The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bahamian borrowers have seen no benefits from June 2011’s Prime rate cut, a leading accountant believes, because the average weighted interest rate on loans has subsequently increased by 2.5 percentage points.

Raymond Winder, Deloitte & Touche (Bahamas) managing partner, told Tribune Business that with deposit rates dropping due to $1 billion-plus excess liquidity, commercial bank interest rate spreads had actually increased over the past four years.

The increased spreads, he added, had helped to keep many Bahamas-based commercial banks profitable despite extensive non-performing loan provisions.

But Mr Winder warned that reduced lending opportunities meant the Canadian-owned commercial banks would soon seek to redeploy the excess capital building up in their Bahamian subsidiaries to more profitable opportunities overseas.

This, he explained, would create a further drain on foreign exchange reserves that stood at $810 million at February 20, 2015.

Mr Winder’s comments came in response to an International Monetary Fund (IMF) statement on its recent Article IV consultation with the Bahamas, which backed this nation’s monetary policy stance and said no adjustment was necessary.

The Fund’s mission head, Wendell Samuel, effectively called for the Central Bank of the Bahamas to leave interest rates unchanged, finding that “neither loosening or tightening would be appropriate”

And he called for this nation to “rebuild the foreign exchange reserves buffers”, even though the current account deficit was expected to narrow with construction on the $3.5 billion Baha Mar project coming to an end.

While agreeing with the IMF’s call to bolster the external reserves, Mr Winder pointed out that the last Central Bank interest rate cut had ultimately brought little relief to Bahamian borrowers.

That cut, in June 2011, dropped the Discount and Prime rates by 75 basis points (0.75 per cent) to 4.5 per cent and 4.75 per cent, respectively.

Yet Mr Winder said the average weighted interest rate on loans and overdrafts, which stood at 10.98 per cent in June 2011, had increased to 13.4 per cent in January 2015 - a rise of almost 2.5 percentage points.

“One would have expected that with the reduction of Prime, the average weighted interest rate paid on loans and overdrafts would have reduced subsequent to that,” he told Tribune Business.

“But there really wasn’t no benefit to debtors in having reduced the Prime rate, because the benefit is not accruing to those who are paying.”

Meanwhile, Mr Winder said the average weighted interest rates on deposits had dropped from 2.63 per cent in June 2011 to around 1.55 per cent in January 2015.

“What has happened is that the [interest rate] spread has actually increased, which would explain why the banks are still profitable even though they’ve significantly provided for non-performing loans,” the Deloitte & Touche (Bahamas) managing partner added.

“The reduction in the Prime rate didn’t result in any yield savings to the borrower.... We hope to see a reduction in the weighted average interest rate in the future, but up till now it’s not happened.”

Mr Winder said banks’ difficulties in finding qualified borrowers appeared to have stimulated greater competition, holding out hope for a weighted average interest rate reduction.

Yet he warned that lending inactivity was resulting in the build-up of excess capital on commercial bank balance sheets. This was rising as a percentage of weighted assets, as institutions found it increasingly difficult to locate profitable credit opportunities.

“The banks find themselves overly capitalised,” Mr Winder told Tribune Business. “As banks seek to reduce their operations, they will further accelerate the build-up of capital.

“What we are likely to see in the future, as banks find new opportunities outside the Bahamas, they will draw down on that excess capital in the Bahamas to fund opportunities, and that will have a potentially negative impact on the foreign reserves in the short term. The opportunities aren’t here in the Bahamas.”

Mr Winder also backed the IMF assessment that the Bahamas’ first credit bureau, which is set to begin operations in 2017, would initially further shrink the available pool of qualifying borrowers.

“We are likely to find out that quite a number of individuals are more stretched than the banks know, because of all the additional credit taken on outside the banking system,” he told Tribune Business.

“While the credit bureau is a wonderful thing to have, in the short-term it is not going to result in an increase in credit. It is going to exacerbate the problem.

“Excess capital is building up, and the banks are looking for opportunities elsewhere. Not only are we going to see employee loss at these institutions due to banks downsizing, but also the loss of capital from the Bahamas, as they are not earning what they’d like to earn.”

To repatriate capital from the Bahamas will mean a draw down on this nation’s foreign exchange reserves, which the IMF wants to see bolstered.

These have been boosted in recent years by the respective sales of the Bahamas Telecommunications Company (BTC) and BORCO, and the proceeds from the Government’s $300 million US dollar bond issue in early 2014.

Mr Winder, though, said that the Bahamian financial system will have “gradually used up that $300 million lying in reserve at the Central Bank”.