The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bank of the Bahamas yesterday revealed that last month’s 2.2 percentage point increase in the unemployment rate caused a $700,000 one-time spike in its credit loss provisions, as it warned shareholders to brace for more potential losses.

Addressing investors after they suffered a collective $6.217 million net loss on their equity investments in the BISX-listed bank, Paul McWeeney, its managing director, effectively delivered a profits warning and said: “By no means are we out of the woods.”

Mr McWeeney told Tribune Business that the unemployment-induced spike in credit loss provisions was equivalent to almost 50 per cent of the $1.5 million general reserve taken for the full-year to end June 30, 2013.

He used this to illustrate how Bank of the Bahamas International’s performance, both for that year and the current one, continued to be impacted by the weak economic environment and jobless rate - issues the institution has no control over.

The main contributor to the bank’s $0.35 loss per share for the year to-end June 2013 was the 107.6 per cent increase in loan loss provisions, which more than doubled from $10.215 million to $21.205 million year-over-year.

Bank of the Bahamas International previously specialised in mortgages and commercial/industrial loans, two segments of the credit market that have been hit hardest by the recession.

Bahamian commercial banking industry sources told Tribune Business yesterday that Bank of the Bahamas International’s net loss for ordinary shareholders “came as no surprise”.

One said: “I think they’re going to see those results for several years as they work their way through the loan book. It’s going to be a painful process.”

This was emphasised by Mr McWeeney’s October 31, 2013, letter to Bank of the Bahamas International shareholders, which warned them that more ‘bad news’ might be forthcoming as the institution worked its way through its non-performing loan portfolio.

“By no means are we out of the woods,” Mr McWeeney said. “The recent announcement of an increase of 200 basis points in the unemployment rate is a clear reflection that risks continue to grow.

“In this environment we must remain steadfast to the basic principles of sound business and banking practices. Stability is the focus of the day. Therefore, loan loss provisions will continue to be recognised as deemed appropriate to insulate the balance sheet and business from the realisation of inherent business risks.”

And the Bank of the Bahamas International managing director added that the 2013 performance, which produced a $3.754 million net loss and $3.513 million comprehensive loss, was “primarily the consequence of the great recession and its lingering impact on businesses and the general consumer.

“Although we do not expect a quick recovery from this position, every effort will be spent on developing new strategies to improve operational efficiency, grow revenue and formulate new credit solutions and services for customers, so that we may be better positioned to claw back into profit these loan loss provisions in the future.”

Mr McWeeney yesterday told Tribune Business that focusing on the $6.217 million net loss to equity investors was “a negative way” to look at Bank of the Bahamas International’s 2013 performance, pointing out that shareholders had enjoyed 20 consecutive years of profitability.

“We still have a very strong equity base absorbing whatever hits it,” he added. “We’ve been around for 25 years, spent the last 21 years being profitable, and will have years like this. These things happen. We’re fortunate to be prepared for it.”

Mr McWeeney pointed to the $31.5 million in new capital raised from its majority shareholder, the Government, in the last financial year.

This, he said, boosted total equity to $142 million at the June 30 year-end, including $29 million in retained earnings.

The latter dropped year-over-year by almost 18 per cent, from $34.778 million to $28.561 million, as Bank of the Bahamas International absorbed the hit to its bottom line.

When it came to the major increase in loan loss expenses, Mr McWeeney told Tribune Business: “We had to do this. We cannot ignore the reality. The outlook is very weak.”

Explaining the one-time spike in loan loss provisions following the bad unemployment news, the Bank of the Bahamas International managing director said its credit portfolio reserve, known as a general reserve, was based “solely on economic data”.

“This recent announcement of an increase in the unemployment rate, that caused an increase in provisions right there,” he told Tribune Business. “That component of the formula drove an increase to general provisions of $700,000 alone.”

That compared to $1.5 million in general reserve provisions taken by the bank in 2013, and Mr McWeeney said it felt this was “the prudent thing to do”, although unsure if other institutions are following suit.

He added that while Bank of the Bahamas International was “working through” its non-performing loan portfolio, which at end-June totalled $118.925 million or 16.18 per cent of its $735 million total credit portfolio.

Non-performing loans jumped by 39 per cent year-over-year from 2012’s $85.448 million, which represented 12.43 per cent of Bank of the Bahamas International’s loan portfolio then.

The size of the jump, more than $33 million, explains why Bank of the Bahamas International’s credit loss provisions more than doubled, with the bulk of the problems in its mortgage book, followed by commercial loans.

Mr McWeeney said that even if clients came in an updated a delinquent loan, Bank of the Bahamas International had to wait three-six months, under Central Bank of the Bahamas regulations, before it could record it as ‘performing’.

“We have made some progress on some of these accounts, but can’t show it yet. We have to show payments are viable and sustainable, even though we are confident they are,” he added.

Mr McWeeney said he was “fairly optimistic” that 2015 would bring signs of a turnaround, with Baha Mar’s first full year of operations bringing growth and a reduction in the jobless rate.

“We’ve got to have hope. We can’t give up,” he added.

The thrust of Mr McWeeney’s message to shareholders was that the loan loss provisions obscured a good year for Bank of the Bahamas International on the top-line, with total revenue up 5.9 per cent to $73 million.

With interest expense at $22 million, gross operating income was also up at $49 million. While operating expenses were up by $2.8 million at $32.5 million, Mr McWeeney said the rate of increase in this category would have matched 2012’s if Business Licence fee increases were “backed out”.

Banking industry sources, though, expressed surprise at this reference, given that the 3 per cent Business Licence increase announced in the 2013-2014 Budget had yet to take effect.

Bank of the Bahamas International also saw a 6.8 per cent increase in loans and advances to $735 million, which Mr McWeeney said outpaced the 11 per cent contraction in private sector loans.