Saturday, April 13, 2024

THE ISSUE: Reaction to economic forces


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CANADIAN BANKS HAVE established themselves as dominant forces in the Caribbean over the years.

In Barbados, and elsewhere in the region, the Canadian Imperial Bank of Commerce (CIBC), the Bank of Nova Scotia (Scotiabank) and Royal Bank of Canada (RBC) have become firmly entrenched, including in retail banking, that institutions from the United States and Britain have long lost interest in.

These institutions are also heavily involved in corporate lending and are known in some cases to be major sources of credit to Government.

In recent years, however, expansion has largely given way to restructuring and consolidation as economic recession crippled Caribbean economies and reduced the earning and spending power of regional people.

Banks, including the Canadian three mentioned above, have been reducing some aspects of their operations, sparking fears that they are preparing to turn their backs on the Caribbean. This is a view that has been downplayed by the Canadian banks, whose leaders have indicated they are here to stay despite the difficulties.

Indications are that even if they do stick around, it will not be regular business for CIBC, Scotiabank and RBC. But are these institutions only facing problems in the Caribbean? Or are the region’s economic problems being used as an excuse for operational changes that are also being influenced by events in Canada and elsewhere?

One answer to these questions came on April 30, when credit rating agency Moody’s announced its affirmation of its long term ratings on Canada’s six largest banks and two deposit-taking institutions.

It also affirmed its negative outlook for “supported senior debt and uninsured deposit ratings of seven of those financial institutions”. It said this action was based on its expectation that “within the next several weeks the Canadian authorities will provide more details on the resolution policy for domestically systemically important banks”.

“Once the details of the bail-in regime are announced, Moody’s will evaluate the feasibility of the government’s implementing a bail-in of senior creditors while maintaining financial stability and limiting any damage to the broader economy,” it said.

Moody’s senior vice president, David Beattie added that “we believe that, although debt obligations and other capital instruments may be subject to loss in a resolution, counterparty obligations may be shielded in order to preserve the continuity of operations and avoid contagion”.

Another issue highlighted in a recent edition of the Globe And Mail newspaper, was the difficulties Canadian banks are facing in relation to “problem loans”.

“You could say Canada’s banks may be healthier than ever, with the small amount of problem loans just a speck on their balance sheets. You could also say that, as a result, Canada’s banks are less prepared for a downturn than ever, as the money they are setting aside for problem loans are a fraction of the long term average,” the April 11 article authored by David Milstead stated.

Two weeks ago, Ian Lee, a former banker and currently a business professor at Carleton University predicted: “2015 is going to be a bad year for Canadian banks. Profit levels are going to decline significantly and they are going to decline for two reasons: their revenues are going to be coming down and expenses are going to be going up.”

The fact that low oil prices meant oil industry companies would be borrowing less and low interest rates that meant banks were now earning less for each dollar lent was also identified as another challenge.


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