The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Fidelity Bank (Bahamas) has bucked the commercial banking sector’s overseas ‘outsourcing’ trend by consolidating back office operations in the Bahamas, a move that increased staff numbers by 6 per cent in 2013.

Speaking after the BISX-listed retail bank posted a 51.7 per cent net income increase for the year to end-December 2013, Anwer Sunderji, its chief executive, told Tribune Business that Fidelity had done “the reverse” of the larger Canadian-owned banks.

While CIBC FirstCaribbean International Bank (Bahamas) and Scotiabank (Bahamas) have either announced, or are planning, to outsource key back office functions to other Caribbean nations, Mr Sunderji said it was “more cost effective” for Fidelity to consolidate its operations here.

“Our headcount was up by 6 per cent during 2013, primarily because we’re hiring people in the Bahamas to provide services to the bank in Cayman and Barbados,” Mr Sunderji told Tribune Business.

“We’re doing the reverse of the big banks. It’s much more cost effective for us.” The extra hirings caused a more than-$300,000 year-over increase in Fidelity Bank (Bahamas) salaries and benefits expenses, which rose by 4.6 per cent from $6.891 million to $7.206 million.

The downsizing/outsourcing by the major Canadian banks is thought likely to result in around 100 jobs leaving the Bahamas, but Mr Sunderji said Fidelity Bank (Bahamas) would not be engaging in staff cuts.

Mr Sunderji described Fidelity Bank (Bahamas) 2013 performance, with net income rising from $6.414 million in 2012 to $9.735 million, as “pretty good results” despite having to increase loan loss provisioning by 55 per cent year-over-year.

The BISX-listed institution’s transformation into a consumer lending bank has also continued apace, with such loans now accounting for 62 per cent ($200 million) of its $324 million credit portfolio.

Fidelity Bank (Bahamas), once a traditional mortgage lender, saw its consumer loan book increase by $50 million or one-third in 2013 compared to the prior year, when it accounted for 53 per cent of the total credit portfolio.

The bank appears to reaping the rewards for such a transition in its results, and Mr Sunderji told Tribune Business that Fidelity Bank (Bahamas) bad mortgage loans deteriorated “quite substantially” by another $5.6 million in 2013.

“Until the risk/reward characteristics of mortgage lending improve, it’s difficult to warrant extensive lending in that area,” he revealed. “It’s kind of hard for an institution like ours to grow on mortgages when there are some basic problems with it.

“We haven’t heard too much about the Homeowners Protection Bill, but that’s potentially a negative, so we’ve not paid too much attention to the mortgage book. Our mortgage book deteriorated, got worse, quite substantially by about $5 million, so we provided for that.”

The Government’s Homeowners Protection Bill, as currently drafted, is seen as making it much more difficult for banks to realise mortgage loan security by inserting the courts into the repossession and foreclosure processes.

This is viewed by many banks as merely increasing time and costs, and with delinquent mortgages in the Bahamas currently totalling $708 million (and no qualifying buyers to take over these distressed properties), the industry views home lending as a sector where risks have sharply increased.

“The key is to attempt to grow in an environment that is difficult overall,” Mr Sunderji said. “Credit demand is muted, there are strong headwinds, VAT is coming through. All these things are problematic and we are trying to control our costs as best we can.”

Fidelity Bank (Bahamas) total comprehensive income for 2013 increased year-over-year by 41.3 per cent, from $6.414 million to $8.678 million. This was less than the rise in net income because the bank incurred a $1.057 million write-off on the revaluation of its property, mainly its Frederick Street head office in downtown Nassau.

This, though, was counter-balanced by the almost $800,000 share of profits that Fidelity Bank (Bahamas) gained from its newly-acquired 50 per cent equity stake in its affiliate, RoyalFidelity Merchant Bank & Trust.

The BISX-listed retail bank paid $8.9 million to acquire this interest from its own 75 per cent majority shareholder, Fidelity Bank & Trust International. The price was based on an independent valuation of the merchant bank, thought to have been done by KPMG, and its $5.512 million net book value share.

The purchase price was thus 1.6 times’ net book value, a lower ratio than Colina Insurance Company paid to acquire its broker/dealer affiliate, CFAL, in a similar deal where its majority shareholder was also the seller.

The regulators, though, appear to have attached more conditions to the Fidelity deal than the one involving its Colina competitor. Fidelity Bank (Bahamas) notes reveal that in return for approving the deal, the Central Bank required Fidelity Bank International to “guarantee” the retail bank against any operating losses incurred by RoyalFidelity, plus capital injections needed to ensure the merchant bank’s capital adequacy.

Fidelity Bank (Bahamas) financials show that RoyalFidelity turned an $82,528 operating loss for 2012 into $2.301 million in total comprehensive income for 2013, on revenues of $8.245 million.

“We’re pleased with that,” Mr Sunderji said of the deal that transferred 50 per cent ownership of RoyalFidelity from the group parent to the BISX-listed bank. “It diversifies the retail bank’s earnings, and the retail bank is a partner with Royal Bank. We have a platform from which to raise capital and do IPOs.”

Elsewhere, Fidelity Bank (Bahamas) said the 49 per cent efficiency ratio it achieved in 2013 marked the first time it had got this below the 50 per cent benchmark.

Earnings per Share (EPS) increased by 55 per cent to $0.31, while the return on average ordinary shareholders equity (ROAE) rose from 15.2 per cent in 2012 to 22.5 per cent. The bank’s return on average assets (ROAA) was 2.3 per cent, an improvement on 2012’s 1.7 per cent.

Loan loss provisions, though, increased from $3.95 million to $6.147 million. “Our provisioning has gone up quite substantially,” Mr Sunderji told Tribune Business. “We’ve strengthened our provisioning policy.

“Our quality of earnings is better. We’re capturing consumer loans 30 days after providing them. We just took the opportunity to provide while we could, because income was good. We were trying not so much to boost earnings but position the going forward.”

In a statement issued later, Mr Sunderji added: “While the bank’s results are positive, we remain concerned at the sharp deterioration in asset quality, particularly in the mortgage area.

“During the year, the bank’s delinquent mortgage book worsened by some $5.6 million with a corresponding increase in provisions for mortgages of $0.5 million. Collateral held against mortgages is generally deemed to be adequate.

“Because of the massive overhang of delinquent properties, some borrowers are making a deliberate choice not to pay their mortgage obligations (while servicing their consumer loans, car loans, phone bills and other miscellaneous obligations) and continue to occupy their property as there isn’t a ready resale market for the lender to recover the debt”.

Fidelity Bank (Bahamas) paid a dividend of $0.14 per share in 2013, with a dividend yield of 4.7 per cent based on the year-end share price. Total assets grew by 15 per cent to $444 million, fuelled by a growing deposit book. Loan assets grew by nearly 13 per cent to $314 million.

Mr Sunderji said Fidelity Bank (Bahamas) had maintained the improving results “trajectory” into 2014, paving the way for what he expected would be “another year of good results” despite the ongoing economic uncertainty.