The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bank of The Bahamas’ top executive says the country is “a long way away from a debt default” even though constant sovereign downgrades are “taking their toll” on the banking industry and wider economy.

Kenrick Brathwaite told Tribune Business the frequent downgrades by Moody’s and Standard & Poor’s (S&P) cut his bank’s profits for the 2023 first quarter by “in excess of $1m” as he voiced concern that these actions were painting a misleading position on the nation’s financial health.

The Bank of The Bahamas managing director expressed optimism that a sovereign debt default “is just not going to happen”, given that the country still has multiple tools it can employ to stave off such an outcome such as new and/or increased taxes and selling-off public assets such as Crown Land and state-owned enterprises (SOEs).

The Government also has access to borrowing at much cheaper rates in the domestic Bahamian capital markets, but Mr Brathwaite told this newspaper that gaining access to capital - with system liquidity standing at $2.254bn at end-September 2022 - was not as easy as it appeared.

Pointing out that Bahamian commercial banks, which are major purchasers of public sector debt, already carry significant holdings on their balance sheets that place them close to their regulatory and prudential limits, he added that the industry must always guard against the potential “imbalance” caused by the Government’s demand for long-term funding with depositors wanting short-term access to their funds.

Speaking after Bank of The Bahamas’ posted a more than 13-fold rise in total comprehensive income for the three months to end-September 2022, hitting $2.742m compared to $207,859 for the prior year, Mr Brathwaite said the increase would have been even more impressive if not for the Moody’s downgrade of The Bahamas’ sovereign credit rating which occurred during the period.

This forced Bank of The Bahamas, in common with its fellow commercial banks and other government debt holders, such as insurance companies and pension funds, to take a haircut or provision on the value of these investments as a result. Tribune Business understands the impact for the BISX-listed institution could have been close to $1.5m of the $1.6m hit that the BISX-listed institution took on non-loan financial assets.

However, Mr Brathwaite said: “I would just say for the record that it [Moody’s impact] was in excess of $1m. The results could have been better if we didn’t have the downgrade. The entire industry has a lot of government debt. We’re restricted based on our relationship, so we don’t have as government debt as the others.

“But we still have quite a bit, and it’s taking its toll on everybody in the industry. Moody’s, their timing is always impeccable. Hopefully we can get this thing turned around.” Bank of The Bahamas is collectively owned more than 82 percent by the Public Treasury and National Insurance Board (NIB), meaning that as a related party with common ownership it is more restricted in the amount of government debt it can acquire.

Moody’s main concern, in its latest downgrade of The Bahamas’ sovereign further into ‘junk’ status, was whether this nation can access the international capital markets at reasonable costs (interest rates) should it need to do so for refinancing and other purposes.

Mr Brathwaite, while pointing out that the Government can obtain much cheaper financing in the domestic capital markets, said: “Whether they can is another thing. There’s a lot of liquidity in the system, but that liquidity belongs to our customers - the depositors - and not the bank. There’s always an imbalance between the Government wanting long-term funding and depositors wanting their money short-term.

“All the banks have agreed to do what we can, but we have sovereign risk, debt ceilings. We have large exposure ceilings, we have as a related party ceilings which impact Bank of The Bahamas. I don’t think anyone won’t participate out of fear or lack of confidence in the Government, regardless of which government it is.

“But everybody looks at it, liquid asset ratios of 200 percent, and everybody says the banks have money to lend. Based on that, everybody says there is a lot of money in the system, but that money is depositors’ money. We have to make sure we balance the books and not create an imbalance where we have long-term government debt and short-term depositor monies. That may create issues for you down the line.”

Voicing hope that Standard & Poor’s (S&P) will not follow Moody’s lead, and downgrade The Bahamas again when it issues its report before year-end, Mr Brathwaite said the rating agencies’ persistent actions were creating a misleading impression that this nation stands on the brink of a debt default.

“We cannot deal with another downgrade,” the Bank of The Bahamas chief said. “The overriding factor all economists need to understand is that when you downgrade someone they may be at risk of default, but The Bahamas is very far away from that. There’s a long way before we get to the point of default. When they downgrade you, they anticipate a default. When you analyse what the potential of default is in The Bahamas, it’s minimal.

“When you downgrade you increase costs to the Government, you increase costs to the banks as we have to recognise a provision on government debt. You’re not doing what downgrades are supposed to do, which is determine what is the point of default? Most economists will say to you that The Bahamas is not in line for any kind of default. There’s no way any international agencies will allow The Bahamas to default. It’s just not going to happen.”

Despite the jump in total comprehensive income, Mr Brathwaite said Bank of The Bahamas has yet to hit the sustained profitability it is striving for. It will receive a vital boost towards this ambition if the Central Bank clears it to resume commercial lending, which was the market segment chiefly responsible for prior woes that resulted in two taxpayer-financed bail-outs of the institution - plus a $40m rights issue - that collectively cost over $300m.

“We have not reached the level of sustainability we’ve been targeting in terms of overall profitability, but are working towards that,” Mr Brathwaite told Tribune Business. “The last piece of the puzzle is for the Central Bank to release us, and allow us to engage in the commercial market and diversify our books. Without that, the numbers are skewed because we really want to participate in all the markets.

“They’ve done their review, we’ve responded to their review, and are just waiting on their decision. Then we can really embark on what we’ve laid out in our strategic plan in terms of full diversification and ensuring that the risk carried is in line with what the risk appetite document says.”