The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

“Aggressive lending practices” by Bahamian commercial banks pre-recession has been cited by Moody’s as one factor behind “chronically high” non-performing loans totalling $1.028 billion at end-July 2014.

The Wall Street credit rating agency, in its September 10 analysis of the Bahamian economy, said the ramifications of this ‘crisis’ had permeated through almost every industry, especially the housing/real estate market and construction industries.

Moody’s pointed out that residential housing construction has “fallen every year in real terms” since the 2008-2009 recession, as banks tightened up lending policies and the supply of credit contracted. Qualified borrowers are also few in number.

Total loan arrears stand at $1.358 billion or 22 per cent of all outstanding bank credit, meaning more than $1 out of every $5 lent by the commercial banks is either 31-90 days, or more than 90 days, past due.

This, Moody’s indicated, has also translated into high interest rate spreads that were above nine percentage points in the 2014 first quarter. This means that not only are Bahamian consumer and business borrowers faced with a restricted credit supply, but also relatively high interest (debt servicing) costs.

“Credit to the private sector remains depressed, as banks are increasing holdings of attractively priced government paper while they clean up their loan books,” Moody’s said.

“Amid weak economic performance and high unemployment levels, non-performing loans (NPLs) tend to be elevated and rising, reaching 15.6 per cent in the 2014 first quarter, up from 13.6 per cent in 2012.”

It then added: “Chronically high NPLs may, to some extent, also be tied to the banks’ aggressive lending practices prior to the 2008-09 recession.”

This though, which will likely resonate in some quarters in the Bahamas, suggests that the commercial banks are partly to blame themselves for the predicament they are in. It suggests that when the economy was performing well, they let their guard down and advanced credit to persons who should not have received it.

Noting the widespread ramifications of all this for the wider Bahamian economy, Moody’s said: “Even after shrinking in the first quarter of 2014, the average interest rate spread remains above nine percentage points, a level that may be viewed as commensurate with low double-digit NPLs.

“Additionally, with mortgages accounting for the bulk of arrears, high NPLs also reflect the banks’ reluctance to foreclose on residential assets amid low real estate valuations. Concentrated in the mortgage sector, delinquencies have translated into tighter underwriting standards and subdued residential construction activity.”

Reiterating how the high NPL level is acting as a drag on the rest of the Bahamian economy, Moody’s said: “Private consumption has remained weak and non-performing loans have risen significantly, particularly affecting mortgage credit.

“Loan growth has decreased significantly as demand from qualified borrowers has fallen and banks have tightened their lending policies. Residential construction has fallen every year in real terms.”

Bahamian commercial banks have also seen their investment returns depressed, with the sector’s collective return on assets (ROA) now below 1 per cent. While the industry’s provisions for bad debts are relatively low in comparison to the Caribbean, they increased in both 2013 and 2014 - trend Moody’s expects to continue.

“Increasing delinquencies and shrinking interest margins have put significant pressure on banks’ profitability, sending the system-wide return on assets into the sub-1 per cent territory,” the credit rating agency warned.

“Nevertheless, despite a rapid build-up in NPLs and a corollary increase in provisioning, the banking system has been able to maintain positive profitability through the cycle.

“Going forward, we expect that credit growth will be anemic as public funding and foreign direct investments crowd out financing opportunities in the tourism sector. However, given the banks’ adequate capitalisation, low level of interconnectedness and ample liquidity, we believe that the risk of a banking crisis remains moderate and manageable.”