Caribbean Commercial Banking: Myths, Realities and the Way Forward

byRonald Ramkissoon Ph.D.

Senior Economist, Republic Bank Ltd. 3rd International Conference on Business, Banking and Finance, May 27-29, 2009 UWI, St Augustine, Trinidad

Outline

Background to Paper Attempt to clear up misunderstandings

Myths Realities Way Forward Conclusions

Caveats

Paper done in 2007 World’s financial system has changed

radically since then Major focus on banking system

Myth #1: Banks Lend More for Consumption

Data proves otherwise Is consumption lending bad?

Note urging of advanced economies Is the problem re- “productive” loans, on the

supply side or on the demand side? Is the Caribbean open for business?

T&T: Loan Portfolio Distribution (TT$m)

13,76915,404

11,794

9,096

11,216

6,764

8,380

13,026

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

2003 2004 2005 2006

Private Sector Consumer Loans

T&T: Loan Distribution (%) (Ave. 2002-2006)

40.26

50.18

11.85

0

10

20

30

40

50

60

Consumer Loans Private Sector Loans Gov't Loans

Bank Household/Consumer Loans to Total Loans (1999-2004)

Country Average %

Trinidad and Tobago 43.3

ECCU 47.2

Caribbean 40.0

Bahamas 61.9

T&T: Distribution of Consumer Loans (Ave. 2004-2006)

Motor Vehicles 11%

Education 2%Travel

1%

Financial Assets 6%

Insurance 1%

Refinancing 8%

Consolidation Debt6%

Domestic Appliances

1%

Misc. Personal Services

3%

Other Purposes20%

Home Improvement

8%

Land & Real Estate 10%

Bridging Finance 1%

Real Estate Mortgage Loans

22%

Singapore 1

St. Lucia 27

Antigua & Barbuda 33

St.Vincent & the Grenadines 44

Jamaica 50

Belize 56

Trinidad and Tobago 59

Dominica 72

Grenada 73

St. Kitts & Nevis 85

Dominican Republic 117

Suriname 122

Guyana 136

Haiti 139

Democratic Republic of Congo 175

Doing Business in the Caribbean (Ranking 2007)

Way Forward

Address business environment Address capital market development etc.

Myth #2:Bank Spreads are Too High

Spreads are highest for more risky performers. The reverse is also true.

On the deposit side deposit rates are higher in Jamaica and Suriname compared to Barbados-no surprise here

Lending rates are higher in the same countries with higher deposit rates

Risk free rates are higher in developing countries If deposit and loan rates are consistent then spreads

must be

Caribbean Interest Rate Spreads (%) 1995-2004

1995 2000 2001 2002 2003 2004

Barbados 6.6 7.05 8.00 7.74 7.61 7.30

Bahamas 9.06 7.77 7.23 7.22 8.11 7.47

Belize 9.10 10.80 11.10 10.00 9.30 8.80

Guyana 9.92 10.40 10.90 12.98 13.23 12.49

Jamaica 30.74 13.20 11.87 11.38 12.62 11.68

Suriname 0.00 13.60 12.40 12.90 12.50 11.40

Trinidad and Tobago

9.46 10.50 9.12 8.64 8.34 6.74

Average OECS 6.34 7.35 7.21 7.47 8.28 7.11

Average Caribbean

8.37 8.81 8.56 8.71 9.19 8.18

Deposit Rate Lending Rate Spread

Antigua & Barbuda 4.6 12.1 7.5

Dominica 3.8 10.9 7.1

Grenada 3.8 11.2 7.3

St.Kitts & Nevis 4.3 11.1 6.8

St. Lucia 4.5 12.9 8.4

St. Vincent & the Grenadines

4.3 11.3 7.0

Bahamas 4.2 13.8 9.6

Barbados 3.5 9.1 5.5

T&T 5.8 13.7 7.9

Belize 5.0 15.1 10.2

Jamaica 10.0 21.1 11.1

Suriname 11.4 24.3 12.9

Guyana 6.4 16.4 10.0

ECCU 4.2 11.6 7.3

Caribbean 5.5 14.1 8.6

Caribbean Comparison- Bank Interest Rates (av.%) 1999-2004

Comparative Treasury Bill Rates 3 month(%)

1.37

3.21

4.85

6.08

1.001.62

4.8 4.8 4.76 4.86

0

1

2

3

4

5

6

7

2002 2003 2004 2005 2006

%

US Treasury Bill Rate TT Treasury Bill Rate

Way Forward

Reduce/mitigate risks in Caribbean countries Be careful about the level of reserve

requirements- these represent costs which are reflected in deposit rates

Myth #3: Bank Profits are too High

Absolute dollar values are not as meaningful ROA’s in the Caribbean are generally on par with

those in other jurisdictions Banks in more risky environments with higher

intermediation costs should have higher profits “…banks stand a better chance of surviving the

vagaries of banking and risk mitigation if their margins are larger than is the case in more developed environments where banking structure is presumably superior and shocks are likely to be weaker.”

Assets & ROA-Selected Banks (2003-2005)

Bank Assets (US$b) ROA

Schrader’s-UK 5.17 5.82

Singer & Friedlander-UK (failed)

4.86 2.16

Silicon Valley Bankshares-USA

4.97 1.75

Citigroup-USA (failed) 1,414.0 1.89

T&T (aver.3 banks)

3.94 3.1

The Banker, 2004-2006

R.O.A. of Banks and Other Companies in T&T (ave.2003-2006)

Major Companies ROA%

NGC 20.9

Guardian Holdings 6.2

Ansa McAl 8.4

Neal and Massy Holdings 12.7

National Enterprises Ltd. 23.4

T&T Banks 3.1

Myth #4: Banks do not Compete

T&T banking system comprises Central Bank, 5 foreign-owned banks, 1 government-owned bank and 1 privately-owned local bank

A wide range of non-banks Caribbean has always been host to a range of

international banks Way forward: continue to ensure competition

Be aware that there is something as “unhealthy competition” i.e. non-bank institutions that compete with banks without being properly regulated

Myth #5: Banks do not Take Enough Risks

That banks look for “opportunities of lowest risks” in the economy is positive not negative

Banks should not be encouraged to take risks for which there balance sheets are not suited

Central banking regulation typically plays an important role here

Indeed higher risks typically generate higher returns which is one of the criticisms!

Myth # 6: Banks not Interested in Extending “Development Loans” Be careful about what might be defined as

“development” loans Such longer term loans tend to be made by

the longer term lending arm of banks i.e. merchant banks etc.

T&T: Non-bank “Development” Loans to Total Loans 2004-2006

66.96

77.25

6062646668707274767880

Trust & Mortgage Finance Companies Finance Companies and Merchant Banks

Conclusions

Caribbean commercial banks plead “not guilty” to the charges

Banks ought not to be asked to do what they are not equipped to do

To the extent that there is a gap for additional longer-term funding, cheaper funding and venture capital funding more remains to be done.

“When your neighbour’s house is on fire….” While Caribbean banks have remained largely

unscathed by the global financial meltdown we nevertheless have work to do

Conclusions

Make improvement to the Caribbean business environment the # 1 priority by Addressing limitations of the business

environment (demand side) Developing/providing the appropriate financial

institutions/products (supply side)

Thank You For Listening