The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

FINCO’s $22 million provision warning was yesterday seen as a further sign that the Bahamas’ mortgage crisis is “deteriorating”, a leading businessman suggesting its announcement “may not be the end” of the sector’s woes.

The BISX-listed mortgage specialist, which is 78 per cent owned by Royal Bank of Canada (RBC), used a newspaper advertisement to deliver what amounts to a 2014 full-year and fourth quarter profits warning.

FINCO also hinted strongly to shareholders that it is likely to suspend dividend payments for the second time since the 2008 recession hit, in a bid to conserve capital.

In an advertisement buried deep in The Tribune’s main section, FINCO said that “following a thorough review” of the impact loan loss provisions have on its financial performance, it has altered the way it calculates “collective allowances” for non-performing mortgages.

This seems to indicate that FINCO has decided to increase its general, rather than specific, provisioning for non-performing mortgage loans - something that is heavily influenced by the performance of the overall housing market and wider economy.

Either way, FINCO said had taken a “one-time” $22 million provision for its 2014 fourth quarter, something that “may impact decisions on future dividend payments”.

FINCO has yet to publish its results for the 2014 fourth quarter and full-year, both of which ended on October 31, meaning that its advertisement is effectively an advance profits warning for shareholders.

It is unclear what impact the $22 million in provisions will have on FINCO’s full-year bottom line, but profits will almost certainly decline and, possibly, be wiped out for 2014.

“That’s a big announcement. It just goes to show, and FINCO is a mortgage bank, that the situation is deteriorating,” one senior banking industry executive told Tribune Business, speaking on condition of anonymity.

“I suspect they’re going to suspend the dividend payment again. That’s a big number. For RBC, that’s a big statement. It’s a profits warning.”

Another banking industry source suggested that FINCO’s move reflected both its and the market’s stubbornly high level of non-performing loans, and the fact that anticipated improvements had failed to materialise.

The sector, the source added, was now facing up to the problem that they might be stuck with extraordinarily high levels of non-performing mortgage loans for some time.

“I think the banks have been reassessing the severity of the problem over the last several years. I don’t think we’ve ever seen an 18 per cent delinquency rate on mortgage loans,” the source said.

“I don’t think the market thought it would ever get as high, and it expected to see some improvement by now, but things have got worse.

“There’s a general sense that things will not get better for a while. At some stage, the banks will hope to get those provisions back, but we’re going to be stuck with this for a while.”

FINCO’s total net comprehensive income for the nine months to end-July 2014 was already down 20 per cent year-over-year at $18.758 million, compared to $23.366 million at the same point in 2013.

Apart from a $3 million increase in FINCO’s expense base, the profit decline was almost entirely accounted for by a near $4 million rise in loan loss provisions - from $5.251 million in 2013, to $9.131 million this time around.

The warning signs were thus already there, with FINCO also confirming that non-performing loans stood at $115 million at end-July 2014, having increased as a percentage of its total loan book from 11.8 per cent to 12.5 per cent.

FINCO’s actions come just after Tribune Business this week revealed that almost $1 out of every $4 mortgage dollars lent by Bahamian commercial banks was past due at end-October 2014.

The Central Bank of the Bahamas’ latest credit quality indicators report, obtained by this newspaper, showed the depth of the debt delinquency crisis plaguing Bahamian society and the economy, with more than $700 million worth of mortgage credit past due.

This, the report reveals, equates to 24.04 per cent - almost one-quarter - of the banking industry’s $2.885 billion worth of outstanding mortgage credit being in default.

Of the past due mortgages, some $519.52 million, or 18.01 per cent of the total, are non-performing, meaning they are over 90 days past due and the banks have stopped accruing interest on them. A further $184.15 million, or 6.38 per cent of the total, is between 31-90 days past due.

FINCO is far from the first bank to take such action, as it follows the $174 million and $69 million net losses incurred this year by CIBC FirstCaribbean International Bank (Bahamas) and Bank of the Bahamas, respectively.

All Bahamas-based commercial banks have had to ‘take their medicine’ at some point over the past six years, with FINCO having previously suspended dividend payments in 2009, resuming them more than two years later in early 2012.

And Franklyn Wilson, who has been charged with making recommendations to revive the Government’s Mortgage Relief Plan, yesterday said FINCO was likely to be far from the last institution to take drastic provisioning action.

“FINCO now. Where does this end?” asked Mr Wilson. “The FINCO thing may not be the end of the problem.”

He told Tribune Business that it was becoming “a national imperative” for the Bahamas to resolve its delinquent mortgage crisis, as its negative effects were being felt throughout society and the wider economy, particularly in the banking, housing, construction and real estate industries.

Mr Wilson emphasised that any revived Mortgage Relief Plan would not be his own personal work, and that he was embarking on a collaborative approach were all feedback and suggestions were welcome.

“The Prime Minister has genuinely done a lot of work on this,” he added. “Before he got me involved, he spoke to a lot of the players, and there have been a lot of conversations.

“He didn’t seek to get me involved until he thought there was some prospect for this. You don’t go down this road until you think you’ve got a reasonable shot at an outcome.”