The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bahamian commercial banks enjoy the highest interest rate spreads in the Caribbean but this does not necessarily mean they are “making a killing” on profits, a senior executive argued yesterday.

Gowon Bowe, the Clearing Banks Association’s (CBA) head, told Tribune Business that observers are ignoring multiple other factors that play a critical role in the industry’s financial health after the International Monetary Fund’s (IMF) Article IV report on The Bahamas revealed that the sector’s interest rate spread is around two percentage points higher than the nearest regional rival.

The spread, which measures by how much the interest banks charge on loans exceeds that which they pay to depositors, stood at around 10 percentage points in The Bahamas in 2023. This compared to around eight percentage points in Barbados, which was the closest to The Bahamas, with banks in all other Caribbean nations enjoying spreads of six percentage points or below.  

One financial source, speaking on condition of anonymity, told this newspaper yesterday: “That spread for The Bahamas is well in excess of everyone else and well above the regional average. That tells a very interesting story.

“It’s a very healthy spread, which suggests the banks are making a killing together with fee income and the like. I’d like to see the explanation for why our spreads are so pronounced compared to the region.” The Bahamian commercial banking sector, and especially the Canadian-owned banks, have recently come under scrutiny over concerns related to costs, accessibility and challenges such as opening bank accounts.

CIBC Caribbean recently unveiled annual profits of $136.3m for the year to end-October 2024, up $14m or 11 percent from the prior year’s net income of $122.3m. This has attracted the Prime Minister’s attention, with Philip Davis KC telling last week’s Bahamas Business Outlook conference: “Too often, I see companies and banks declaring record profits year after year.

“But where does that money go? How much of it flows back into our economy to benefit the Bahamian people beyond providing jobs, for which we are grateful?” Mr Bowe, though, told Tribune Business it was too simplistic to imply that the commercial banks are profiteering at the expense of Bahamians based on one statistic.

Emphasising that the situation has to be assessed holistically, the Fidelity Bank (Bahamas) chief said factors such as this nation’s high-cost operating environment and the challenges banks encounter in finding qualified borrowers to lend to have to be included in any assessment. And he pointed out that the higher cost of funds for banks in other Caribbean territories inevitably means their spreads are lower in comparison.

“I think that, again, persons are picking on one aspect of it,” Mr Bowe said of the IMF report’s table on Caribbean bank interest spreads. “The first thing is whether they have done a comparison on how banks in other jurisdictions fund themselves. In The Bahamas, what we do have is very substantial deposit funding, but in a lot of the territories there is a lot of wholesale funding by bonds.”

Bond financing is typically more expensive than relying on deposits, he added, which means Caribbean banks are paying more for the funds that they then lend out to borrowers when compared to their Bahamian counterparts. This, Mr Bowe explained, results in a narrowing of the interest spreads for regional banks when compared to this nation.

And he also pointed out that Bahamian commercial banks, with cash and cash reserves some $2bn above regulatory requirements at September 2024, “have probably the greatest excess liquidity” in the Caribbean. This excess liquidity represents funds the banks are unable to lend out due to difficulties in finding qualified borrowers, which means they are gaining no return on this cash pile.

“We have a tremendous amount of cash sitting unproductive in the banking system,” the Fidelity Bank (Bahamas) chief said. “If I have deposits out there making money the spread can contract because I have money in circulation being productive in The Bahamas. There is now $2bn in liquidity earning zero.

“How is yield determined on a portfolio? It’s by active lending, but are they [critics] looking at the asset portfolio earning zero? You cannot look at pieces of a report and jump on it as a conclusive statement.” Mr Bowe said the Government’s increased reliance on Central Bank advances to finance its 2024-2025 first quarter deficit also revealed it is challenged in accessing commercial banking system liquidity.

“The reality is that even the Government is having difficulty in accessing it because persons are waiting for higher-yielding assets to invest it in,” he added. “From that one indicator you cannot draw the conclusion that the banks are extracting greater profits in The Bahamas. That’s only one side of the coin and you have to look at all other factors. That single factor highlighted is only a very small part of the puzzle.”

The IMF, in its Article IV report, concluded that The Bahamas faces only “moderate” systemic risks to its financial stability. “The credit gap remains negative after several years of credit contraction, and household and corporate leverage are at modest levels,” the Fund said.

“Banks are well capitalised even in a stressed scenario conducted by the Central Bank, and 20 percent of domestic assets are held in cash or reserves. However, the high domestic bank exposure to the public sector - 25 percent of domestic assets - does represent an important vulnerability. Financial stability risks stemming from non-bank financial institutions are modest compared with domestic banks.

“Domestic assets of insurance companies and agents accounted for just 13 percent of GDP (gross domestic product) at the end of 2023, compared to 82 percent for banks. Active credit unions’ capital buffers are below those of banks, but their domestic assets accounted for just 3 percent of GDP in 2023.”

As for interest rates, the IMF argued: “Improving the Central Bank’s liquidity management framework would allow domestic interest rates to be more responsive to external conditions. The banking system maintains very high levels of liquidity, creating a significant difference between domestic and foreign interest rates.

“Currently short term rates are 212 basis points below those in the US despite the peg to the US dollar. Long-standing capital flow management measures allow the maintenance of this interest differential. Improving liquidity forecasting and introducing tools such as interbank repos or 30-day Treasury Bills could better manage systemic liquidity over the long-term and provide a market-based, short-term reference interest rate.”