The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Despite an almost 10-fold net profit increase in 2015, FINCO’s Board is citing the earnings “volatility” produced by “unacceptably high” bad mortgage loans and low growth as the rationale for no year-end dividend payment.

Robert Johnston, FINCO’s chairman, told shareholders that the Bahamian economy’s health, coupled with the company’s own performance and loan portfolio quality, would determine when dividend payments resume.

Writing in the BISX-listed mortgage lender’s annual report, Mr Johnston said FINCO’s core business will remain “under pressure” as a result of its $102.5 million non-performing loan portfolio.

He added, though, that non-performing mortgages had decreased as a percentage of FINCO’s total loan portfolio by 130 basis points during the 12 months to end-October 2015. And the 11.5 per cent they represent is below the commercial banking industry’s 17.7 per cent mortgage delinquency average.

“Our core earnings continue to be volatile and under pressure from lower mortgage growth, lower mortgage interest rates and unacceptably high levels of delinquent and non-performing mortgages,” Mr Johnston wrote.

“Non-performing mortgages of $102.5 million (2014: $117.6 million), as a percentage of the portfolio, were 11.5 per cent at the end of the fiscal year compared to 12.8 per cent in 2014, and compared to the industry at 17.7 per cent as of October 2015.”

Royal Bank of Canada’s (RBC) Bahamian mortgage lending arm saw its net income for 2015 jump to $25.6 million, compared to $2.6 million the year before.

The improvement was generated by much-reduced loan loss provisions and lower operating expenses, coupled with a rise in ‘bad’ loan write-offs.

Warning FINCO’s 22 per cent minority shareholders that there was no prospect of an instant recovery, Mr Johnston said: “With the slow recovery in the economy and high unemployment rate, the bank [will] continue to be challenged with allowances for credit losses as a result of the stubbornly high level of non-performing mortgages.”

He promised that FINCO’s Board of Directors would review the dividend issue quarterly, but indicated that the mortgage lender would continue a conservative posture to preserve capital.

FINCO’s net loan portfolio contracted by 1.97 per cent or $17 million to $831 million in 2015, while gross loans remained flat.

Echoing his chairman, Michael Munnings, FINCO’s managing director, told shareholders that its market share remained “consistent” despite the pressures facing commercial lenders.

“The bank will continue to be challenged to grow its mortgage book in a very competitive mortgage environment, and in an economy that is showing mild growth with high unemployment at 14 per cent,” he wrote in the annual report.

“We are also concerned about the persistently high levels of delinquent and non-performing loans, and the recovery of these loans, despite best collection efforts by our Loans Collection Centre. Notwithstanding, we are cautiously optimistic that our 2016 business plan is achievable.”

Mr Munnings said FINCO’s multi-faceted business plan was designed to focus on growth opportunities, combined with efforts to reduce costs, boost efficiencies and improve governance practices.

Perhaps acknowledging that FINCO’s branch integration with Royal Bank locations had not been entirely smooth, he added: “Our clients have told us that there remains opportunity to improve our level of service.

“We are executing a number of initiatives to improve the client experience, and will continue to refine our strategies to close service gaps.”

Confirming that further branch consolidation will be pursued in a bid to reduce costs, Mr Munnings said credit underwriting policies and related training had also been strengthened in 2015.

FINCO’s improved 2015 financial performance was driven by a $19.6 million reduction in loan loss impairment charges, which fell from $35.6 million to $16 million.

“The lower impairment charge is due to a $15.1 million decrease in non-performing loans from $117.6 million to $102.5 million during the year,” the mortgage lender said.

“The decrease in non-performing loans was driven in part by larger loan write-offs during the year. Additionally, the impairment charge in 2014 was higher due to the change in the estimates used to assess the impairment. The change in estimate caused a $22.8 million charge against the 2014 profit.”

FINCO added that the total allowance for impairment losses in 2015 was 6.4 per cent of the total loan portfolio and 55.8 per cent of non-performing loans, compared to 7.6 per cent and 59.7 per cent, respectively, at the end of 2014.

Increased fee charges produced a 2.8 per cent increase in FINCO’s non-interest revenue to $4.304 million, while reduced rental costs and professional fees drove an 18.9 per cent decline in non-interest expenses to $11.979 million. This was offset slightly by the introduction of Value-Added Tax (VAT).