The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Central Bank's governor wants to further cut the "terrifying" 8.7 percent loan delinquency rate by more than half despite it having fallen to its lowest level in a decade.

While describing the consistent decline in non-performing bank loans as "very encouraging", John Rolle said even a four percent delinquency ratio was "not complimentary" by international standards.

Pointing out that one consequence of high loan delinquency rates is higher interest rates and fees for Bahamian borrowers who are in good standing, he added that the proportion of outstanding bank credit in default locally is still more than double the ratio that would strike fear into developed country banks and their regulators.

Mr Rolle said a "comfort zone" for non-performing credit, which represents loans that are 90 days or more past due, would be "a rate that is less than half of what we are experiencing" now. Based on the governor's comments, this implies a rate of less than four percent - a ratio not seen by the Bahamian commercial banking industry since before the 2008-2009 recession.

"Today The Bahamas has seen a very encouraging drop in the delinquency rate in terms of the loans that are more than 90 days without a payment being made," Mr Rolle said during the Central Bank's latest quarterly economic briefing. "People who have fallen behind for three months or more, the rate of delinquency is below 9 percent.

"That figure at one point was above 14 percent. We've done a good job in reducing it. But internationally, even if the delinquency rate's at 5 per cent, that's a terrifying number. Yes, it's been reducing, and we want to see a further reduction.

"Thinking about a comfort zone we'd like to see, we'd need to be ultimately at a rate that's less than half of what we're experiencing" currently. Pressed further on this by Tribune Business, Mr Rolle added: "Four percent is even not complimentary by international standards.

"That delinquency rate means something else has to pay for the money [tied up in non-performing loans], whether it's fees, interest rates. There's always a cost with the percentage of loans out there that are not working."

The total value of non-performing Bahamian commercial bank loans peaked at just under $1bn in June 2014, but the Central Bank's latest economic developments report reveals that figure has been cut by around 50 percent to $491.8m or 8.7 percent of outstanding credit.

Total private sector arrears, which also includes bank loans between 30-90 days past due, fell by $28m or 3.9 percent in June alone to close the month at 12.2 percent of outstanding credit - a figure described by the Central Bank as "the lowest level recorded since November 2008" - almost 11 years ago.

Mr Rolle, meanwhile, reiterated that the Central Bank was continuing to push its commercial bank licensees to "take more aggressive steps" to clean-up the remaining pile of non-performing credit clogging their balance sheets.

This, he explained, would enable the banks to both increase lending to new, qualified Bahamian borrowers and fortify their ability withstand any future recessions. As a result, the Central Bank is prodding its licensees to accept higher losses on delinquent loans; take greater haircuts on the value of distressed properties; and making more aggressive efforts to sell-off such properties still on their books.

At least one Bahamian commercial bank appears to be heeding the Central Bank's call, with Scotiabank (Bahamas) recently advertising in the newspapers that it has sold another tranche of delinquent loans to Gateway Financial, the distressed debt acquirer, which is a joint venture between Sir Franklyn Wilson's Royal Star Assurance and Sunshine Finance and the Mexican firm, Ascendancy.

"Once that cloud is taken from the head of institutions," the Central Bank governor added of distressed credit, "we would expect the institution to have a better balance sheet to lend moving ahead, and more comfort. Part of the clean-up is making sure this is not hanging over the head of institutions and holding them back from lending."

Mr Rolle conceded that the foreclosure/repossession of homes subject to delinquent mortgages was "unpleasant", but reiterated that the protection of bank depositors and their funds - which ultimately finances borrowers and their purchases - was "the priority" for both industry and regulator.

"There are two sides to this: The borrower and the depositor," he explained. "The system's first obligation, when there are difficulties, is to make sure depositors do not lose their funds. We're trying to avoid any outcome where depositors lose money. They're the priority; to not leave question marks hanging over people's money. It's unpleasant but necessary to protect people's money."

Still, Mr Rolle said Bahamian commercial banks - the largest source of credit in the country - were only expected to recover their appetite for further lending "at a gradual pace". This was despite a $118.7m, or 14.6 percent, fall in total private sector loan arrears during the 2019 first half alone.

This dropped total loan arrears from 14.6 percent to 12.2 percent as percentage of total outstanding bank credit. Short-term arrears, in particular, fell by $93.5m or 31.9 percent, while non-performing loans more than 90 days past due dropped by $25.2m.

Mortgage arrears, in particular, fell by $60.6m during the 2019 first half, while problem consumer and commercial loans contracted by $33.8m and $24.3m, respectively.

Central Bank data, though, backs Mr Rolle's assertion that this has yet to translate into any significant uptick in lending. "During the first six months of 2019, total Bahamian dollar domestic credit fell by $72.5m compared to a reduction of $33.8m during the comparable period of 2018," it noted.

This confirms that the amount of outstanding credit to the Government, private sector and individuals continues to fall, meaning that new lending continues to be constrained. Net claims on the Government fell by $41.6m, while credit to the public corporations contracted by $12.8m.

Private sector credit again decreased by $18.5m, although the reduction was not as great as the $64.2m drop in the 2018 first half. While lending to businesses firmed by $26.7m compared to the prior year, 2019 first half credit for consumers and mortgages fell by $38.6m and $6.2m, respectively.

The fact it has taken over a decade to make significant inroads into the industry's 'bad loans' pile highlights the breadth and depth of the 2008-2009 recession, which caught both the sector and wider economy off-guard and ill-prepared to quickly adjust.

Many Bahamian families and businesses already over-extended on credit fell into default as a result of job losses and/or reduced incomes, with many unable to get back on track even if their lender was able to restructure the debt.

Besides the economy's vulnerability to external shocks and over-borrowing, other causes of the non-performing loan crisis were identified as over-aggressive lending by the banks themselves between 2002 and 2007 coupled with real estate appraisal valuations that, in some instances, proved wildly optimistic.