The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A top bank executive yesterday estimated that the planned Value-Added Tax (VAT) would increase Bahamian consumer prices by around 10 per cent, with this and higher Business Licence fees increasing his institution’s operating expenses by an annual $2.5 million.

Anwer Sunderji, Fidelity Bank (Bahamas) chief executive, told Tribune Business that the combination of VAT and the 3 per cent Business Licence fee unveiled in the 2013-2014 Budget would increase the bank’s total operating costs by a material 13 per cent.

Responding to Tribune Business’s questions via e-mail, Mr Sunderji said the BISX-listed bank was forecasting that VAT alone would add $1 million to its annual cost base.

This is because Fidelity Bank (Bahamas), along with all other commercial banks, will be treated as VAT ‘exempt’ for tax purposes. This means that while they will not levy 15 per cent VAT on the products and services they sell to consumers, they cannot reclaim the tax paid on their inputs.

Yet it is the impact VAT will have on Bahamian consumers that appeared to concern Mr Sunderji the most, as he forecast that a ‘material’ 10 per cent increase in inflation would spark a further increase in loan delinquencies, with borrowers unable to service their obligations.

“We believe that the already hard-pressed Bahamian consumer will see an inflationary impact from VAT of around 10 per cent,” Mr Sunderji told Tribune Business.

“Absent any increases in compensation, this will result in a cost of living increase and further stress on the consumer’s ability to discharge debt obligations. We expect to see a continued deterioration in the already sky high delinquency rates.”

The Government has admitted that VAT will have an initial inflationary effect when it comes in on July 1, 2014, although it has not given any precise figure forecasts.

It has also sought to downplay this by suggesting VAT will ultimately result in inflation becoming less in the medium term (five to eight years).

Still, turning to the impact on Fidelity Bank (Bahamas), Mr Sunderji added: “The combined effect of higher fees and VAT will increase the bank’s expenses by about $2.5 million.

“This is a significant increase in our operating overhead by about 13 per cent. We are unsure as to what we will do to mitigate against this significant increase. But it is clear that coupled with rising delinquencies and increased provisions, the bank will be exploring all options.”

This hints that fee increases are likely, along with potential cost-cutting measures. Given that 50 per cent of bank operating expenses are staff costs, downsizing and redundancies cannot be ruled out.

“We are forecasting that VAT will cost the bank an additional $1 million dollars,” Mr Sunderji said.

“Our [Business] License fees will nearly triple. Unfortunately the new fees are regressive in nature and smaller institutions are disproportionately impacted.”

The main question for the Bahamian economy is whether the impact from Baha Mar commencing operations in 2015, and the creation of more than 5,000 full-time jobs, will offset the impact from VAT and any associated inflation.

Mr Sunderji said VAT would have the advantage of getting in first, adding: “The benefits of Baha Mar are anxiously anticipated by the business community, but the reality is that it will take time for the project to ramp up.

“It is also heavily dependent on the state of the US economy, which fortunately is showing some signs of strength.

“On the other hand, the impact of VAT is likely to be felt more quickly, and the downdraft from the inflationary impact of VAT will be felt by consumers immediately, and affect the economy negatively, before we see the positives of Baha Mar.”

Unveiling its results for the 2013 third quarter and first nine months, Fidelity Bank (Bahamas) said comprehensive income had risen 56 per cent year-over-year to $6.77 million up to end-September.

This was despite incurring a 35 per cent increase in loan loss provisions, as the bank’s non-performing loans grew by $2.4 million over the first nine months to hit $23.35 million.

It increased loan loss provisions during the first nine months by $3.6 million, and expects to book more during the fourth quarter and into 2014 as more borrowers fall behind on their loans.

Fidelity Bank (Bahamas) said mortgages accounted for 83 per cent of non-performing loans, but the latter remained well below the industry average at under 8 per cent of total credit.

On the positive side, Fidelity Bank (Bahamas) saw its operating efficiency improve to 53 per cent, while return on assets (ROA) rose to 1.7 per cent, with Return on Average Equity hitting 21 per cent.

Mr Sunderji said: “Fidelity’s operating performance has shown resilience despite a difficult economy. During the first nine months, total assets and loan assets each grew by 8 per cent to $417 million and $299 million, respectively.

“On a TTM (trailing 12 month) basis to September 30, 2013, operating efficiency improved to 53 per cent from 57 cent for fiscal year 2012 full year, as revenues climbed by 18 per cent and operating expenses increased by 8 per cent, reflecting the increased provisioning for fees and levies. TTM results show comprehensive income of $8.8 million (2012 full year - $6.4 million).”

Fidelity Bank (Bahamas) share price reached $3 per share and provided capital appreciation of 42 per cent during the period. Based on trailing twelve month earnings, the shares are trading at a multiple of 10.7 times earnings.

The bank added that it had helped a “handful” of borrowers to qualify for the Government’s Mortgage Relief Plan.

Liquidity remained robust, with cash and investments constituting 23 per cent of total assets. The loan to deposit and debt ratio was under 84 per cent. Risk capital was in excess of Central Bank requirements.

Fidelity Bank (Bahamas) added that it paid its parent and 75 per cent majority shareholder, Fidelity Bank & Trust International, $8.9 million to take over ownership of a 50 per cent stake in its affiliate, RoyalFidelity Merchant Bank & Trust.