Health check: commercial banks
Central Bank of Barbados
The pandemic influenced the performance of the banking system in 2020, but the sector remained stable. During the review period, commercial banks remained well capitalized. The sector’s capital adequacy ratio (CAR) increased to 16.0 percent, in part due to the conversion of a bank from a branch to a subsidiary. However, in the absence of the conversion, the underlying RAC rose steadily from 13.5% to 14.3%, as banks replenished their regulatory capital, especially Tier 1 capital. All individual banks remained well above the 8% benchmark with ranges between 12.1% and 24.6% at the end of 2020.
The improvement in capital adequacy reflects the strengthening of the after-tax profitability of the sector and the growing share of zero risk-weighted assets, resulting from claims on the Central Bank of Barbados rather than loans to the private sector . Profitability before tax weakened as commissions and other income decreased significantly, commissions associated with loans and advances and non-loan commissions decreased. On the other hand, net interest income contracted 6.6% due to lower loans to the non-financial private sector and deposits in banks abroad. In addition, non-interest expense increased sharply mainly due to increased loan provisioning, but operating expenses declined for the first time since 2014.
The after-tax return on assets (ROA) of 0.8% represents an increase of 20 basis points over the previous year, when the one-time write-off of deferred tax assets following the reduction in corporate tax rates. companies weighed on after-tax profitability.
Commercial bank assets grew 3.1% in 2020, slightly faster than the previous year. However, while customer deposits maintain a moderate growth path and lending continues its downward trend, commercial bank deposits with the central bank have continued to increase. As a result, the liquid asset ratio of commercial banks continued its upward trend.
Total loans fell by 2%. New loans fell by more than $ 510 million, but repayments also fell as banks proposed moratoriums on loans of up to six months to customers affected by COVID-19 in anticipation of a deterioration in prices. loan portfolios. At its peak, 38.2% of loans granted by banks were subject to moratoriums. However, in March 2021, most of these loans returned to a normal payment model or were restructured to provide cash flow relief to borrowers.
The decrease in loans is mainly due to the personal sector, with household credit card debt decreases by 13.4%, a probable reflection of the drop in trips abroad. Loans to the tourism sector recorded a reduction of 16.1%, mainly due to the early repayment of a foreign currency loan by a hotel group during the first quarter of 2020. However, there was an increase in loans to utilities, public sector companies and real estate. sector.
In the first three months of 2021, total lending remained depressed, down 1.7%. The decline in the personal and real estate sectors prevailed over the new loans granted to the tourism sector, which also continued to benefit from the moratoria.
Loans from the moratorium program were not classified as non-performing, and aAt the end of 2020, the NPL (non-performing loans) ratio stood at 7.3%, an increase of 0.7 percentage point compared to 2019. Regarding the sectoral distribution of NPLs, an increase in personal, tourist and retail loans was recorded as non-performing loans in 2020.
AAs temporary customer support ended, reported credit quality began to deteriorate in early 2021, and during the first quarter of 2021, NPL’s ratio rose to 7.9% as the value of tourism-based NPLs was increasing.
Provisions for bad debts increased from 59.4% to 62.0% in 2020, as banks increase their reserves to protect against losses due to the expected increase in defaults.
The low interest rate environment on deposits persisted through 2020. Interest paid on transferable deposits remained below 0.1%, while spending on “other deposits” edged down to 0 , 4%. As the share of transferable deposits increased, the effective interest rate on deposits was practically zero, while the effective interest rate on loans declined slightly to 5.8% than the interest income on the loans contracted. Thus, the implied deviation was 5.8 percent.
Domestic currency deposits grew 6% in 2020, as personal and business holdings increased, largely reflecting the positive effects of the moratoriums on savings and the easing of fiscal policy. Transferable deposits continued to be the national deposit of choice, as they accounted for 95.9% of total national currency deposits, with falling interest rates on term deposits making these accounts less attractive.
Liquidity increased significantly throughout 2020 and through the first quarter of 2021. The excess liquidity ratio fell from 19% to 23% in 2020 as banks increased their liquidity relative to deposits. The excess securities ratio increased, with the required securities ratio increasing from 17.5% to 5% in April 2020. This policy measure was abandoned with the passage of the new Central Bank of Barbados law in December. . In the first quarter of 2021, the excess cash ratio reached 26.5%.
The net foreign currency position suffered a slight deterioration in 2020, mainly due to the reduction in foreign currency loans which now represent 1.8% of total loans. Foreign currency deposits increased 4.3 percent, bringing their share of total deposits to 6.6 percent. This increase was driven by the corporate sector, real estate, rental and other business activities in particular. Commercial banks have maintained adequate levels of foreign exchange for transactions, as evidenced by minimal purchases by the Central Bank in 2020.
Adapted from Financial Stability Report 2020.
Central Bank of Barbados published this content on 08 October 2021 and is solely responsible for the information it contains. Distributed by Public, unedited and unmodified, on 08 October 2021 11:41:07 AM UTC.