The Tribune

Commonwealth Bank believes it would have come close to matching 2022’s “extraordinary” nine-month profitability had it not been for $3m in new Business Licence fees and utility costs “more than doubling”.

Tangela Albury, the BISX-listed lender’s vice-president and chief financial officer, told Tribune Business that these increases - together with a 25 percent year-over-year jump in general insurance costs - are “becoming an increasingly more prominent contributor” to growth in general and administrative expenses (G&A) which rose by over $6.5m during the first nine months of 2023.

And, in written replies to this newspaper’s questions, she disclosed that such costs will likely further rise in 2024 due to the “doubling” in premiums that Commonwealth Bank and its fellow commercial lenders will have to pay to the Deposit Insurance Corporation. This is the entity that fully insures deposits up to a maximum $50,000 in the event of bank or credit union failure

While Commonwealth Bank’s profits for the nine months to end-September 2023 were down year-over-year by almost 14 percent, standing at $50.3m compared to $58.2m, the latter figure benefited heavily from the one-time $21.679m reversal of COVID-related loan loss provisions as borrowers returned to work and were able to service their obligations once again.

The bank enjoyed just a $2.596m reversal of such provisions in 2023 by comparison, and Ms Albury said it had been buoyed by the fact this year’s results have been driven by “organic growth of our core business” rather than one-time, non-recurring reversals.

“The nine months of 2023 have shown organic growth of our core business, impairment reversals contributing only $3m to the bank’s profitability compared to $22m for the same period in 2022, and yet the net profits as of September 2023 are only $8m below that of September 2022,” she told Tribune Business.

“We have replaced the extraordinary impairment reversals with significant net interest and fee income growth, representing recurring revenue outcomes rather than net profits based on extraordinary conditions.” And Ms Albury suggested the first nine months of 2023 would have come close to 2022 without the surge in “non-controllable operating expense items”.

“We believe that we would have almost matched the September 2022 profitability in 2023 had it not been for non-controllable operating expense items such as the additional $3m in expense from the Government’s reimposition of Business Licence fees on banks, increased general insurance costs and electricity costs,” she said.

“The reimposition of Business Licence fees has added approximately $3m to the bank’s costs and means that the bank is paying approximately $11m in licensing fees for 2023. Both 2022 and 2023 were impacted by substantial increases in real property taxes paid, so these costs are now firmed into the bank’s operational costs.

“However, 2024 is expected to be further impacted by the doubling of the insurance premium paid to the Deposit Insurance Corporation. These non-controllable operating costs are becoming an increasingly more prominent contributor to our general and administrative expense growth.”

General and administrative expenses rose by 12 percent year-over-year to $61.114m for the first nine months of 2023, as opposed to $54.539m for the same period in 2022, and costs associated with licensing and other regulatory fees were not the only factor.

“General insurance costs increased by 25 percent year-on-year, and utility costs have more than doubled, driven by the increase in electricity costs year-on-year,” Ms Albury added. Despite these cost pressures, she disclosed to this newspaper that Commonwealth Bank expects to beat its financial targets for the 2023 full-year even though it is unlikely to match the prior year’s post-pandemic high.

“We expect to finish 2023 firmly above our budgeted net profit. The bank’s historic net profit in 2022 benefited from the V-shaped recovery of the economy, which translated into a significant reversal in impairment expense,” Ms Albury said.

“While we believe 2023 net profits will be lower than those of 2022, we are satisfied that the profits earned in 2023 represent sustainable organic growth tied to a stabilising economy and beginning to reflect more normalised lending conditions.

“For 2024, we expect our profitability to follow the historic financial results just before Hurricane Dorian’s impacts and the pandemic, especially given the International Monetary Fund (IMF) projections for a return to the country’s historical levels for GDP growth.”

Indicating its optimism over near-term prospects, Ms Albury confirmed that Commonwealth Bank plans to maintain the 50 percent increase on quarterly shareholder dividends - from two cents to three cents - for the “foreseeable future” after the first such payout was declared for the recently-closed third quarter.

“We expect the quarterly three cents per share to reflect our regular dividend for the foreseeable future, consistent with our cautious optimism about the stabilisation of The Bahamas economy and the retail bank lending market returning to normal lending conditions,” she added.

“The bank’s improved financial performance, supported by its continued strong liquidity and capital adequacy levels, supports a return to its historical dividend payout rate of 75 percent.”

Commonwealth Bank’s net loan book grew by 2 percent during the first nine months of 2023, expanding to $801.983m from $786.245m at year-end 2022, and Ms Albury said it believes there is opportunity for more expansion in its core lending business over the run-up to Christmas and through 2024.

“The opportunities to grow the loan portfolio for the remainder of 2023 are very favourable. We are going into the Christmas holiday season, and this is usually when we see persons drawing down available loan funds either on their credit cards or seeking new loans or top-ups on existing loans in this season of giving.

“We have budgeted for loan growth in 2024, save for any extraordinary events that could negatively impact the economy of The Bahamas. For example, climate change has been a key topic for discussion because, in recent times, the impacts of climate change have been so severe, particularly on the economies of smaller nations.”