FinancialSectorDevelopmentsintheCaribbean

JohnA.RolleGovernor

CentralBankofTheBahamas

1

OVERVIEWOFPRESENTATION

I. MacroEnvironment&Macro-PrudentialIndicators

II. MicroPrudentialIndicators

III. SystemicRisks

IV. CorrespondentBankingChallenges

2

StateoftheFinancialSectorintheCaribbean

• The sectors still face elevated vulnerabilities, correlated with realeconomic trends but with manageable risks

– Commodity based economies face weaker conditions thanservice based economies

• No recent institutional failures

• Stress tests at country level generally point to manageable risks

• Mixed results for systemic risk indicators

3

MacroeconomicEnvironment

• Macroimbalances&challenges:

– Low average growth– Highunemployment– Highfiscaldeficits– Balanceofpaymentdeficits– High sovereignindebtedness

• Adverse credit ratings &rising USinterestratesareplacingupwardpressuresondebtcosts

4

MacroeconomicEnvironment

5

MacroeconomicEnvironment

6

Macro-prudentialIndicators

• The regional banking system is stable as measured by:

– Capital adequacy ratios, which remain in excess of statutory

norms, in part because banks shifted from private sector lending

to holding more cash

– Liquidity ratios which have continued to improve

– Moderate decline in non-performing loans

– Recovery of profitability

• The insurance sector is adequately capitalised

7

AssetQuality— Non-PerformingLoans(NPLs)

• Assetquality,asmeasuredbytheratioofNPLstototalloans,continuedtoimproveduring2017.

• Reflectseffortstoaddressproblemloans,includingthroughassetsales,debtrestructuringassetsandmoreaggressiveresolutions.

• But…NPLratiosarestillabove2008levels.

Non-PerformingLoansRatio(%)

0

2

4

6

8

10

12

14

16

18

20

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

%

RegionalWeightedAverageCommodity-BasedWeightedAverageService-BasedWeightedAverage

Source:CaribbeanEconomicResearchTeam(CERT)8

CapitalAdequacy

• Banksarewellcapitalized,principallywithTier1capital.

• Averagecapitaladequacyratioremainedhighat21.5%in2017.

• Inlowreturnenvironment,somecapitalreductionisnowconsideredprudentforauthoritieslikeBahamas.

CapitalAdequacyRatios(%)

0

5

10

15

20

25

30

35

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

%

Regional Weighted AverageCommodity-Based Weighted AverageService-Based Weighted Average

Source:CaribbeanEconomicResearchTeam(CERT)9

ReturnonAssets(ROA)

• Profitabilityisrecovering• TheaverageROAwas

recentlylowestin2014whenlargeloanwrite-offsoccurredinTheBahamasandBelize.

• TheROArecoveryhasbeenslowerintheEasternCaribbeancurrencyareaandSurinameremainingbelow1%.

ReturnonAssets(%)

-2

-1

0

1

2

3

4

5

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Regional WeightedAverageCommodity-BasedWeightedAverageService-BasedWeightedAverage

Source:CaribbeanEconomicResearchTeam(CERT)10

Liquidity• Giventhemodestgrowthof

credittotheprivatesector,regionalbankingsystemsremainedveryliquid,withlessdispersion.

• Theaverageliquidassetsratiostayedataround26%,withBelize,TrinidadandTobagoandBarbadosexperiencingdeclines,contrastingwiththeincreasesofGuyana,TheBahamasandtheECCU.

LiquidAssetsRatios(%)

0

10

20

30

40

50

60

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

%

Regional AverageCommodity-Based Economies AverageService-Based Economies Average

Source:CaribbeanEconomicResearchTeam(CERT)11

SystemicRisks

• SystemicRiskisbeingassessedusingavarietyofmeasures,including:– Credit- to- GDPgaps– Aggregatefinancialstabilityindex– Bankingstabilityindex– Signals-basedindex– Compositeindicatorofsystemicstress– Cross-bordercontagionchannels

12

Credit–to-GDPGaps

Currentlevelofcredit-to-GDPrelativetolong-termtrend

• Economiesareatvariousstagesinthecreditcycle.

– ECCU,Belize,Barbados&Surinameareestimatedtobeinthedownturnphase.

– Trinidad&Tobago(highestgap),Guyana,Bahamas,HaitiandJamaicareflectexcesscreditbuild-up.

8.6

2.8 1.2 0.4

-5.0-7.6

-12.9

-25.7-30

-25

-20

-15

-10

-5

0

5

10

Trinidad&Tobago

Guyana

Jamaica

Haiti

Belize

Barbados

Surin

ame

ECCU

2016

Source:CaribbeanEconomicResearchTeam(CERT)13

AggregateFinancialStabilityIndices• TheAggregateFinancialStabilityIndex(AFSI):acomposite

measurereflectingthedifferentaspectsofthemacro-financialenvironment.

• Aweightedaverageofnormalizedbankbalancesheetandmacroeconomicpartialindicators(includinginternationalfactors).

• Sub-indices:– financialdevelopmentindex(10%weight)– financialvulnerabilityindex(40%weight)– financialsoundnessindex(40%weight)– theworldeconomicclimateindex(10%weight)

14

AggregateFinancialStabilityIndices• Aggregateindexcontinuedtobe

abovepre-crisislevelsin2016:

– Softeningforcommoditiesbasedeconomies(TrinidadGuyanaandSuriname);butimprovingforserviceseconomies.

– Drivers:deteriorationfromincreasinginflation,higherNPLsanddecliningcapital(Suriname),loanqualityandliquidity;andreductionofliquidassets,inthecontextofgrowingcreditrelativetoGDP(Trinidad)

0.00

0.05

0.10

0.15

0.20

2008 2009 2010 2011 2012 2013 2014 2015 2016

Trinidad&Tobago Guyana Suriname

0.00

0.05

0.10

0.15

0.20

2008 2009 2010 2011 2012 2013 2014 2015 2016Jamaica Belize Bahamas

Source:CaribbeanEconomicResearchTeam(CERT)

Services-basedeconomies

Commodities-basedeconomies

15

BankingStabilityIndex• Index(BSI)isweightedaverageofnormalized indicators:

– AssetqualityorNPLs(50%)

– Profitability(20%)

– Lquidity (20%)

– Foreignexchangeraterisk(5%)

– Capitaladequacy(5%)

• Improvementisskewedtoserviceeconomiesversussomedeclineforcommodities-basedeconomies.

16

BankingStabilityIndexBahamas Barbados

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Mar-200

8Sep-2008

Mar-200

9Sep-2009

Mar-201

0Sep-2010

Mar-201

1Sep-2011

Mar-201

2Sep-2012

Mar-201

3Sep-2013

Mar-201

4Sep-2014

Mar-201

5Sep-2015

Mar-201

6Sep-2016

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Mar-200

8Sep-2008

Mar-200

9Sep-2009

Mar-201

0Sep-2010

Mar-201

1Sep-2011

Mar-201

2Sep-2012

Mar-201

3Sep-2013

Mar-201

4Sep-2014

Mar-201

5Sep-2015

Mar-201

6Sep-2016

Source:CaribbeanEconomicResearchTeam

Services-basedeconomies

17

BankingStabilityIndexBelize

-2.0-1.5

-1.0

-0.5

0.00.5

1.0

1.5

Mar-200

8Sep-2008

Mar-200

9Sep-2009

Mar-201

0Sep-2010

Mar-201

1Sep-2011

Mar-201

2Sep-2012

Mar-201

3Sep-2013

Mar-201

4Sep-2014

Mar-201

5Sep-2015

Mar-201

6Sep-2016

Source:CaribbeanEconomicResearchTeam

-1.5

-1.0

-0.5

0.0

0.5

1.0

Mar-200

8Sep-2008

Mar-200

9Sep-2009

Mar-201

0Sep-2010

Mar-201

1Sep-2011

Mar-201

2Sep-2012

Mar-201

3Sep-2013

Mar-201

4Sep-2014

Mar-201

5Sep-2015

Mar-201

6Sep-2016

CurrencyUnion— ECCUServices-basedeconomies

18

BankingStabilityIndex

Jamaica Suriname

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Mar-200

8Sep-2008

Mar-200

9Sep-2009

Mar-201

0Sep-2010

Mar-201

1Sep-2011

Mar-201

2Sep-2012

Mar-201

3Sep-2013

Mar-201

4Sep-2014

Mar-201

5Sep-2015

Mar-201

6Sep-2016

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Mar-200

8Sep-2008

Mar-200

9Sep-2009

Mar-201

0Sep-2010

Mar-201

1Sep-2011

Mar-201

2Sep-2012

Mar-201

3Sep-2013

Mar-201

4Sep-2014

Mar-201

5Sep-2015

Mar-201

6Sep-2016

Source:CaribbeanEconomicResearchTeam

Commodities-basedServices-based

19

BankingStabilityIndex

Trinidad&Tobago

-1.0-0.8-0.6-0.4-0.20.00.20.40.6

Mar-200

8Sep-2008

Mar-200

9Sep-2009

Mar-201

0Sep-2010

Mar-201

1Sep-2011

Mar-201

2Sep-2012

Mar-201

3Sep-2013

Mar-201

4Sep-2014

Mar-201

5Sep-2015

Mar-201

6Sep-2016

Source:CaribbeanEconomicResearchTeam

-1.5-1.0-0.50.00.51.01.52.0

Mar-200

8Sep-2008

Mar-200

9Sep-2009

Mar-201

0Sep-2010

Mar-201

1Sep-2011

Mar-201

2Sep-2012

Mar-201

3Sep-2013

Mar-201

4Sep-2014

Mar-201

5Sep-2015

Mar-201

6Sep-2016

GuyanaCommodities-basedeconomies

20

CorrespondentBankingThreatsEither fully withdrawn or “de-risked” relationships in other constrainingways, responding to a combination of concerns related to elevated anti-money laundering (AML)/counter financing of terrorism (CFT) riskassessments and economic considerations related to correspondentbanking business models.

• The Caribbean is one of the regions most affected by decliningcorresponding banking relationships (World Bank, 2015).

Trends :• Fewer institutions available to facilitate international transactions• Increased of vulnerability of the domestic financial sectors• Financial exclusion risks for some population segments and industries

21

Source: Caribbean Association of Banks, 2016

AreasofImpactLines

22

Source: Caribbean Association of Banks, 2016

AreasofImpact

• Money transmission/remittance services firms• Indigenous owned banks• Stand-alone international banks• Inward and outward cash shipment services

23

StrategicResponses

Collect data to quantify

impacts on inclusion and

cost transactions.

Use technical assistance and national risk assessments to improve AML/CFT systems.

Use uniform international benchmarks to improve AML/CFT standards.

Engage international stakeholders to address

perceptions &other

obstacles.

Use data to inform international engagement, but also areas for reform and strengtheningof AML/CFT systems.

A coordinated regional approach …

StrategicResponses

Accelerate financial inclusion initiatives.

Reduce dependence

on cash through

payments system reform.

Embrace consolidation

of smaller banks.

Make it easier for

small banks to

share technology

costs.

Reduce longterm vulnerabilities

Source: Caribbean Association of Banks, 2016

Conclusion

• Average financial sector conditions are improving, but shaped by thevarying strength of macro conditions across service versuscommodity export dependent economies.

– Low growth and high debt impose constraints on the environment

• Elevated NPLs represent the area for most significant requiredimprovement.

• Access to correspondent banking services remains a concern forwhich both near-term and longer-term risk reduction reductionstrategies are being deployed.

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