed that the average per cheque drawing charge increased by 35.32 per cent to $1.17 on business accounts. In addition, the stop payment order fees firmed by 27.39 per cent to a rate that was similar to those incurred on regular chequing accounts ($22.50)....
“The average early withdrawal charge remained the same over the review period at $36.75, whereas fees associated with interim statement printouts saw an increase in the average cost by 35.78 per cent, from $7.68 to $10.43.”
Cheque-cashing fees for non-customers were introduced by two banks, and averaged $7.69 per cheque, the Central Bank found. Another two were levying $1.21 per transaction on automated banking machine (ABM) deals.
Some fees, including those for late credit card payments, dishonoured cheques and replacement of cards, dropped over the six months under reviews.