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