Profitability has shrunk by 37% and loan arrears going up

 The Bahamian commercial banking system is currently suffering with profitability during the fourth quarter of 2020 shrinking by a whopping 37 per cent year-over-year.

At the same time, private sector loan arrears have increased by $76 million. The Bahamian Central Bank has revealed that the credit portfolio in the banking system deteriorated from October 2020 onwards, accounted for all but $10 million of the year’s total $87-million increase in loan arrears, as deferrals continued to unwind amid COVID-19’s economic devastation.

In its economic review of the year’s final three months, the Central Bank of The Bahamas reports that the credit quality indicators in the banking system also deteriorated during the fourth quarter, reflecting the ongoing slowdown in domestic economic activity related to the COVID-19 pandemic.

Total private sector loan arrears rose by $75.8 million (10.9 per cent) over the quarter and by $86.7 million (12.6 per cent) on an annual basis to $773.1 million. 

“Consequently, the ratio of arrears to total private sector loans firmed on a quarterly and year-on-year basis, by 1.5 and 1.7 percentage points, respectively, to 13.8 percent,” the Central Bank of The Bahamas states in its fourth quarter economic review.

In examining the credit quality decline, the Central Bank points out that, “an analysis by the average age of delinquencies revealed that short-term (31- 90 day) arrears grew by $66.4 million (28.6 per cent) to $298.5 million with the associated ratio increasing by 1.2 percentage points to 5.3 percent of total private sector loans.

Non-performing loans climbing high

In addition, the non-performing segment – arrears in excess of 90 days and on which banks have ceased accruing interest – rose by $9.4 million (two per cent) to $474.6 million, thus contributing to a 25-basis-point rise in the corresponding ratio to 8.5 per cent of total private sector loans.

In terms of the banking industry’s delinquency increase, the Central Bank adds that the expansion in total private sector loan arrears was mainly due to an $86.7 million (21.7 per cent) growth in mortgage delinquencies to $486.2 million.

The commercial segment loan arrears were reduced by $11.6 million (16.6 per cent) to $58.2 million with the associated ratio narrowing by 1.3 percentage points to seven per cent.

Meanwhile, the non-performing loan rate for consumer loans stood at 6.8 per cent versus 5.2 per cent in the previous year, and businesses at 4.9 per cent compared to 6.1 per cent at end-2019. Mortgages were relatively unchanged at 11.1 per cent.

As a result of the loan arrears, banks were forced to increase their total provisions for loan losses by $56.1 million (10.9 per cent) to $569.7 million over the quarter. Consequently, the ratio of provisions to non-performing loans and to total arrears grew by 9.6 percentage points to 120 per cent and by four basis points to 73.7 per cent, respectively.

Also, specific provisions relative to non-performing loans increased by 4.3 percentage points to 83.4 per cent. 

Banks forced to write of many bad loans

In addition, banks were also forced to wrote-off an estimated $40.8 million in delinquent loans and recovered approximately $5.4 million during the review period.”

Turning to the matter of commercial bank profitability, the Central Bank says, “during the third quarter of 2020, banks’ overall profitability contracted by $15.1 million (36.8 per cent) to $25.9 million relative to the same period of 2019, as institutions continued to increase their provisioning for bad debt to buffer against predicted losses related to the COVID-19 pandemic. 

Most profitability ratios trended downward over the review quarter. As a percentage of average assets, the gross earnings margin narrowed by 24 basis points to 5.23 per cent, as the interest margin fell by 27 basis points to 4.91 per cent, while the commission and foreign exchange ratio edged up by three basis points, to 0.33 per cent. Similarly, the net earnings margin ratio reduced by 30 basis points to 1.55 per cent, as the operating costs ratio increased by six basis points to 3.69 per cent.

As a consequence of the rise in bad debt provisioning, the net income ratio narrowed by 64 basis points to 0.94 per cent.