The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Value-Added Tax (VAT) will likely increase costs for each commercial bank by “several million dollars” annually, a top banker yesterday warning: “It’s still too early to celebrate the end of the recession.”

Ian Jennings, Commonwealth Bank’s president, told Tribune Business that “the big unknown of VAT’ and other variables meant it was difficult to predict the bank’s 2014 performance with any certainty.

And, despite the BISX-listed institution seeing profits return to historical trends in 2013, with net income up 42 per cent year-over--year to $51 million, Mr Jennings said: “We still have the hatches battened down.”

Emphasising that the commercial banking industry still had to “go through the process”, he added: “The economy, while showing recovery, is far off the level it was.

“We consider 2014 is going to be another challenging year.” Loan loss provisions were likely to remain at elevated levels, although Commonwealth Bank was hoping for some stability and a decrease in bad credit.

With “bold forecasts” out of the question, Mr Jennings said the 2013 drop in lending to the private sector - while not as substantial as in 2012 - showed economic activity was “still depressed” and that conditions remained “very tough”.

Commonwealth Bank’s non-performing loans, as a percentage of its overall portfolio, remain the lowest in the commercial banking sector, its consumer loan focus enabling it to charge-off bad credit after 180 days and remove this from the balance sheet.

Mr Jennings, meanwhile, said it was impossible for Commonwealth Bank and other institutions to determine how VAT would impact them.

The sector is currently being treated as VAT ‘exempt’, which means that the banks will suffer an increase in their operating costs, as they will be unable to reclaim/net off their ‘input’ tax payments.

This, Mr Jennings said, would add “several million dollars of additional costs to the banks in the second half of the year”.

While consumers will be spared the 15 per cent levy on many financial transactions, the Government is also proposing to charge VAT on fee-based transactions - creating more concern over what will be ‘VAT-able’ and what will be ‘exempt’.

Describing VAT as “a work in progress”, Mr Jennings said the Bahamas was “running out of time” to hit the Government’s July 1 implementation deadline.

The Commonwealth Bank chief added that preparing for the demands of the US Foreign Tax Compliance Act (FATCA), and potential changes to account opening and operating procedures, would also occupy the institution in 2014.

Crediting what it called “effective management” of delinquent loan accounts , which slashed loan loss provisions almost in half, Commonwealth Bank yesterday said it enjoyed its third best year in its 53-year history.

“The improvement in total profit is primarily attributable to the focused and effective management of the bank’s delinquency management resources, which allowed for a $19 million or 44 per cent decline in loan impairment expenses in 2013 compared to 2012,” said executive chairman, William B. Sands, Jr.

The bank’s unaudited financial results put total profits at $51 million. Year-over year there was a 42 per cent increase in profit, some $15 million higher than the $36 million in total profit reported in 2012.

Total assets remained virtually unchanged at $1.43 billion. Meanwhile, return on equity stood at 23.5 per cent, with shareholders earning $0.47 per share, and return on assets was 3.16 per cent.

These figures compared favourably with the prior year when return on equity was almost 30 per cent less at 16.5 per cent, return on assets was 2.06 per cent and earnings per share were $0.31.

“Our good performance comes from the financial strength and consistent application of the bank’s business model that is focused on personal banking for Bahamians, and has been in place for more than 50 years,” said Mr Sands.

Regulatory capital was 26.3 per cent, up from 24.8 per cent last year, and well above the Central Bank’s requirement of 17 per cent. The Bank’s liquidity ratio was 32 per cent, also well above the required 20 per cent.

Commonwealth Bank’s allowance for non-performing loans, at 124.5 per cent of total non-performing loans, compared to the industry average coverage of 45.8 per cent.

The bank also produced an efficiency ratio of 45.66 per cent, reflecting its ability to “accomplish more with less”.

Commonwealth Bank operates 11 branches in New Providence, Grand Bahama and Abaco, and plans to re-open its expanded Oakes Field branch before the end of February.