The Tribune

By NEIL HARTNELL

Tribune Business Editor

DESPITE recovering "in excess of" 80 per cent of the outstanding principal 0n distressed property sales, FINCO's managing director yesterday said the mortgage lender was forced to take a $9.1 million second quarter provisioning hit because such sales were typically taking three years to close.

Tanya McCartney told Tribune Business that the BISX-listed lender, which is 75 per cent majority owned by its Royal Bank of Canada parent, was forced to alter its loan loss impairment policy to account for "the time value of money" due to the average three-year wait to sell distressed real estate via its mortgage powers.

Explaining that FINCO's previous impairment policy factored in just a one-year period for selling distressed properties, Ms McCartney said the $9.1 million adjustment was entirely responsible for propelling the mortgage lender to a $2.196 million net loss for the three months to end-April 30, 2012.

That represented an almost-$9 million reversal from the $6.722 million in net income recorded during the year-before comparative period, with impairment losses for the 2012 second quarter jumping to $11.504 million as opposed to an $842,361 reduction in 2011.

For the 2012 first half, despite loan loss provisions more than doubling from $5.81 million to $12.523 million, a 115.5 per cent increase, FINCO still managed to produce a 1.8 per cent net income increase to $4.997 million.

Meanwhile, Ms McCartney told Tribune Business that while FINCO's non-performing loans collectively totalled "just over $90 million", accounting for 11 per cent of its total $847.515 million mortgage portfolio, the latter ratio was still below the industry average of just under 14 per cent.

Emphasising that FINCO was continuing to control costs, with its efficiency ratio standing at a strong 26 per cent, Ms McCartney added that the average age of non-performing loans was more than seven years. This, she explained, indicated that new home loans it was writing were for good borrowers only.

Explaining that the $9.1 million provisioning increase would likely "go back into profit" once the economy turned around, and FINCO's clients became current with their obligations, Ms McCartney said of the provisioning adjustment: "That's based on what we see as the amount of time to recover on the distressed properties.

"Even though we're selling the properties, and we're generating in excess of about 80 per cent of the principal outstanding from the sales, they're averaging roughly three years to move.

"They're taking long to move, so we have to factor the time value of money into provisioning levels. We used to factor in one year, but it looks like it's taking three years now. We have to factor in how long it takes to move these properties."

The extra 'lag time' before a sale is achieved is due to a depressed economy and real estate market, together with a surplus of properties that are available for sale.

Still, Ms McCartney said FINCO's provisioning levels were in line with the Bahamian commercial banking industry average, and the mortgage lender was careful not to be over or under-provisioned.

Confirming that the BISX-listed lender was monitoring its mortgage portfolio closely, she added: "There aren't new loans that are going bad. It tells us that the credit we're now writing is consistent with our policies.

"The average age on non-performing loans that we see going into our Collections Centre exceeds seven years. When we look at them, it's self-employed persons, persons from the tourism and construction sectors. Those are the ones being impacted by the downturn in the economy."

The FINCO managing director said the mortgage lender had seen "some stabilisation" in its non-performing loan book, which was neither increasing nor decreasing, and she expressed hope this would continue.

And, although FINCO had more than 400 distressed properties on its books, she added that the lender was focused more on restructuring customer loans when the opportunity presented itself, rather than selling homes, as this achieved "better results".

Although FINCO achieved growth of just over $5 million, or 3 per cent, in its loan book during the 2012 first half, Ms McCartney said it was focusing on its existing client base for further lending opportunities.

It was also "leveraging partner relationships" within the Royal Bank group and targeting "centres of influence" to maximise its search for new clients.

Ms McCartney said FINCO was looking to capitalise on client referrals from Royal Bank's consumer lending (retail) and wealth management arms, plus RoyalFidelity Merchant Bank & Trust.

"Outside the partner base, we're staying close to centres of influence - real estate developers, attorneys, accountants and professionals," she explained of FINCO's strategy.

"We've been able to keep expenses down, and our efficiency ratio is about 26 per cent, which is very good. We've put in a lot of effort around cost containment, managing expenses and growing net interest income.

"We're focusing on delinquency management, growing the loan book at a modest pace with a focus on credit quality, and leveraging partner relationships and centres of influence to grow the business."

For the six months to end-April 2012, Ms McCartney said pricing power on some mortgage products, together with loan book growth and credit recoveries, had helped to increase interest income year-over-year from $32.474 million to $35.388 million.

And, with interest expense dropping to $13.794 million from $17.198 million, aided by system liquidity and the drop in Bahamian Prime from last May, net interest income for the 2012 first half rose from $15.276 million in 2011 to $21.594 million.

Ms McCartney said the high commercial banking system liquidity was also likely responsible for FINCO's cash balances increasing from $33.346 million at year-end 2011 to $52.528 million at April 30, 2012.

"All the banks have reduced their deposit rates, so it's difficult to shop around for a better rate," she added. And, with customer deposits growing from $807.57 million to $825.58 million during the 2012 first half, the FINCO managing director explained that Royal Bank sometimes referred such clients to FINCO "where we may be able to price a bit better".

And, with no dividend paid to shareholders for the 2012 second quarter, Ms McCartney explained: "Ideally we want to make sure we give a return to shareholders, but we have to account for the economic realities and the fact delinquency levels remain high."