The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamian commercial banking is facing an estimated 169 per cent increase in its total tax burden to $43 million, Tribune Business can reveal, a development that could result in further lending and economic contractions.

Calculations shared with this newspaper by a Bahamian banker, on condition that they remained anonymous, noted that under the pre-existing asset-based fee structure, the Government earned around $16.05 million in revenue from the commercial banking industry in 2012.

Now, with the addition of a 3 per cent Business Licence fee levied on a bank’s interest and fee-based income, the banker’s calculations showed this would have increased the Government’s 2012 tax take by more than $27 million.

Describing this ‘more than doubling’ of the industry’s tax contributions as “an enormous burden”, the banker said it was likely to further reduce commercial bank “lending appetite”.

This, in turn, would inhibit lending to businesses for expansion and investment, they suggested, further harming the Bahamas’ economic growth and recovery prospects.

Noting that Bahamian commercial bank returns on equity capital were the lowest in the region, the banker said the individual banks might respond by increasing consumer fees and charges - as Scotiabank (Bahamas_ has already done - or cutting overhead, such as staff numbers.

“The idea that nothing is going to change is foolishness. It’s amazing to me,” the banker said of the Government being seemingly oblivious to the reaction to its tax increases.

“Everybody is going to have to do something. The banks are going to have to go back to the drawing board and say: ‘How are we going to make up for this?’.”

Acknowledging that the Government was “desperate for revenue”, the banker added: “They’ll force the banks to review their expense structures and what they do.

“We’re in a period of retrenchment, not expansion, and forced austerity will have an impact on the economy”.

The banker also pointed out that the 3 per cent Business Licence fee, due to being simply applied ‘across the board’, was a regressive, “not progressive”, tax.

They explained to Tribune Business it would have a “disproportionate” effect on the smaller Bahamian-owned banks, all of which are publicly traded, as their relative lack of economies of scale meant they would be “hit much harder”.

A perfect example is Bank of the Bahamas International. Under the new tax regime, its 2012 net income of $1.213 million would have been dwarfed by a $3.243 million total tax burden, plunging it - and its Bahamian shareholders - into a multi-million dollar loss if preventative action was not taken.

And, ironically, Bank of the Bahamas International is 51 per cent majority-owned by the Government, via a combination of the Treasury and National Insurance Board, making this a classic case of ‘shooting yourself in the foot’.

Based on the calculations sent to Tribune Business, these are the existing and new commercial bank tax payments based on each institution’s 2012 results.

• CIBC FirstCaribbean - From $3.75 million to $9.734 million

• Commonwealth Bank - From $1.8 million to $7.072 million

• Scotiabank (Bahamas) - From $3.75 million to $8.383 million

• FINCO - From $1.2 million to $3.289 million

• Bank of the Bahamas - From $1.2 million to $3.244 million

• Fidelity Bank - From $600,000 to $1.708 million

• Royal Bank of Canada (estimated) - From $3.75 million to $9.734 million

As a percentage of average annual net income between 2007-2012, the banker’s calculations show the new industry tax burden would account for 65 per cent of Bank of the Bahamas’ annual net income.

It would also have eaten up an average 55 per cent of Fidelity Bank’s net profits, and 27 per cent and 21 per cent,, respectively, of Scotiabank (2011-2012 only) and FINCO’s bottom line.

But the commercial bank industry is unlikely to elicit much sympathy from the Bahamian public, though, given the widely-held notion - fostered by politicians - that the sector has made enormous profits “on the backs of the Bahamian people”.

There is also fairly widespread agreement that the commercial banking sector - especially the three Canadian-owned banks, Royal Bank of Canada, CIBC FirstCaribbean and Scotiabank (Bahamas) - has been ‘under-taxed’.

The real danger, though, may not be the imposition of a 3 per cent Business Licence by itself but the context in which this is taking place.

Burdened by $1.285 billion in total loan arrears, with more than one in every $5 lent in default (some $681 million is mortgage arrears), the banking industry has also been squeezed by $408 million in enforced loan loss provisions.

Added to this is the further uncertainty created by the Government’s proposed Mortgage Relief Plan and Homeowners Protection Bill, the latter of which threatens to fundamentally alter the banks’ risk-reward calculation on mortgages - and not for the better.

Any further pull back in lending would deprive the Bahamian economy of much-needed revival juice, in the shape of liquidity and credit, while also depressing the vital housing, real estate and construction industries.

Summing it all up, the banker said in a written note to Tribune Business: “I am not sure that the boffins at the Ministry of Finance did their analysis using individual bank size and results. The implications are evident - the new tax is 169 per cent over what the banks were paying.

“This enormous burden is on top of the massive provisions banks are booking for delinquent loans. The policymakers are focused on the money banks make, but they fail to take into account how much the banks make based on the risk capital that they have deployed.

“The percentage return on equity capital is lower than elsewhere in the Caribbean.”

Data provided to Tribune Business shows that the average return to bank shareholders between 2007-2012 has varied between a low of 5.92 per cent for Bank of the Bahamas International, and 29.15 per cent for Commonwealth Bank. These returns, this newspaper was told, are likely to “get worse” with the new tax regime.

The banker added: “The stark choices the banks have is to reduce their risk appetite (lend less) and reduce expenses (people account for 50 per cent of overhead).

“International banks will move their overseas assets that they currently book in the Bahamas to other jurisdictions. More importantly, the Bahamas needs funding for economic recovery to take place. Instead, the Government of the Bahamas will force austerity to prevail, with a domino effect on employment and real estate asset prices.”