The Tribune

* Tells regulator: 'Don't intervene on financial reporting'

* Concern on accounting for COVID-19 loan defaults

* Treatment must satisfy auditors, global standards

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Commercial bankers are urging the Central Bank to effectively stay in its lane and "not intervene in financial reporting matters" after the regulator's recent COVID-19 guidance release.

Gowon Bowe, Fidelity Bank (Bahamas) chief executive, voiced concerns to Tribune Business in a recent interview that the Central Bank's statement on "loan accounting and provisioning" threatened to take the supervisory body "outside its remit".

Explaining that Bahamian commercial banks needed to comply with International Financial Reporting Standards (IFRS) when it came to the treatment of delinquent loans and credit arrears, Mr Bowe said external auditors had the main watchdog responsibility for accounting treatment oversight rather than the Central Bank.

He argued that the regulator should instead be focused on compliance with the bank and trust company regulatory regime that underpins the IFRS standards, rather than on financial reporting itself after recent COVID-19 related guidance appeared to stray into this area.

Mr Bowe, who was backed by Kenrick Brathwaite, the Clearing Banks Association's (CBA) chairman, spoke out after Charles Littrell, the Central Bank's inspector of banks and trust companies, reinforced the contents of a July 2, 2020, letter sent to the commercial banking industry in relation to how it will treat borrower defaults caused by COVID-19.

"The Central Bank communicated its prudential accounting minimum standards with respect to COVID-19 affected non-performing loans, interest accrual and accounting for deferred loans on the balance sheet," Mr Littrell said in reference to the previous letter.

"We wish to reinforce this guidance, which implies among other things a minimum 10 per cent provision on the portfolio of unsecured deferred loans (net of security held) by December 31. Feedback from the domestic banking sector is that as a group the banks can afford to provision more conservatively than this, and have started that process."

Both Mr Bowe and Mr Brathwaite, who is also Bank of The Bahamas' managing director, quickly pointed out any accounting treatment would need to comply with IFRS and be approved by their banks' external auditors.

"This is one, while it may be a little controversial, where my position is the Central Bank should not intervene in financial reporting matters," Mr Bowe, an accountant by profession and former PricewaterhouseCoopers (PwC) Bahamas partner, told Tribune Business.

"From a financial reporting perspective we have to comply with International Financial Reporting Standards, particularly as a public company. All the commercial banks have some public interest responsibilities. We have to be audited by external auditors and comply with international standards.

"The Central Bank should not be seeking to intervene in financial reporting matters; it should be focused on the regulatory regime for reporting matters. It doesn't need to get into the financial reporting. It should not influence auditors to depart from IFRS standards, and should instead focus on the regulatory regime for reporting matters."

Mr Bowe explained this meant the Central Bank continuing to focus on capital adequacy and other prudential norms that it has oversight responsibility for, and which could assume critical importance as the $1.85bn worth of loan deferrals granted earlier in the pandemic unwind and the commercial banking industry gains a clearer picture of who it will have to treat as non-performing.

The Fidelity Bank (Bahamas) chief also warned that The Bahamas cannot afford to be seen as an outlier departing from adherence to IFRS standards, as these are designed to present a uniform, consistent presentation of bank income statements and balance sheets across the globe.

"The purpose for IFRS is for there to be consistency globally," Mr Bowe explained. "We don't want, in our little Bahamaland, to alter that where comparisons between Fidelity Bank (Bahamas) and Lloyds in London differ because of some directive from the Central Bank.

"It becomes very difficult if you start managing things outside your remit. How far do you go? There's a reason why you have financial reporting standards that are recognised worldwide. You should leave the standard setters in each area to determine what they do best."

Mr Bowe was backed by Mr Brathwaite, who said every commercial bank's external auditors would have to be satisfied with their treatment of COVID-19 loan delinquencies and related provisions before they signed off on the annual financial statements.

"We must make sure the external auditors are in agreement, and we must make sure we comply with these standards," Mr Brathwaite said. "There's nothing we can do that can contradict or contravene these standards. They hope the banks can be more conservative than the guidance, but that's if the external auditors agree."

The Central Bank, in its recent monthly update for September 2020, revealed that commercial banks increased their loan loss provisioning by $87.6m or 20.6 percent during the first nine months of the year in anticipation of a wave of delinquencies when present COVID-19 loan deferrals end.

"The ratio of total provisions to arrears rose by 11.6 percentage points, while the ratio of total provisions to non-performing loans firmed by 16.6 percentage points. For the nine-month period, banks wrote-off an estimated $69.7m in bad loans and recovered approximately $17.9m," the regulator added.

However, the Central Bank's report revealed that banks’ credit quality indicators actually improved in September "as total private sector arrears decreased by $16.7m (2.3 percent) to $697.3m, with its accompanying ratio narrowing by 29 basis points to 12.35 percent".

This, though, was solely due to a drop in credit between 31 to 90 days past due or short-term arrears. "An analysis by the average age of delinquency showed that short-term arrears reduced by $39.1m (14.4 percent) to $232.1m, corresponding with a 69 basis points decrease in the attendant ratio to 4.11 percent," the Central Bank said.

"In contrast, non-performing loans rose by $22.4m (5 percent) to $465.2m, resulting in the non-accruals rate moving higher by 40 basis points to 8.24 percent."