The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Central Bank’s governor is expecting commercial banks to make a “more hands on” effort to tackle their $1 billion non-performing loan pile.

John Rolle told Tribune Business he expected to see more sales of bad loans, suggesting that Scotiabank’s disposal of a portion of its toxic portfolio to Gateway Financial, the Sunshine Holdings affiliate, could act as a model for the sector.

Emphasising that the banks cannot rely on an improving economy alone to clear up their ‘bad’ pre-recession loans, he added that the Central Bank expected to have “more conversations” on the issue with its licensees.

“We continue to believe that in addition to all the support that the economy will provide, there will still have to be some level of hands on effort by the institutions to address those exposures,” Mr Rolle told Tribune Business.

“That’s one of the areas where we expect to have even more conversations with the institutions. To be fair, for the last few years there’s been a recognition that the economy alone should not be relied upon to whittle away these exposures.”

The Bahamian commercial banking sector’s ‘bad’ loan pile peaked at a collective $1.2 billion, and little significant progress was made in reducing it until Scotiabank’s arrangement with Gateway Financial. The latter is understood to have purchased the problem loans at a substantial discount, possibly as low as 25-28 cents on the dollar.

This brought delinquent and ‘past due’ loans to $1.007 billion at end-June 2017, and Mr Rolle said the Central Bank was “looking at cases” where banks had been able to offload some of their non-performing portfolio to the likes of Gateway.

“That’s a good sign, and provides something of a model to other institutions in dealing with their arrangements,” the Governor said of the Scotiabank transaction.

“I would expect to see more hands on involvement, and the possibility of more sales of bad loans is still there.”

Sir Franklyn Wilson, Sunshine Holdings’ chairman, confirmed to Tribune Business last August that Gateway had acquired a portfolio of “several hundred” delinquent home loans, all more than 90 days past due, from a then-unnamed commercial bank.

He added that Gateway’s efforts to subsequently restructure these loans had already proven “very effective”, and would allow many borrowers to remain in their homes on terms better aligned with their financial circumstances.

Entities such as Gateway have been viewed as part of the solution to the Bahamas’ entrenched mortgage/housing market crisis, as they can reduce the pile of ‘bad loans’ weighing down commercial bank balance sheets.

Selling such distressed loans enables commercial banks to recover some of their previous provisioning, and releases capital for lending to better-qualified home purchasers.

The consequences of the Bahamas’ failure to deal more rapidly with the commercial banking industry’s ‘bad’ loan pile were spelled out by Moody’s, which said it had resulted in a “subdued” residential housing market.

With construction, real estate and attorneys all relying heavily on the housing market, together with furniture supply stores and other businesses, the non-performing mortgage overhang has dragged down much of the Bahamian economy.

“Credit to the private sector remains depressed, as banks are increasing holdings of attractively-priced government paper while they clean up their loan books,” Moody’s said. “Non-performing loans (NPLs) continue to be elevated, amid weak economic performance and high unemployment levels.

“Chronically high non-performing loans are partly explained by the domestic banks’ aggressive lending practices prior to the 2008-09 recession. However, debt restructuring operations and the government’s Mortgage Relief Programme (MRP) are finally beginning to positively impact the asset quality of domestic banks.

“Asset quality is further bolstered by non-performing sales, complimenting the MRP-supported loan restructuring in the mortgage segment,” Moody’s added. “After a decade of non-performing overhang from the mortgage/financial crisis, non-performing loans are finally beginning to decrease.

“At end-2016, non-performing loans stood at 12.3 per cent of total private loans, compared to 15.1 per cent as of April 2016. As non-performing loans are concentrated in the mortgage sector, delinquencies have translated into tighter underwriting standards and subdued residential construction activity.”

Moody’s said commercial bank profitability had further strengthened in 2016, having further recovered from the previous year following a major drop in earnings in 2014.

“In 2016, domestic banks’ profitability again strengthened, primarily due to a rise in fee-based income and decreased provisioning for bad debts,” Moody’s said. “Net income to average monthly assets (ROA) rose to 2 per cent and equity (ROE) to 8 per cent in 2016, from 1.9 per cent and 7.4 per cent in 2015.

“Given the banks’ adequate capitalisation, low level of interconnectedness, mildly improving asset quality indicators – including falling non-performing loans – we believe that the risk of a banking crisis remains low and manageable.”

Moody’s added that the three Canadian-owned banks - Scotiabank, Royal Bank of Canada and CIBC FirstCaribbean - controlled around two-thirds of the banking sector’s total assets, and added: “The system also remains well-capitalised.

“Capitalisation ratios are well in excess of statutory requirements, 28.6 Regulatory Capital/ RWA (risk weighted asset ratio as of December 2016 versus 14 per cent regulatory trigger, and liquid.

“Banks are deposit-funded and have limited exposure to wholesale and interbank funding. Foreign currency lending by onshore banks is restricted to domestic borrowers who generate foreign currency, such as hotels.”