Since September 2012, the financial system has remained generally stable and well capitalized.
Levels of liquidity across all financial institutions continued to be high and entities were generally profitable, though profit margins continued to be compressed.
Credit quality declined further at banks. For banks, this deterioration was mainly in the personal mortgage and real estate sectors.
Banks have continued to experience rising liquidity levels as deposits have grown modestly, while loans declined marginally. The increased liquidity has been shared between interest-bearing securities and non-interest bearing reserves at the Central Bank of Barbados.
Total net external assets improved from a deficit of $296 million in September 2012 to a deficit of $183 million in March 2013, due to a reduction in the deposits of non-residents.
Loan quality continued to weaken due primarily to increased delinquencies in the residential mortgage and real estate sectors and to a lesser extent, the tourism sector. The non-performing loan (NPL) ratio grew from 12.7 per cent in September to 13.9 per cent in March 2013.
Commercial banks have continued to be profitable despite the consecutive reductions in profitability since 2009. Over the six months under review, the performance was uneven across institutions but the overall contraction in profitability was 40 per cent compared to the similar period of the previous year.
Although the provision-to-NPL ratio has declined from 37 per cent to 32 per cent relative to September 2012, banks continue to hold reserves in excess of statutory requirements. Additionally, the total capital adequacy ratio rose from 19.9 per cent in September to 20.8 per cent in March 2013.
As at March 2013, the capital adequacy ratios (CARs) for the major lending sectors in the financial system ranged between 15 and 35 per cent. Reserves held in the financial sector are sufficient to support sizeable adjustments to the provisioning rates. The impact on capital ratios for both banks and non-banks is less than one percentage point when moving to the baseline assumptions.
In scenario A (ten per cent for the ‘special mentioned’ category and 50 per cent for the substandard category), the sectors as a whole remained well capitalized, but one bank would require additional capital. However, in the extreme case, Scenario B, two banks and one non-bank would be in breach of the eight per cent prudential threshold.
An investigation into the impact of inter-bank exposures, as well as cross-border exposures on bank capital has revealed that related company activities pose the most significant threat. Nevertheless, given the current exposures and level of reserves held, the banking system has been proven to be resilient to the simulated shocks from these sources.
In terms of the domestic inter-bank market, only a few firms had some level of exposure, which was too small to create any real concern. For the cross-border impacts, it was assumed that the foreign exposures, classified by region, were eroded. The size of these losses was then matched by the capital reserves to determine the overall impact on the institutions’ capital adequacy ratio.
Overall the results suggest significant exposure to Caribbean and global affiliates, with one bank failing in each case. Losses to all other geographic regions were insufficient to erode capital levels below the eight per cent threshold.
• Information captured from recent Financial Stability Update published by the Central Bank.