The Tribune

• Commonwealth enjoys best Q1 for decade

• Driven by $17.4m COVID provision reversal

• Commits to rolling-over $600m Gov’t debt

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A BISX-listed bank says its best first quarter for a decade has more than wiped out the near-$30m full-year loss it suffered for 2021, which was sparked by a 41.4 percent jump in bad loan impairments driven by COVID-19 fall-out.

Tangela Albury, Commonwealth Bank’s vice-president and chief financial officer, in written replies to Tribune Business questions revealed that credit recoveries during 2022’s first three months were “more than double budgetary expectations” as borrowers’ ability to service their loans improved in line with a reflating Bahamian economy.

Driven by a $17.403m reversal of previously-taken loan loss impairments, the lender’s $30.406m profit for the 2022 first quarter more than recovered in just three months the $29.998m full-year 2021 loss that was largely caused by a $27m-plus year-over-year rise in bad credit provisions.

“We have had a great start to the year, with a terrific first quarter total profit of $30m,” Ms Albury said. “This result has effectively overturned the losses the bank recorded for the full year of 2021. Our loan assets and deposits are up, and our capital and liquidity positions are strong.

“In terms of loan originations, we saw improved credit demand year-on-year and, more importantly, significant improvement in the credit quality of our loan assets. The bank’s non-performing assets were reduced by quarter-end, and we had recoveries during the quarter which were at historically high levels for the bank, more than doubling budgetary expectations.”

Commonwealth Bank’s 2022 first quarter outcome represented a more than-$33m positive turnaround from the $2.679m loss incurred during the same period in 2021, when the institution was grappling with COVID’s impact on the ability of borrowers - many of whom were still either unemployed or under-employed - to service their loans and meet their obligations.

“While the bank reported a net loss of $3m in the first quarter of 2021 because of the unprecedented impact of the COVID-19 pandemic, historically the bank has reported average first quarter results in the past ten years of $12m [profit],” Ms Albury said, putting the strength of 2022’s performance into context.

“On that basis, this has been the best first quarter in the recent ten-year history of the bank as the country moves closer to post-pandemic recovery. Having said that, the first quarter of 2021 was the worst first quarter over this historic period, and 2021 was the first year the bank had recorded a net loss owing to the COVID-19 health and economic crisis.”

Stripping out the $17.403m loan loss impairment reversal, a positive, would still leave Commonwealth Bank with a $13m profit for the 2022 first quarter that would be in line with historical trends. And the outturn for the first three months of this financial year was also achieved despite a $1.5m-plus increase in general and administrative expenses, which rose by 10.5 percent to $17.642m compared to $15.958m the year before.

The commercial bank, which largely specialises in personal or consumer credit, saw a modest near-$10m expansion of its loan portfolio during the first three months of 2022 to $777.221m. Total assets grew by 3.7 percent to $1.78bn, largely due to a rise in cash and deposits at other banks, while deposits rose more slowly to $1.493bn at quarter-end.

While the reversal of COVID-related loan impairments is expected to slow over the remainder of 2022, and “cease” by year-end, Ms Albury said Commonwealth Bank was starting to renew its focus on the “organic growth” of its loan portfolio moving forward.

“The bank has a $17m reversal of the loan impairment expense through to the quarter-end, as compared to the same period in 2021, which reflected a loan impairment expense of $21m,” she added. “We believe that opportunities still exist for further milder reversals over the coming months as the economy improves from the COVID-19 pandemic, and employment and work hours continue to improve for Bahamians, in particular those in the tourism and leisure sectors.....

“The focus of the bank is on organic growth as the reversal of impairment losses is not a permanent financial outcome. We expect that these will cease by the end of the year and that the bank will move towards normalized lending and deposit relationships.... As more of our customers experience increased work hours, the bank’s credit risk has declined and there is an improvement in the credit quality of the bank’s loan portfolio.”

Pledging that Commonwealth Bank will not “cherry pick” which segments of Bahamian society and commerce to lend to, Ms Albury said the majority of its clients wanted to “right-side” their financial affairs post-COVID and become current again with their loan payments. They recognised that this will ensure they maintain access to credit in future, especially as The Bahamas’ first-ever Credit Bureau starts to ramp up operations.

“We believe that the vast majority of our customers want to be in a position, should financial needs arise, to call on their good credit reputation to advance further credit. This is particularly valuable as the Credit Bureau moves away from its infancy stage and is fully integrated into the credit approval process,” Ms Albury said.

Acknowledging rising inflation’s impact, she added that Commonwealth Bank’s operating costs will be impacted in areas where no pre-existing contracts were in place to lock-in prices. And borrowers whose loan repayments are not secured by salary deductions could also encounter difficulty in servicing their obligations due to the surging cost of living.

“To the extent we do not have previously negotiated contract costs, there is no doubt that the cost of operating will be impacted,” Ms Albury said. “Recognising the difference between ‘sticky’ inflation, that is those goods and services whose prices are slower to change, and ‘flexible’ inflation, where the goods and services respond almost immediately, we have not seen a material impact on our operations during the first quarter of 2022.

“For borrowers who service their loans through salary deduction, we are not expecting to see a change in their credit behaviours, but in other circumstances these borrowers may be challenged and we encourage them to reach out to bank representatives directly to get the assistance we can provide.”

And, in a boost for the Government, which has to refinance $1.9bn-plus in domestic Bahamian dollar debt due to mature this year, Ms Albury said Commonwealth Bank was committed to rolling-over and reinvesting in public securities to maintain its existing portfolio worth more than $600m.

“The bank invests over $600m in support of The Bahamas government through its investment in debt of various tenors, and continues to reinvest at maturity of its existing holdings,” she added. “Downside risk to the bank is the financial stresses of the Bahamas government and the perceived downgrade in creditworthiness by international rating agencies.

“Therefore, the bank activity manages its Bahamas sovereign debt portfolio, both in terms of the aggregate dollar value of its exposure and tenors of that exposure across the portfolio.” Commonwealth Bank, in common with its commercial counterparts, has had to discount the value of its government debt holdings due to the increased risk created by The Bahamas’ debt burden and rating downgrades.

“Our goal is certainly to remain profitable in 2022. Given the great start to the year and the potential for an expanded recovery of the economy, while being mindful of the unfavourable conditions related to elevated levels of inflation, supply chain disruptions and the war in Ukraine, we have considered it necessary to revise our initial budgetary expectations during this second quarter,” Ms Albury said, although no details were provided on what these are.