The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

While expressing hope that Commonwealth Bank’s loan loss impairments would “taper down” in 2013, its managing director yesterday conceded that persistent unemployment meant it faced “a challenging three-six months ahead” in this area.

Speaking to Tribune Business after the BISX-listed institution unveiled an 88.3 per cent growth in loan loss provisions to $30.699 million for the nine months to end-September 2012, Ian Jennings said the rise reflected the fact that borrowers previously on “the knife’s edge” were increasingly falling off.

The loan impairment expense rise prompted a 24.5 per cent decrease in Commonwealth Bank’s year-over-year comprehensive income, and Mr Jennings disclosed to Tribune Business that the bank, too, had no distressed borrowers who qualified for the Government’s Mortgage Relief Plan.

Looking ahead, Mr Jennings said he expected Commonwealth Bank and the wider commercial banking industry to face “more of the same” in 2013 with “more belt tightening for everybody”.

He predicted another “couple of hard years” ahead, barring any major turnaround in the economy prior to Baha Mar coming on stream in 2015.

But, on the positive side, Mr Jennings told Tribune Business that Commonwealth Bank was achieving efficiency ratios in the “low 40 per cents”, well ahead of its 50 per cent target.

And, from an operational perspective, the BISX-listed institution had enjoyed a “good nine months”, with all income and balance sheet line items showing largely positive improvements. The only drag, as with the rest of the Bahamian commercial banking industry, are the loan loss provisions.

Mr Jennings explained that the heightened provisions reflected both the anemic economy and that many customers previously aided, via loan restructurings, remained unemployed with no prospect of servicing their debts.

“They’ve gone through the process of restructuring and assistance, but after they’ve gone through six-12 months of assistance, and are still unemployed, the loan impairment expense has to ultimately be adjusted to reflect that,” Mr Jennings said.

“The situation is that 2011 was a pretty high [loan impairment expense] number, 2012 is even higher, and there’s going to be no dramatic change until we see a recovery in employment. We’ve got a lot of customers who’ve been trying to make ends meet but can’t.”

Mr Jennings said loan delinquencies had appeared to deteriorate in late 2011, and this seemed to coincide with when the Bahamas Telecommunications Company (BTC) switched its pre-paid phone card distribution from street vendors to in-store electronic top-up.

“From the time the streets were covered with them, and then they disappeared, we’ve seen things worsen since then,” Mr Jennings said. “Household income is down, and we’re seeing a reflection of that. It [phone card vending] added more to household income than we understood it to.”

Staff turnover at major employers such as Atlantis had also increased, meaning job security was reduced, another factor playing into increased loan loss expenses.

The protracted time taken to sell distressed real estate subject to mortgage loans was only a small part of Commonwealth Bank’s impairment increase, Mr Jennings said, as its $250 million mortgage portfolio was less than 25 per cent of the consumer credit-focused institution’s total portfolio.

And many of those distressed properties still retained positive equity.

Questioning whether Hurricane Sandy’s impact on the Bahamas’ core US east coast tourist markets might make things worse by depressing the peak winter season, Mr Jennings said that while the economy was showing signs of a slow recovery, “we’ve come down so far that we’ve got a long way to recover”.

He added: “There’s a question of how many years, decades, it will take to get back to the days of 2007-2008. A long, tough haul continues.”

Asked by Tribune Business whether Commonwealth Bank’s heightened loan loss provisioning was expected to continue into 2013, Mr Jennings said: “We would anticipate it would taper down.

“Precisely when it will taper down we’re not sure, but we think we’ve got a challenging three-six months ahead.”

With Baha Mar not set to become fully operational until 2015 effectively, the Commonwealth Bank chief added: “We’ve got another couple of hard years ahead.”

Mr Jennings said debt servicing problems stemmed from a variety of issues, such as persons working but at lower income/salary levels than previously; spousal unemployment; divorce, which had left only one partner’s income taking care of the loan; and unemployment in the wider family.

“I think we’ve seen more of an increase than we’d anticipated in the loan impairment expense,” Mr Jennings said. “But relatively we’re doing very well. We’re just about to pay a December dividend, and through this we’ve been able to maintain all dividends, so we’ve got to be thankful for what we have.

“Operationally, it’s been a good nine months. The high liquidity continues to depress interest expense. We’ve been able to maintain efficiency of operations, and the three Saturday banking branches continue to meet demand.”

Mr Jennings said Commonwealth Bank was ahead of its target, which was to have an efficiency ratio below 50 per cent. The current metric stands in the low 40 per cents.

He conceded, though, that Commonwealth Bank “falls pretty much in the same group” with Scotiabank (Bahamas) and Bank of the Bahamas International in having no borrowers who qualify for the Government’s Mortgage Relief Plan as presently structured.

Again, he pointed out that the bank had largely restructured the loans of those still able to service them on new terms.

Looking to the New Year, Mr Jennings said Commonwealth Bank was focusing on an expansion of its Oakes Field branch, with customer demand having outgrown the existing premises.

Noting that the bank was looking to bring all its branches “up to standard”, Mr Jennings said: “When that branch was built in 1988, we thought that would be the largest ever needed, but with the location on that roundabout it does not have enough space, and we will be adding to it as economically as we can to relieve the tension and stress of customers.

“That will be the building project for 2013 or 2014. A renovation is always more difficult than anticipated. We don’t have a start date, and are still in the drawing stages.”