The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bank of the Bahamas International has room to increase its non-credit services’ revenue share by 30 per cent over the next five years, its managing director yesterday saying investments in this area were starting to “pay off” with results trending “upwards”.

Speaking to Tribune Business after the BISX-listed institution unveiled a 60.7 per cent drop in net income available to ordinary (equity) shareholders for its 2012 financial year, Paul McWeeney said the bank was still continuing to “add shareholder value” via its investments in electronic, fee-based banking.

Pointing out that many rival institutions were seeing reduced shareholder value, Mr McWeeney - while declining to go into specifics - said results for Bank of the Bahamas International’s 2013 first quarter were “proving” his expectations of a better year correct.

He also revealed to Tribune Business that Bank of the Bahamas International was currently testing a mobile banking application, part of upgrades to its online banking platform,

Bank of the Bahamas International’s long-awaited Carmichael Road branch was set to open next month, with the institution looking to more than double its off-site Automated Banking Machine (ABM) network to seven after its Arawak Cay location went live.

And Mr McWeeney disclosed that the bank was aiming to redeem the remaining $11.5 million in mortgage-backed bonds remaining on its balance sheet by the 2013 year-end on June 30.

Some $9.5 million has already been returned to investors, and Mr McWeeney said the strategy was intended to deleverage the bank’s balance sheet and acquire cheaper forms of funding, such as bank deposits.

Bank of the Bahamas International’s net income for the 12 months to end-June 2012 was down 17.4 per cent year-over-year, dropping from $4.452 million to $3.677 million.

Telling Tribune Business the bank missed internal bottom line projections by around 10 per cent, Mr McWeeney said this had largely been caused by accounting treatment changes related to its mortgage indemnity product.

As reported by this newspaper on Friday, Ernst & Young, the bank’s auditors, noted this meant it had “understated its credit loss expense and overstated other operating income from [its] mortgage indemnity product” in its 2011 financial statements.

“It was slightly off in terms of expectations, mainly because adjustments had to be made with the mortgage indemnity insurance,” Mr McWeeney said of the 2012 financial performance.

“If not for that, we would be within budgeted expectations. We were not off much; I would probably say above 10 per cent off.”

Bank of the Bahamas International’s income statement was also affected by the 6.6 per cent increase in credit (loan loss) expense to $10.215 million.

And a more than $1 million increase in dividends paid to preference shareholders, up from $1.363 million to $2.462 million, reduced equity shareholders’ net income from $3.09 million in 2011 to $1.215 million this time around.

Acknowledging that equity investors had seen a reduction in their returns from $0.20 earnings per share (EPS) to $0.08, Mr McWeeney responded: “The important aspect, the bottom line, is yes, it may be down, but we continue to add value when many banks in this business have diminished value.

“We continue to improve the value of shareholders’ investments. It’s not as great as before, but we expect things to move upwards this year. There are developments proving that opinion to be right at this point in time, but it’s still early in the year.

“I believe 2013 will be a much better year, because we’ve changed the business model to suit the new environment.

“We won’t see an improvement in the elevated non-accrual rate until we see an improvement in the unemployment rate in the country. That’s the new norm, and I don’t see any change on the horizon at all.”

Mr McWeeney said the increased preference share dividends was a ‘timing issue’, related largely to when the Central Bank of the Bahamas approved such a payment.

“The book value of the shares continues to rise,” he told Tribune Business, attributing this to “the investment in technology over the last several years, the new services. The fact we are controlling expenses is also starting to pay more positive benefits.”

With the Arawak Cay ABM making three such off-site locations, after Phil’s Food Services and Lynden Pindling International Airport (LPIA), Mr McWeeney said Bank of the Bahamas International was seeking to add another four in New Providence.

He added that the bank was revising its Family Island strategy, looking to “source inexpensive ABMs” that could then be installed to serve the “unbanked” communities in remote locations.

Mr McWeeney said Bank of the Bahamas International also hoped to open its Carmichael Road branch next month, something that would build capacity, while that location’s “operations infrastructure is already incorporated” due to the staff being on its payroll currently.

With high non-accrual loans set to remain for some years to come, Mr McWeeney said: “We are confident other business we are generating is starting to offset that.

“The credit card platform, the processing platform, the entire electronic banking platform, non-credit initiatives ate starting to produce the results we envisioned.”

Bank of the Bahamas International has set a target of generating 50 per cent of total revenues from non-credit products by 2017.

“Right now, that level is around 20 per cent, so there is a long way to go,” Mr McWeeney told Tribune Business. “That shows you the significant potential we have to improve the revenue base.

“We’re in the process now of developing private label cards for major institutions. They happen to be financial services-related, but we are talking to other institutions about doing similar projects.”

While Bank of the Bahamas International would continue to modernise its branches, installing self-service machines, Mr McWeeney added that it was set to 
“roll-out an updated version of our online banking platform that has a mobile banking application. That’s being tested right now”.

The Bank of the Bahamas International chief said it aimed to launch the mobile banking functions before 2012 year-end, providing customers with e-mail alerts once balances reached a certain level, and the ability to top-up prepaid cards.

“I believe that electronic banking will take over banking in the next 10 years,” Mr McWeeney said.

Explaining the decision to redeem $9.5 million worth of mortgage-backed bonds after the 2012 year-end, he told Tribune Business: “It’s really a strategy to redeem all the mortgage-backed bonds, so hopefully we will redeem the [$11.5 million] balance before the end of this financial period.

“It’s about efficiency. We think we can better build the balance sheet by utilising less expensive means. That’s part of the deleveraging strategy to redesign the bank.”

Mr McWeeney said Bank of the Bahamas International was well protected against loan losses, having $35 million in such provisions on its balance sheet.

The over $10 million in provisions taken in 2012 added to a similar amount from the year before. Some $5 million in retained earnings had also been set aside for this purpose, along with $3 million via a portfolio assessment of undefined credit risk.