Jun 2010 Financial News

Central Bank: Non-performing loans go up by 3 per cent

Jun 17, 2010

On Monday, the Central Bank released the 2009 Financial Stability Report. According to the report, bank deposits increasing by more than 30 per cent in 2009 were partially due to the Central Bank’s intervention into the Clico Investment Bank (CIB) in February 2009. Local banks’ reduction of their exposure to the Caricom region has reduced their vulnerability during the global recession. Non-performing loans have risen from a low of one per cent of total loans in 2008 to four per cent in April 2010, which the bank described as “a substantial increase.” Among the areas looked at in the 49-page report were CL Financial, Caricom, liquidity, non-performing loans, mortgage loans, 2009 decline in profits, delinquency and macroeconomic developments.

CL Financial
The significant exposure of the banking system to CL Financial is being addressed without comprising financial stability. In cases where obligations are not being serviced, banks have been cashing in on collateral (in many cases, tradeable equities). In addition, CL Financial has been involved in a series of restructuring agreements with commercial banks. Moreover, affected banks have increased provisions against these delinquent loans.

Deposits
Bank deposits increased by more than 30 per cent in 2009, almost twice as fast as in the previous year. For the entire decade, the growth of bank deposits has tended to outpace that of nominal gross domestic product, in part, reflecting limited alternative investment opportunities. In 2009, the rapid growth of bank deposits was influenced by two special factors. First, following the Central Bank’s intervention into the Clico Investment Bank (CIB) in February 2009, there was a transfer of deposits from this non-bank institution to the State-owned commercial bank. Second, during the second half of 2009, a financial institution announced a change in its pricing mechanism to allow unit prices to be determined by the market, ending the practice of price guarantees. This change generated a level of uncertainty among investors and resulted in a substantial movement of resources out of mutual funds into deposit accounts.

Caricom
Over the past few years, the banks have reduced their exposure to the Caricom region, (including loan, investments and equities in subsidiaries), which now stands at nine per cent of total assets. This reduction has reduced the vulnerability of the domestic banking system since the region has been particularly impacted by the global recession.

Liquidity
The high level of liquidity experienced by the banking system is reflected in the sizeable increase in the ratio deposits to loans as well as unusually large un-remunerated excess reserves held at the Central Bank. To cushion the potential for high excess liquidity to lead to a sudden surge in demand, the Central Bank offered $2 billion of interest-bearing accounts and rolled over similar deposits that matured in late 2009.

Non-performing loans
Perhaps the major consequence of the economic downturn has been the rise in loan delinquencies. Non-performing loans have risen from a low of one per cent of total loans in 2008 to four per cent in April 2010. This is a substantial increase, though it is somewhat confined to a few banks that lent heavily (through demand loans) to finance the construction of luxury apartments. Interestingly enough, delinquency on mortgage loans has been very low.

Mortgage loans
There is an issue of the heavy concentration of mortgage loans on the balance sheet of the domestic banks. This is a legitimate issue, given recent global concerns about sub-prime mortgages, the tendency towards real estate bubbles and the absence of a well-functioning secondary mortgage market. The bank’s view is that the potential riskiness of this situation is mitigated by several factors, viz: the generally conservative posture of our banking system, including the low loan to value ratio (between 70-80 per cent); the widespread use of adjustable rate loans; and the downward rigidity of real estate values, except for high-end properties.

Small decline in profits in 2009
As a result of the increase in provisions and the fall in both interest and non-interest income, banks have registered a small decline in profits in 2009 compared with 2008. This decline, notwithstanding, the rate of return on assets or equity continues to be very high, both by regional and international standards.

Delinquency
The merchant banks and finance houses faced basically the same challenges (increasing delinquency and decling profitability). However, these do not undermine the stability of the sub-sector. In fact, the intervention of Clico Investment Bank by the Central Bank has significantly reduced the level of risk in the sector.

Macroeconomic developments
On the capital account side, there was a slowdown in foreign direct investment in the energy sector. As a result of these factors, net international reserves declined by US$713 million in 2009, representing the first overall balance of payments deficit since 1992. It is to be noted that this level of reserve loss was after taking into consideration a special allocation of special drawing rights (SDRs) equivalent to US$441 million, from the International Monetary Fund. As at the end December 2009, gross official reserves amounted to US$8,651.6 million, the equivalent of 12 months of import cover.


Source:
Trinidad Guardian
Thursday June 17, 2010

http://guardian.co.tt/business/business-guardian/2010/06/17/central-bank-non-performing-loans-go-3-cent-bg