By NEIL HARTNELL
Tribune Business Editor
nhartnell@tribunemedia.net
FIDELITY Bank (Bahamas) is targeting 10 per cent profits growth for 2018, following a year in which the "cost of business" exceeded staff payroll and benefits.
Gowon Bowe, the BISX-listed institution's chief financial officer, told Tribune Business that general and administrative (G&A) expenses exceeding workforce salaries was "not a ratio we like to see". He explained that the near-$2 million, or 21.9 per cent, jump in year-over-year G&A expenses was almost entirely driven by increased Business License fees.
This, in turn, stemmed from the rise in Fidelity Bank (Bahamas) gross revenues, meaning that the 3 per cent fee - imposed by the former Christie administration - effectively acts as a deterrent to commercial bank growth via the loan book expansion that is desperately needed to stimulate the Bahamian economy.
Mr Bowe said the Government has "to figure out that balance" between growing the economy and increased tax revenues from the banking sector, pointing out that the industry's efforts to recover increased 'doing business' costs would almost inevitably impact Bahamian consumers.
Speaking after Fidelity Bank (Bahamas) unveiled 2017 full-year profits that were essentially flat with the year before, Mr Bowe nevertheless said the bank was targeting 'bottom line' growth of more than $2 million for 2018 based solely on loan portfolio expansion.
"Overall, we are aiming to have 10 per cent growth in profits," he told Tribune Business. "We're looking at growth of near 10 per cent in total comprehensive income. We will do that largely through increases in net interest income and trying to hold all other lines fairly constant.
"We will focus on our traditional banking business and lend to qualified customers that will give us a good return, while giving a return on deposits as well. When you look at it from an economies of scale perspective, if you say overall expenses are fairly constant, it gives you an opportunity to grow without adding expenses.
"It's really growing the loan book, with containment of costs and interest expense, and keeping loan loss provisions low. Our forecasts are based more on being able to grow the portfolio. We have been fairly successful in our target market, been successful in competition with other banks, so we are hoping to continue with the formula that has given us success so far."
Fidelity Bank (Bahamas) has benefited significantly from the timing of its business model 'transformation', which occurred just before the 2008-2009 recession hit. That has seen it convert from a traditional mortgage lender to one that is now focused on consumer loans, which Bahamian banks now perceive as less risky because they can be secured via salary deductions.
Mr Bowe said 81 per cent of the bank's credit portfolio at end-December 2017 consisted of consumer loans, agreeing that the bank had performed "more than a complete 180 degrees" on its loan book composition and "gone even further in the opposite direction".
Fidelity Bank (Bahamas) total comprehensive income inched up by just over $200,000 year-over-year, expanding by just 1 per cent to $21.389 million from $21.231 million in 2016. While net interest income rose by 3.4 per cent to $46.243 million, and total income grew 4.2 per cent to $49.871 million, profitability was constrained by the 8.4 per cent increase in total expenses.
In particular, Fidelity Bank (Bahamas) $10.727 million in G&A expenses exceeded 'salaries and employee benefits' by almost $500,000, even though the latter grew by 3.8 per cent to $10.259 million.
"A large part of that is the increase in Business License fees, which are based on the top line," Mr Bowe said of the G&A growth. "It's a double-edged sword. As you grow interest income, we as a Clearing Banks Association have not been able to convince the Department of Inland Revenue that it should be on net interest income.
"A $2 million hike in gross revenues leads to a significant increase in Business License fees. All of that is coming through the 3 per cent Business License. The huge increase in these expenses is driven by the large increase in Business License fees for the most part."
With gross revenues of $61.074 million and net interest income of $46.243 million, Mr Bowe said levying Business License fees on the latter as opposed to the former would result in "a significant saving" to Fidelity Bank (Bahamas).
"Government has to figure out that balance, if you will," he told Tribune Business. "What it wants to do in terms of growing the economy, and what it wants to do in terms of collecting Business License fees."
Commercial banks, especially the Canadian-owned ones, were targeted by the former Christie administration as it sought to plug its annual nine-figure deficits. Seen as having especially deep pockets, and consistently taking out huge sums in dividends, the banks were hit by several measures that included the 3 per cent Business License fee tax.
The imposition of such measures, though, resulted in the banks seeking to recover these extra costs by hiking fees paid by Bahamian consumers, such as those for cashing cheques.
Mr Bowe said the situation, and its impact on Fidelity Bank (Bahamas) financials, showed there was "a cost to growth" for the commercial banking sector which has to be recovered.
"That will have an impact on consumers," he warned. "Previously, payroll costs were our largest expenses. G&A, which is the cost of business, has taken over salaries and employee benefits.
"That's not a ratio we like to see when talking about the ease of doing business and cost of doing business. We're a service organisation and want to pay salaries, but also want to pay reasonable administration costs.
Mr Bowe said Fidelity Bank (Bahamas) had to grapple with high banking system liquidity and the impact of the Central Bank's Christmas 2016 interest rate cut, as the latter worked its way through the banking system in 2017.
He added, though, that net loan book growth of just over $22 million had exceeded the bank's own $20 million target for the year to end-2017.
With almost $106 million in 'cash in hand' at end-2017, some 90 per cent of which was with the Central Bank, Mr Bowe said Fidelity Bank (Bahamas) had begun "deploying some of the excess" into investment securities in a bid to generate greater returns.
He explained that the bank was targeting government securities with principal maturity of three years or less, thereby giving it enough flexibility to switch its funds should greater lending opportunities arise.
"We'd much rather have it sitting in loans and advances than government securities, as we get a better return on loans and advances," Mr Bowe said. "We are attracting customers faster than increasing our loan book. We are getting deposits in, but are not able to deploy them as fast as we get them in."
With the Bahamian economy projected to expand by around 2.5 per cent this year, Mr Bowe said an economic recovery would place Fidelity Bank (Bahamas) "in great stead" because it has the funding available to expands its loan book without compromising credit quality.
Comments
Use the comment form below to begin a discussion about this content.
Sign in to comment
Or login with:
OpenID