The Tribune

• Bahamas downgrades cost BISX-listed bank total $1.6m

• First quarter 42% off-target on temporary, one-off costs

• Expects loan restructure, initiatives to 'bear fruit' in '23

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government's declining creditworthiness has sparked "real life consequences" for a BISX-listed bank by forcing it to take a "much bigger than expected" $560,000 hit in its 2022 full-year results.

Gowon Bowe, Fidelity Bank (Bahamas) chief executive, yesterday told Tribune Business that successive downgrades of The Bahamas' sovereign credit rating have resulted in the lender incurring a total $1.6m impairment charge to its $100m government debt securities holdings over the past two years.

Warning that the Government cannot ignore the impact such downgrades have on lenders and their investment decisions, he added that the latest $560,000 charge had largely offset a $700,000 loan loss provision recovery and left Fidelity Bank (Bahamas) just short of the $21m-$22m net income it had forecast for its audited 2022 financial results.

Mr Bowe also revealed to this newspaper that the bank was "significantly behind where we want to be" with its 2023 first quarter profits, which are set to come in 41.7 percent below expectations at $3.5m as compared to the $6m target. However, he reassured shareholders there was no cause for alarm as Fidelity Bank (Bahamas) had incurred a total $1.7m in costs that are either "temporary" or will generate "accrued" income over the rest of 2023.

Of that $1.7m, some $1m related to loan loss provisions associated with restructured loan facilities. Mr Bowe explained that Fidelity Bank (Bahamas) has taken a conservative approach by not treating that credit as current until the borrowers concerned make six consecutive payments and demonstrate their creditworthiness, after which those provisions will fall away and be reversed.

And the $700,00 balance relates to MasterCard and Visa licence fee payments that were taken upfront during the first three months of the year. The Fidelity Bank (Bahamas) chief said this will benefit the bank's performance over the remainder of 2023 by assisting with the expansion of its merchant services business, and added that the first quarter bottom line would have been $5.2m - closer to the anticipated $6m - if these costs were stripped out.

Detailing the fall-out from Moody's decision to downgrade The Bahamas' credit rating from 'Ba3' to 'B1' in October 2022, Mr Bowe explained to Tribune Business: "When we completed the loan loss provision modelling we had a release of about $700,000. If you look at the quarterly and audited financials, that provision for loan losses, the excess was down by $700,000.

"However, the downgrade of the Government had a much larger impact than we were anticipating, and we had to take a $560,000 allowance for impairment all related to government securities. We were not expecting the $560,000, almost $600,000, on the Government securities. While the Government came out with a response to the credit rating, and gave the impression all is well, there are real life consequences for people who purchase and hold their securities.

"It's necessary for the Government to factor that in so that when they go out to seek capital they appreciate the investment decisions factor in the prospect of immediate impairment [to those debt securities]. We've kept our government securities portfolio at over $100m because we've continued to roll over the debt. If you look at our balance sheet, almost all the investments are in government securities."

As a result of the Moody's-related impairment charge, Mr Bowe said Fidelity Bank (Bahamas) "slightly under-shot" the full-year 2022 profit target it projected earlier this year prior to audit completion. Rather than come in between $21m and $22m, and be almost flat with 2021's $22.17m, the lender ended up at $20.9m aided by a $684,814 revaluation of its property assets that occurs every three years.

"We were expecting the release on the loan loss provisions, but we were not expecting the significant impairment on government securities," he added. "We said we would be between $21m and $22m, but the sovereign credit rating had a greater impact than we estimated although it was not material. At the end of the day, it was largely in line with what we said in the quarterly results release."

Mr Bowe said the impact to Fidelity Bank (Bahamas) results means the Government cannot afford to be insensitive to the effects its so-called 'junk' investment grade status has on both purchasers and holders of its debt securities. "There are three factors that need to be appreciated," he said.

The limited number of alternative fixed income investment opportunities in The Bahamas outside government securities means institutional investors, such as banks and insurance companies, will always be active buyers of new issues and have large holdings on their balance sheets. However, Mr Bowe pointed out that these capital markets restrictions also mean that the same investors "have to absorb all the risk as there's no opportunity to divest" in a negative environment.

"The second reality is that we can only invest so much without exceeding prudential limits," he added, pointing out that Fidelity Bank (Bahamas) $106.5m investment in government securities almost matches its $109.345m in net shareholder equity. "We're showing confidence, but can't go beyond that."

Describing the third factor as a combination of the first two, the Fidelity chief said: "Over the past two years we've taken roughly $1.6m in impairments in relation to a $108m investment in government securities. We have a portfolio of over $108m, but can only carry $106.5m. The whole impairment issue is based on the probability of default, because that is driven by the credit rating which, in turn, is determined by your creditworthiness.

"The Government has to focus on regaining confidence of the rating agencies to move the country's credit rating up." This, Mr Bowe said, requires a credible long-term debt management strategy, economic growth plan and tax reforms as well as collecting all outstanding taxes due. "It is not as simple as rebutting what the rating agencies say, and saying we've never defaulted and don't intend to, and we're on our growth targets," he added.

While voicing confidence that the Government will honour its obligations, and repay its debt to enable the likes of Fidelity Bank (Bahamas) to ultimately recover its $1.6m in impairments, Mr Bowe said that in the meantime he has to "abide by accounting rules and take the provision" unless the country's credit rating reverses course and moves upwards.

Meanwhile, disclosing that the BISX-listed bank will be unveiling its 2023 first quarter results shortly, Mr Bowe told Tribune Business: "We are significantly behind where we want to be. But what we have realised is some of that is investment in the rest of the year.

"I will share with you that we are anticipating coming in at about $3.5m for the first quarter, which is somewhat behind where we wanted to be at $6m. Included in those numbers we have about $1m in additional provisions which we believe are temporary because we were restructuring a lot of delinquent loans in the first quarter. We heavily targeted bringing customers back into good standing but kept the provisions until they show six months of payments."

Mr Bowe said a further $700,000 in expenses related to Visa and MasterCard licence fees associated primarily with Fidelity Bank (Bahamas) growing merchant services business. These had previously been split with its former Cayman Islands subsidiary, which has now been sold, and "this year we have borne all the cost. It's not that the cost is different, but you have to pay that upfront.

"A lot of charges were borne in the first quarter, which were about $700,000, and we know that is going to accrue back to us," Mr Bowe added. "What we are looking at is if you take the cost of the provisions, that additional $1m, and that $700,000, out we would have been closer to $5.2m.

"Our revenues were actually above last year, and our expenses were just above in those two areas. We are going to report coming in significantly behind where we want to be, but we have a number of initiatives we expect to bear fruit. We are not in any mode of saying the results are wholly unacceptable. They are not far off, but still behind."