The Tribune

* Increase caused by deferral initiative end

* Banks face 18-24 month pandemic work-out

* Senior executive predicts 'bumpy road ahead'

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bahamian commercial banks saw loan defaults spike by $83m in August as the sector started to feel the COVID-19 chill, with one senior executive saying: "The accounting is catching up with reality."

Gowon Bowe, Fidelity Bank (Bahamas) chief executive, told Tribune Business it will likely take 18 to 24 months before the industry gains a complete picture of the pandemic's fall-out for borrowers after it was revealed that loan arrears among individuals, households and businesses rose by some 13.1 percent during August compared to the prior month.

The Central Bank of The Bahamas, in its monthly economic developments report, attributed the increase to the end of COVID-19m payment deferral plans for borrowers who accounted for some of the $1.85bn - almost one-third - of outstanding bank credit that went into forbearance after the pandemic struck.

"Banks’ credit quality indicators weakened during the review month, led by an increase in short-term delinquencies. Specifically, total private sector arrears rose by $82.8m (13.1 percent) to $714m, while the accompanying ratio moved higher by 1.5 percentage points to 12.64 percent," the Central Bank said.

"Contributing to this development was an $80.6m (42.3 percent) growth in short-term arrears (31-90 days) to $271.m - signaling the conclusion of some banks forbearance programmes — and corresponding to a 1.4 percentage points firming in the attendant ratio to 4.8 percent.

"In addition, non-performing loans grew by $2.3m (0.5 percent) to $442.8m, resulting in a 4 basis points rise in the relevant ratio to 7.84 percent."

Breaking this down by loan type, the Central Bank said consumer loans - those for vehicles, furniture and other items - saw the greatest rise in defaults followed by credit extended to private sector businesses.

"Disaggregated by loan type, the increase in total delinquencies was led by a $48.4m (26.7 percent) expansion in consumer loan arrears to $230.1m, as both the short and long-term segments increased by $45.2m (81.3 percent) and $3.2m (2.5 percent), respectively," the Central Bank added./

"Similarly, commercial loan delinquencies rose by $18.3m (30.7 percent) to $77.9m, owing to a $17.5m (106.8 percent) rise in short-term arrears and a $0.8m (1.9 percent) uptick in non-accrual loans.

"Further, mortgages delinquencies advanced by $16.1m (4.1 percent) to $406m, attributed to a $17.9m (15.1 percent) growth in the short-term component, which outstripped the $1.8m (0.7 percent) decline in non-performing loans."

The Central Bank said its commercial licensees reacted by increasing their loan loss provisions some $3.7m in August, taking the industry total to $501.8m - a sum equivalent to 113.3 percent of non-performing loans.

This indicates the sector is braced for COVID-19 delinquencies and defaults, as the provisions for non-performing loans - those 90 days past due, and on which interest is no longer being accrued - exceed the value of credit in this category.

"However, the ratio of total provisions to arrears narrowed by 8.6 percentage points to 70.3 percent. During the review month, banks wrote-off an estimated $3.4m in bad loans and recovered approximately $0.9m," the Central Bank added.

Mr Bowe, meanwhile, told Tribune Business the loan delinquency situation will start to "crystallise" for Bahamian commercial banks "between now and the end of the year", as they identify those who have lost their jobs or remain in furlough, and thus are unable to service their obligations.

"I put the reality this way: The accounting is starting to catch up with reality," he said. "For those institutions with deferral programmes, their loan portfolios continued to record those persons on deferral as being current, and as that period comes to an end the accounting starts to catch up....

"By the end of this year we'll start to have crystallisation of those in extended furlough periods. There's going to be a long, bumpy road ahead to manage the period when people are out of sustainable incomes."

Mr Bowe said it may be another 18 months to two years before Bahamian commercial banks gain a complete grip on the situation, adding: "All financial institutions in some or fashion will have identified that upper limit, identified those persons in the hotel sector and those persons in the private sector who are unemployed, and be able to say what their nuclear scenario will be.

"All of us are sitting here with some form of bated breath, hoping for an early opening of tourism, a return to normal visitor numbers and a return of employment. All of us appreciate that rapid return will not be rapid. It will be over 18-24 months."

The COVID-19 fall-out will likely undo the Bahamian commercial banking industry's slow, decade-plus process of working itself out of the 'bad loans' pile that built up following the 2008-2009 recession,l which peaked at around $1.2bn.

With much depending on the strength and timing of tourism's rebound, and the return of economic activity, jobs and incomes that will allow persons to service their loan obligations, Mr Bowe said commercial banks will not be immune from COVID-19's fall-out.

Institutions will feel a top-line impact from reduced interest income, while also taking a hit to the bottom line from higher loan loss provisions. In the meantime, their expenses remain unchanged due to the retention of staff and continuing overhead costs, which will result in an earnings squeeze for shareholders.