LAST WEEK WE WERE TALKING about the real estate sector where prices have been falling, especially in the condominium segment which, according to Terra Caribbean’s Hayden Hutton, has experienced “a drastic reduction in trading, prices plummeting, and an overall lack of confidence in the sector.” – The Red Book, 2012 Edition, Page 103.
In 2009, the Barbados economy contracted by almost five per cent due to the impact of the global financial crisis and resulting fall-off in tourist arrivals and lack of foreign direct investment.
This led to real estate prices declining by up to 25 per cent in some segments, according to Terra estimates.
Others have put the overall fall-off in real estate values at up to 30 per cent, but however you try to calculate the average, you will probably find the decline to be significant.
The effect on Barbados’s last line of financial defence, the banking sector, has not been immune to the economic contraction we have all been experiencing, and an accurate snapshot of the sector is printed every year by PricewaterhouseCoopers East Caribbean.
Unfortunately, PWC’s annual report for last year, titled Barbados Banking Industry 2010: Performance Highlights, only came out recently – in early 2012 – about eight months later than usual, but through no fault of PWC’s. I understand that we can look forward to the edition covering 2011 by mid-year, the usual time frame.
Kudos to the firm for going through the trouble of compiling all of these figures as part of its contribution to information and analysis on the local financial sector.
Writing in the issue, PWC’s banking partner Ann Wallace-Elcock notes that there wasn’t much to celebrate in terms of profits and growth for the sector but at least there were no disasters either, adding that “Our banks remain well capitalized by global standards”.
She acknowledges that local banks hold mainly Government debt – which, as we all know, currently has a rating just above junk bond status – but she points out that “there is no indication that customers believe that their deposits are at risk,” as is the case elsewhere.
I started off by referring to the real estate sector, because mortgages – and consumer loans as a whole – are seen to be the area of business causing the banks the most concern.
Although the economy improved by about half a per cent in 2010 and also last year – results which may be closer to estimates than actual hard numbers – the financial sector as a whole increased its total provision for credit losses in 2010 by 11 per cent as delinquencies rose. As I understand it, that goes to the bottom line eventually and causes a reduction in net income.
However, the total loan portfolio remained static in 2010, at BDS$6.4 billion, according to the PWC report.
My understanding is that based on the commercial banks’ statements for 2011 published so far in the Press, the sector’s overall results were no better than in 2010. But since 2010 is long gone and PWC’s 2011 compilation won’t be out until August, let’s look at the ten-year arc of the banking sector as reported.
Boy, did it do well. Seems like if you could add two and two together (which I can’t), the sector was the place to build your career.
Net income doubled
Net income for commercial banks (that means not including finance houses) in 2001 was almost BDS$98 million. After dropping back in 2002 (effects of 9/11) it rose every year to almost double by 2008, when net income totalled almost $196 million.
That is worth a recap: commercial banks’ net income doubled in just eight years.
Then came the recession, and it has fallen since then to $188 million in 2009 and $164 million in 2010.
The engine which produced that revenue was, of course, loans. Total loans made by commercial banks also doubled in eight years, from $3.2 billion in 2001 to $6.5 billion in 2008. Similarly, total assets – of which loans are the major part – likewise doubled from almost $6 billion to $12 billion.
And of course, you are awaiting the salary totals: in 2001, commercial banks paid out nearly $96 million in salaries and staff benefits, rising every year to $148 million in 2008 and, shock! despite the recession, continuing to rise in the last two years to their 2010 position at $166 million.
So, just before I go to prepare my résumé to send out to the banks for a job (any job, please, since you obviously pay so well), let me leave you with a few performance figures from the finance companies, of which there are three reported, but only for 2009 and 2010: Consolidated Finance, Globe Finance, and Signia Financial (I understand the former CLICO Mortgage & Finance will be included under its new title, Capita Financial, in the next report).
The three noted firms had total income of $62 million in 2010 and total net profit of $11 million. Consolidated had the lion’s share of the net profit at $5.5 million, with the remainder split almost evenly between the other two: Globe $2.5 million, Signia $2.9 million.
Going forward, I understand that the inability of some homeowners to meet their mortgage payments will show up as an even bigger damper of bank profits when 2011’s results have been compiled.
When mortgages go into the non-performing category (usually after three months of not being serviced), they cause a ripple effect through the banking system in ways too complicated for me to understand but which end up affecting the banks’ bottom line for the year in question.
The matter is compounded if the new valuation on the property in such straits shows it is worth less than the amount at which it was first valued on the books. If you are a mortgage holder with a property now valued at less than you still owe for it, I believe your loan is said to be underwater.
And while we are nowhere near the percentage of underwater housing loans as, say, the United States, the rising tide is said to be a cause of increasing worry to the local banking system.
As Ms Wallace-Elcock states in the report, “While there has been no marked worsening of credit, it will remain a major challenge for the banks to ensure the quality of the new loans issued, as well as those existing.”
So if you have suspected your friendly banker of perhaps suffering from the onset of dotage in the way you have been treated lately the minute you asked for a loan or an overdraft – that is, acting as if you were a perfect stranger who had never darkened their doorstep, far less done business with them for umpteen years – perhaps the above will help to explain (but not excuse) this increased caution and conservatism.
Not to mention their demands to see every piece of paper that could prove you are who you have always said you were, no matter how long you have been their customer.
