The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Fidelity Bank (Bahamas) yesterday warned that its 2013 second half performance was likely to “deteriorate” due to the impact of its new $1.2 million Business Licence fee, a development that will triple its tax burden.

Speaking after a first half that should have been cause for celebration, with total comprehensive income up 41.7 per cent, Anwer Sunderji, the BISX-listed bank’s chief executive, said the Government’s Budget would make the final six months “more challenging”.

Confirming that the new 3 per cent Business Licence fee for commercial banks would cost Fidelity Bank (Bahamas) “about $1.2 million annually”, Mr Sunderji told Tribune Business the new tax was still shrouded in much uncertainty.

Emphasising that it was his understanding that commercial banks could pay the Business Licence fee quarterly, he added that the industry was “awaiting clarification” on how it would be determined.

The sector’s initial expectation, Tribune Business understands, is that the Business Licence will be calculated on the combined value of interest income and fees/charges.

Summing this all up, Mr Sunderji said in a statement that the Business Licence fee “will very substantially impact profitability in the banking sector in general, and the smaller institutions in particular.

“It will also skew the risk/reward equation and force banks to address costs and risks. Fidelity’s fee will likely more than double what it pays just now.”

Under the existing asset-based tax structure, which commercial banks will still have to pay, Fidelity Bank (Bahamas) pays the Government around $600,000 annually.

The estimated $1.2 million Business Licence will thus take its total annual tax burden to around $1.8 million, triple what it pays now.

Disclosing that the Clearing Banks Association (CBA) had lobbied the Government to “reconsider” the new 3 per cent Business Licence fee, Mr Sunderji added: “If the Government maintains the proposed fee structure, then the performance metrics for the second half of 2013 for the bank will likely deteriorate.”

Changes to the Government’s tax and other banking sector policies overshadowed what was a relatively successful 2013 first half, as Fidelity Bank (Bahamas) total comprehensive income rose year-over-year from $3.091 million to $4.38 million.

The only downside for the first six months was the 125 per cent increase in loan loss provisions to $2.3 million, reflecting the continued difficulty many borrowers - especially mortgage holders - are having in servicing their loans.

“The results were consistent with our expectations, although the substantial increase in loan loss provisions was not fully anticipated,” Mr Sunderji told Tribune Business, in response to this newspaper’s questions.

“The continued deterioration in our mortgage book was the primary reason. But we also saw deterioration in the consumer loan book. Until we see a sustained recovery in employment, it appears that we can expect the delinquency levels to continue to grow.”

Mr Sunderji added that non-performing loans, those 90 days past due and upon which the bank has stopped accruing interest, now stand at roughly 8 per cent of Fidelity Bank (Bahamas) total loan portfolio.

That remains well below the industry’s 14-15 per cent non-performing average, but Mr Sunderji confirmed that the 20 per cent delinquency rate associated with mortgages had forced Fidelity Bank (Bahamas) to diversify away from its traditional roots in this category.

He disclosed to Tribune Business that consumer loans now account for 55 per cent, or the majority, of the bank’s $295.455 million credit portfolio.

“It has become evident that the severity of the recession has increased operating risks for all businesses, and the Bahamian experience shows that mortgage lending has become a riskier business, with delinquency rates topping 20 per cent,” Mr Sunderji said.

“All businesses will have to adapt to this new reality of higher operating risks, lower revenue streams and higher expenses.”

Meanwhile, Mr Sunderji disclosed that the few successful applicants for the Government’s initial Mortgage Relief Plan have effectively been sent back to the drawing board.

With the Government redesigning the scheme in the hope more persons qualify, Mr Sunderji said those who qualified first time now have to reapply.

“We understand that they have to requalify under a revised plan that will be announced soon,” he told Tribune Business.

“The Government-sponsored Mortgage Relief Programme is back at the drawing board for retooling, as not many delinquent mortgagors qualified. Regrettably, those of the bank’s borrowers that did continue to be in limbo and will have to reapply under revised rules when they are announced.”

For the 2013 first half, Fidelity Bank (Bahamas) return on average assets (ROA) improved to 2 per cent, while return on average ordinary share equity (ROE) to 20 per cent.

Its efficiency ratio, which measures the percentage of operating revenue consumed by operating expenses, improved to 52 per cent, as operating costs were largely kept in check.

The bank’s total assets grew by 13 per cent from year-end 2012 to $435.8 million, while net loan assets rose by 6 per cent to $295.5 million as at June 30, 2013.

Looking to the future, Mr Sunderji said the Government’s plan to implement Value-Added Tax (VAT) by July 1, 2014, would likely further inhibit economic recovery as businesses coped with increased costs.

And, with companies and consumers having to deal with this, he predicted that Bahamian commercial banks would take longer to deal with their non-performing loan pile and repair balance sheets.

“The bank.... remains hopeful that the Government will scale back its proposed increases in fees and work more closely with the industry to mitigate the severe impact of the recession on businesses in general, and the economy in particular,” Mr Sunderji said.

“Ultimately, banks play a critical role in any economic recovery and need to be seen as committed and reliable partners.”