The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

FINCO is relying on existing borrowers to “carry us through” to the end of its 2013 financial year, having suffered a “bit of a spike” in accounts over 90 days past due during the 2012 third quarter.

Tanya McCartney, managing director of Royal Bank of Canada’s Bahamian mortgage lending arm, said that with non-performing loans accounting for 11 per cent, or $98 million, of its total $848 million loan portfolio, FINCO was focused on its existing client base in the search for new lending opportunities.

“It’s going to be organic growth that’s going to carry us through this financial year and next, I believe,” Ms McCartney told Tribune Business, indicating that new borrowers were going to be few and far between.

As a result, FINCO is continuing to “leverage” its relationship with Royal Bank and other group entities, such as RoyalFidelity, in the search for new credit opportunities.

Explaining that FINCO and its affiliates were using strategies such as product ‘bundling’, where clients were exposed to a variety of lending products and offered discount rates, Ms McCartney said the mortgage provider was aiming to close 2012 having generated 4 per cent loan growth for the year.

Pointing out that this would exceed the 2.5-2.7 per cent growth rate projected for the overall Bahamian economy, Ms McCartney added that the back office efficiencies generated by the Royal Bank ties had propelled FINCO’s efficiency ratio to a “very good” 26 per cent.

While FINCO’s non-performing loans, as a percentage of the total portfolio, are below the 15 per cent industry average, they continue to act as a drag on the BISX-listed mortgage lender’s results.

For the 2012 financial year’s third quarter, which closed at end-July, FINCO suffered a 41.8 per cent net income drop, the bottom line declining from $10.624 million to $6.18 million year-over-year.

This was entirely due to a more than $6.9 million reversal on loan loss impairments, FINCO having enjoyed a $4.118 million write-back in the 2011 third quarter compared to a $2.795 million provision taken this year.

The picture was the same for the nine months to end-July 2012, with FINCO’s net income down 28 per cent at $11.177 million compared to $15.533 million the year-before.

Again, a dramatic increase in loan loss provisioning - from $1.692 million in 2011 to $15.318 million for the first nine months this year - nullified improvements in all other lines on FINCO’s income statement.

“We’re still seeing growth in the loan book, but are still challenged by the level of non-performing loans,” Ms McCartney told Tribune Business.

“That’s where we’re still seeing the challenge continue. We’re not seeing any decline in the level of non-performing loans. They are still at the same level.

“They’re at about $98 million, which is 11 per cent of our total portfolio. The industry average is 14.94 per cent.”

And, while the underlying reasons were currently unknown, Ms McCartney said recent credit trends were not providing any comfort.

“What we saw was a bit of a spike in the accounts over 90 days in this past quarter,” she added.

The non-performing loan struggles being experienced by FINCO, and the whole Bahamian commercial banking industry, will not ease until jobs and the overall economy resume a strong growth path.

“The reality is there are only two things happening in the economy - Baha Mar and the roadworks,” Ms McCartney said. “Unemployment is still very high, and until we see some change in the economy we’re going to see these trends with non-performing loans.”

Still, FINCO has been able to eke out modest loan portfolio growth. New credit demand for 2012 to-date has been 3 per cent, and Ms McCartney said the lender was “looking at nearing 4 per cent” loan book growth by year-end on October 31, 2012.

“It’s 3.67 per cent,” she added of the current growth rate. “That’s good in an economy that’s only projecting 2 per cent growth. It’s good in this environment.”

Pointing out that FINCO was in the middle of its summer mortgage campaign, Ms McCartney told Tribune Business: “It’s going well to the extent that what we’re trying to do is encourage clients to bundle.

“If you are getting a mortgage, and do online banking and have a credit card from Royal Bank, we can package to give you a better rate. We’re really leveraging the relationship with the parent company.

“We had a Home and Car Expo in Freeport last weekend that went pretty well. We were able to add a significant number of loans to our pipeline, but they are targeted opportunities as opposed to mass market opportunities. It’s really our existing client base, and we want to hold them close.”

The Royal Bank connection, with the Canadian institution holding a 75 per cent majority stake in the company, has also helped FINCO on the expenses side.

“Our efficiency ratio has also improved, as what we’ve done is really leverage the relationship with Royal Bank to improve back office efficiency,” Ms McCartney told Tribune Business.

“My efficiency ratio is at 26 per cent, which is very good.”

FINCO’s non-interest expenses, both for the 2012 third quarter and first nine months, were down by 7.9 per cent and 5.6 per cent, respectively, at $3.067 million and $9.079 million.

Interest income was up by more than $500,000 for the 2012 third quarter at $17.55 million, while for the first nine months it was ahead 6.9 per cent at $52.939 million.

Aided by 75 basis points cut to the Bahamian Prime rate in 2011, FINCO’s margins were boosted by the drop in interest expenses, as deposit rates fell accordingly.

For the first nine months, interest expense fell by 20.5 per cent from $25.425 million to $20.218 million, with the result that FINCO’s net interest income rose 35.9 per cent to $32.72 million.

With non-interest income flat, FINCO’s gross revenues for the first nine months of its 2012 financial year were up 32.5 per cent at $35.574 million compared to $26.845 million for the same period last year.