The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

FINCO’s chairman has warned shareholders it will “continue to be challenged” with low growth and credit losses despite a more than four-fold increase in net income to $39.235m for the 2021 financial year.

Chris Ronald, writing in the BISX-listed mortgage lender’s 2021 annual report, said “high levels” of non-performing loans - which exceed the Bahamian commercial banking industry average - will act as a drag on its future performance in a “low growth” Bahamian economy still trying to rebound from COVID-19’s ravages.

“Non-performing mortgages of $94.1m (2019: $83.4m) as a percentage of the portfolio was 12.9 percent at the end of the fiscal year,” he said of a 12-month period that closed at end-October 2021. “This result is compared to 10.9 percent at the end of financial year 2020, and compared to the industry at 11.1 percent as of October 2021.

“Operating in a low growth economy overcoming the major financial impacts of COVID-19, RBC FINCO will continue to be challenged with mortgage growth and credit losses resulting from higher levels of non-performing mortgages.” Mr Ronald’s downbeat outlook came as the mortgage lender, which remains 75 percent majority-owned by Royal Bank of Canada (RBC), generated its highest profits in five years.

This, though, was largely driven by the one-off write back or recovery of COVID-related loan loss provisions as borrowers who had been furloughed were recalled to work and able to resume their loan repayments. FINCO was able to record a $15.453m write back of such provisions, which helped propel it to a $39.235m bottom line as opposed to 2020’s $9.202m - a 326.4 percent year-over-year increase.

Some $16.249m worth of provisions were taken in the latter year at COVID’s peak, and Mr Ronald conceded: “This significant increase is attributed primarily to the release and reversals of loan provisions charged in financial year 2020 in response to the economic shock of the COVID-19 pandemic and Hurricane Dorian.

“Other operating costs remained relatively flat year-over-year with a 1.5 percent reduction. Our core earnings underperformed and were under pressure due to low growth and lower interest rates in a competitive market..... Notwithstanding the growth and non-performing loans challenges, the bank continues to maintain a strong capital position well above regulatory guidelines and adequate provisions for non-performing loans. We remain profitable, and there are no liquidity issues.”

As a result, Mr Ronald said FINCO had elected to maintain dividend payments to shareholders with some $0.34 (34 cents) per share returned to investors during the 12 months to end-October 2021. A further $0.07 was paid out to investors on February 17. Based on the cumulative $0.41 per share, RBC received a total $8.2m in dividend payments on its 2m shares, with the 25 percent Bahamian minority earning a collective $2.733m on their 6.667m shares.

Despite the positive near-$32m year-over-year provisioning reversal, other aspects of FINCO’s performance continued to be challenged. Net interest income fell by 4.6 percent year-over-year, from $37.67m in 2020 to $35.93m, while non-interest income was down 7.2 percent at $1.825m. Total income was off by 4.7 percent at $37.755m compared to $39.636m in 2020, a difference of close to $2m from that pandemic-stricken year.

“Lower loan volumes, along with lower yields on mortgages, continue to affect the bank’s core revenue. Net interest income has been challenged in a competitive market, and new credit origination continued to be sluggish throughout fiscal year 2021,” FINCO conceded of its top-line results. “Non-interest income is lower than the previous year by 7.2 percent given lower service-based fees derived from lower levels of customer deposits.

“Loans and advances to customers closed at $639.1m, a decrease of 2.6 percent from $656.1m in 2020. This decrease is associated with the credit origination challenges given the current economic environment and certain non-performing loans which were written off during the year.”

FINCO added that the total allowance for loan losses had dropped to 12.2 percent of its loan portfolio, as opposed to 13.9 percent for the prior year, while that for non-performing loans in so-called ‘stage 3’, representing the worst-performing credit, had also fallen to 54.3 percent of the total compared to 59.9 percent for the prior year.