The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

More than one-quarter of the Bank of The Bahamas net loan portfolio was delinquent at end-June 2018 despite the prior year's bail-out, with its financials unable to escape a "going concern" warning.

KPMG, the BISX-listed institution's external auditors, said the $138.9m "accumulated deficit" that existed at financial year-end represented "a material uncertainty that casts significant doubt on the bank's ability to continue as a going concern".

The qualification to Bank of The Bahamas' (BOB) audited financial statements came despite the troubled institution's return to profitability with $2.591m in total comprehensive income for the full-year, a result that was driven by the removal of some $167.7m in toxic commercial loans from its balance sheet in August 2017.

Explaining its inability to give BOB a clean bill of health, KPMG wrote: "The bank experienced significant operating losses for the several years prior to the current year, and has an accumulated deficit at June 30, 2018, of $138.9m (2017: $140.498m).

"These events and conditions, along with other matters.., indicate that a material uncertainty exists that may cast significant doubt on the bank's ability to continue as a going concern. Management does not expect that the operating losses or accumulated deficit will impact the bank's continuing ability to operate as a going concern. Our opinion is not modified in respect of this."

Management's confidence, as BOB's financial statements later make clear, come from the Government's continued commitment to prop up the still-troubled bank through the Bahamian taxpayer.

Such support has already cost $300m (the $100m and $167.7m bail-outs), and $40m rights issue, and continues to climb as the Bahamas Resolve bail-out vehicle is unable to service the interest due on the bonds held by BOB as a result of difficulties in liquidating the real estate security for the toxic loans.

The Government had to step in and pay the $5.8m "accrued interest" due to BOB from Bahamas Resolve - a payment that was noted in the Ministry of Finance's first quarter fiscal "snapshot" released earlier in the week.

Confirming continued taxpayer support, BOB's financials added: "The Government, as majority shareholder (82.6 percent), has confirmed that it remains firmly committed to supporting the continuing operations of the bank, including the implementation of the strategic plan approved by the Board, and will ensure that adequate resources are provided to enable the bank to satisfy its financial obligations and its regulatory requirements for at least the next 12 months and, in fact, for the foreseeable future."

They also asserted that BOB's management has "developed a strategic plan" that will "improve the operational and financial viability of the bank" and its continuation as a "going concern". However, this plan - which the 3,000 minority shareholders have been urging be released - has yet to be disclosed in full detail.

BOB's financials also reveal that last August's bail-out has not restored the BISX-listed institution to full health, since 28.92 percent or $101.648m of its net loan portfolio remains in default. While that represents a significant drop of over $145m from the year-before's 55.11 percent ratio, it is double the 14.3 percent average delinquency ratio for the full Bahamian commercial banking industry.

The bank's second bail-out largely focused on removing delinquent commercial mortgages, leaving BOB with a still-problematic residential mortgage portfolio. Some 31.2 percent, or $76.325m, of a $244.481 residential mortgage book remains in default, accounting for around three-quarters of the bank's remaining troubled loans.

Elsewhere, the audited financial statements showed that the Government continues to prop-up BOB in other ways. Together with its agencies, they accounted for $242.325m or 38.6 percent - more than one-third - of the bank's $628.406m in deposits at end-June 2018.

The Public Treasury also made a $12m payment to part-settle the Government's guaranteed student loans and hurricane loan obligations after the financial year-end.

The audited financials, though, still did not explain the sudden appearance on BOB's balance sheet of $56.727m in Treasury Bills, which were described as a "cash equivalent". As short-term government debt, Treasury Bills are regarded as highly liquid and akin to cash, and the suspicion is they may have been injected as part of the Government's commitment to redeem the first $100m worth of bonds put into BOB on the first bail-out.

The extent to which Bahamian taxpayers continue to remain exposed to BOB through the Government's continued financial support is starkly illustrated by the statements, which show that the loans acquired from the bank by Bahamas Resolve are worth just 37.6 percent of the principal amount paid.

The Government-owned special purpose vehicle (SPV) paid $134.5m, and another $33.2m for "accrued interest", to obtain toxic commercial loans that BOB's statements concede had "a total net book value of approximately $50.6m".

The $117.1m "net difference" between the $50.6m "net book value", and $167.7m in promissory notes handed to BOB, was also written back into the bank's balance sheet as "special retained earnings".

Not only did this wipe out BOB's $139m accumulated deficit, but these "earnings" are treated as equity and regulatory capital, enabling the bank to now far exceed Central Bank-mandated ratios it previously had trouble meeting.