The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bank of the Bahamas International yesterday confirmed it had joined the industry trend of focusing on higher-yielding consumer loans, growing these to 15 per cent of its portfolio after the recession hits its “major jewels in the crown”.

Paul McWeeney, the BISX-listed institution’s managing director, told Tribune Business that the mortgage and commercial loans sectors - the two it had traditionally concentrated on - had been “hit hardest” by the economic downturn.

Disclosing that consumer loans had previously accounted for less than 10 per cent of its $710.177 million net loan book, Mr McWeeney said the renewed attention to this segment had helped to drive an 11.4 per cent increase in interest income during the 2013 first quarter.

Elsewhere, Mr McWeeney told this newspaper that the decision to redeem $10 million, or 50 per cent, of its mortgage-backed bonds would save Bank of the Bahamas International $750,000 in interest costs per year.

He confirmed that the bank was planning to redeem the remaining $10 million during the first half of 2013, subject to the post-Christmas liquidity position, given that this would translate into savings of $1.4 million per year.

And, while loan loss provisions for the three months to end-September 2012 more than doubled year-over-year to $2.418 million, Mr McWeeney said the operating income increase more than offset this to ensure quarterly profits beat internal expectations.

He told Tribune Business that had it not been for the additional provisions it “probably would have been the best first quarter in the history of the bank”.

Attributing the 2013 first quarter performance to improved margins, resulting from a ‘settling down’ of interest rate spreads following May 2011’s Bahamian Prime rate reduction, Mr McWeeney revealed that the bank’s top line had also been boosted by the increased consumer loan emphasis.

Interest income rose from $14.507 million to $16.156 million, and Mr McWeeney said: “That had more to do with some consumer loans we did, debt consolidation loans.

“We set out trying to focus more on retail banking than commercial lending. That is higher yielding, and some of it’s new business from other institutions.”

Explaining the switch from Bank of the Bahamas’ traditional concentration on mortgage and commercial/industrial loans, Mr McWeeney added: “These are the two areas being hit hardest in this recession.

“In the past we always viewed mortgages as the major jewel in the crown, but these are the ones that have been failing, and if you can advance consumer credit in a prudent manner without creating [risk], you’ll be OK.”

Mr McWeeney said Bank of the Bahamas International’s consumer loans were secured by salary deductions.

Confirming that they were “a growing percentage” of the bank’s overall loan book, he added: “It’s about 15 per cent now. Before, it was less than 10 per cent.”

As for the BISX-listed institution’s mortgage-backed bonds, Mr McWeeney told Tribune Business: “The plan is to redeem all of those if it’s within the capacity of the bank to do so without materially impacting the liquidity position.”

Noting that liquidity was key to withstanding high levels of loan arrears, he acknowledged that it “tends to tighten” in the run-up to Christmas, as businesses stock up on inventory and consumers prepare for shopping at home and abroad.

Confirming that redemption of the outstanding $10 million would only take place in 2013, Mr McWeeney said: “If we get back to this liquidity position early in the year, we can do so without putting any strain on liquidity management.

“The benefit of that is that we save another $750,000 a year; $1.4 million in total.”

He added that Bank of the Bahamas International no longer had any need for the mortgage-backed bonds due to its “healthy equity base”, the bonds having previously matched corresponding assets.

Their redemption would also “delever the balance sheet, ensuring we become a lot leaner”.

Mr McWeeney also divulged that Bank of the Bahamas International was aiming to “kickstart” the gradual replacement, over a 10-year period, of the $30-$35 million in preference share capital on its balance sheet.

This is required to bring Tier 1 common equity capital components into line with the latest Basle reforms, and he explained: “We anticipate some capital modifications taking place next year.

“Most banks have to do away with preference shares, or compensate for those preference shares, and we have put in place a plan that will go into effect next year. Once you have a plan in place, you have a 10-year schedule to eliminate them.”

Noting the 129 per cent year-over-year increase in Bank of the Bahamas International’s first quarter loan provisions to $2.418 million, compared to $1.055 million the year before, Mr McWeeney said: “We anticipated provisions would be elevated again this year.

“We had anticipated that the revenue base would be higher, but provisions, while not as high as last year, would still be needed.”

Acknowledging that this reflected the still-high unemployment levels and weak economy, Mr McWeeney expressed concern that the “prolonged” downturn meant hard-pressed borrowers were running out of cash and home equity resources to maintain payments.

With deposit rates now all “recalibrated” to reflect the Prime rate drop, Mr McWeeney Bank of the Bahamas International also received a first quarter boost from its card platform.

“We’re starting to see some traction in the card platform with our new service provider, EDX out of Arizona,” he told Tribune Business. “We’ve been able to get better rates, and improve our margins in that area of merchant services.

“All of these contributed to the trends and success experienced in the first quarter. The results sort of came into line, and were maybe slightly above our predictions."

While cautious on the remaining nine months of 2012, Mr McWeeney was optimistic that “things are not getting any worse”.

Bank of the Bahamas International was continuing to “build capacity”, as evidenced by its Carmichael Road branch opening, and “watching every penny” when it came to controlling expenses.

“It really is tough,” Mr McWeeney told Tribune Business. “I’ve been in banking 30 years, and never seen it like this. It’s almost like Chinese torture. It’s dragging on, dragging on, dragging on, and the longer it goes on the more provisions you have to make.”