Trinidad and Tobago banks adopt many international standards

Following another positive year in 2016, in which it maintained profitability and financial strength in the face of challenges related to a wider economic slowdown, Trinidad and Tobago’s banking sector is poised to play a key role in supporting new growth. Executives in the sector expect the economy to begin to rebound in late 2017 and into 2018. In the meantime, they are seeking to maintain a competitive edge and increase their readiness to deal with the increasing pace of technological change.

Industry Structure 

The sector currently comprise eight active banks, 16 non-bank financial institutions and four financial holding companies. All operate under licences issued under the terms of the Financial Institutions Act of 2008. Unlike non-bank financial institutions, banks are licensed to accept deposits that are repayable on demand, and to extend short-term loans (for periods of less than one year). Banks are also the only institutions allowed to offer current account and chequeing facilities. Deposits in the banking system come under an obligatory insurance system administered by the Deposit Insurance Corporation.

The amount insured goes up to a value of TT$125,000 ($18,700) per depositor, per institution. An individual depositor can receive protection up to a maximum of TT$375,000 ($56,000) across three different types of account (single, joint and trust) in any one institution. The Central Bank of T&T (CBTT) regulates the financial system as a whole.

Dodging Recession 

The local banking sector remained healthy and profitable throughout 2016, despite the contraction in the economy caused by lower international commodity prices. The nation is among the Caribbean’s leading producers of petroleum and petroleum products, and has been feeling the effects of volatility within oil markets in particular. Despite this, non-oil exports, such as steel products, beverages, cereal products, sugar and other agricultural output have played a greater role in bolstering the economy and banks are in good shape, as a result of this economic diversity and the job market that it sustains.

Gregory Hines, the general manager of Small Business and Self Service Channels at Scotiabank told OBG, “Capital levels are multiple times the minimum required. Excess liquidity levels are currently elevated. It is quite significant that you have seen strong credit growth and there are relatively low levels of bad debt.” Hines said that, apart from the inherent financial health of local institutions, the recession has not significantly affected the labour market. “Unemployment is still relatively low; people still have their jobs. Those jobs are generating income, so people can successfully apply for loans and service those loans on an ongoing basis,” he said.

Challenges 

Still, the challenges are requiring banks to be adaptive. Chip Sa Gomes, sector head of financial services at the ANSA McAL Group, told OBG that the macroeconomic situation was, nevertheless, affecting the banking environment. The fall in oil and gas revenue, he explained, means the economy as a whole earns less foreign exchange, which causes difficulties for some companies.

Meanwhile, Nigel Baptiste, president of Republic Financial Holdings, told OBG, “The huge non-energy trade deficit is maintaining the levels of liquidity. Excluding chemicals and oil and gas from the export numbers, Trinidad is running a trade deficit of between TT$18bn ($2.7bn) and TT$20bn ($3bn).”

Banks are seeing the effects in terms of slower demand for credit. However, liquidity in the system remains high, not least because banks have benefitted from two decades of strong growth and diversified their assets over time, taking significant foreign investment positions.

Another positive factor is that lending policies to date have been prudent. “Most loan portfolios have not deteriorated to the extent that any institution might feel pain,” Sa Gomes told OBG. “While profitability from core banking products may have been a bit attenuated, the larger financial institutions have had some gains in other areas,” he said. Additionally, Sa Gomes explained that it is significant that, “share prices in well-run institutions, like Scotiabank and Republic Bank, have sold off a little ... I think that is just the market anticipating a slower rate of growth, or even a possible contraction,” he told OBG.

Adequate Reserves 

In its “Financial Stability Report” for 2015, published in 2016, the CBTT concludes that, “Thus far, challenges within the domestic macroeconomic environment, stemming from the fall in energy prices, have not translated into a material decline in any of the key financial soundness indicators of the banking and insurance sectors.” The report notes that, in the banking sector, the regulated ratio of capital to risk-weighted assets stood at more than 20%, significantly above the 8% statutory minimum, with healthy profitability denoted by a 2.9% return on assets (ROA) and an 18.1% return on equity (ROE). The ratio of non-performing loans (NPLs), a key indicator of asset quality, had fallen to 3.7% of the sector portfolio, down from 6.2% in 2011.

Meanwhile, CBTT stress tests, conducted on a variety of interest and foreign exchange shock scenarios, showed the key capital adequacy ratios remaining above the 8% level. These are positive signs for the sector, and bankers view these efforts as essential. Darryl White, managing director of RBC Royal Bank, told OBG, “Given the current economic climate, the sector needs to focus on stability more than anything else, while ensuring NPLs are held in check.”

Charges & Spreads 

Against the background of a tougher economic climate, there has been some criticism levelled at local banks, suggesting they are, in part, to blame for limits on the level of economic growth. In December 2016 the president of the Couva/Point Lisas Chamber of Commerce, Liaquat Ali, said commercial banks were treating local businesses unfairly by applying onerous charges, such as an administrative fee, on customers making deposits. He also said banks were responsible for an “unfair distribution of foreign exchange”. A complaint was additionally made by Richie Sookhai, former president of the Chaguanas Chamber of Commerce, who said that bank spreads (the margin between interest rates paid to depositors and charged to borrowers) were “far too wide.” Sookhai added, “The fact that there have been no decreases in prime lending and overdraft rates could reflect a lack of interest by the banks in adapting like other business organisations and sharing in the burden of adjustment within this very challenging economic environment.”

In response to these complaints, the Bankers’ Association of T&T (BATT) said it was happy to meet with members of the country’s chambers of commerce to clarify and discuss any concerns. BATT said the sector was highly regulated and required by law to publish a list of all transaction charges. There were cheaper options for some transactions, such as digital and non-branch alternatives, that were “more convenient, safe and time effective”. In relation to complaints over bank spreads, the BATT said, “The data will show that the overall margin between loans and deposit rates are at some of the lowest points experienced in a number of years.”

Tax Compliance

A controversial piece of legislation involving not just T&T, but also the US, was finally put through in March 2017, after months of fierce disagreement between the government and the opposition. During the course of 2016 T&T had moved closer to meeting the requirements of the US Foreign Account Tax Compliance Act (FATCA). Discussions with the US on the subject had been in progress for some three years and remained a subject of ongoing domestic political controversy.

Complying with FATCA obligates local banks to report full details of all accounts held by US citizens or companies to the US Internal Revenue Service. In August 2016, Colm Imbert, T&T’s minister of finance, and US Ambassador John Estrada, whose posting ended in January 2017, signed an inter-governmental agreement committing both countries to implement mutual assistance protocols in tax matters based on automatic information exchange.

The approval of enabling legislation by T&T was considered a matter of urgency, because the US had imposed a compliance deadline of September 30, 2016. FATCA requires US banks to withhold a portion – up to 30% – of payments made to any non-compliant foreign financial institutions. The application of such sanctions could have a major, negative effects on the functioning of T&T’s financial sector, which is closely linked to US payments systems, since it could disrupt critical banking services such as credit card payments, wire transfers and remittances.

Even though the United National Congress opposition party had supported FATCA compliance when it was in office (2010-15), a domestic political confrontation was triggered when it began to oppose the enabling legislation after losing the September 2015 general election. The party argued that the legislation, known as the Tax Information Exchange Agreements Bill, was too draconian.

The Peoples National Movement government was left three votes short of the 26 needed to pass the bill in the House of Representatives. As a result, the legislation was not passed before the deadline. The government sought to find a solution through continued negotiations with the opposition, and it was simultaneously able to agree to an end-February 2017 compliance deadline with US authorities.

Those In Favour 

Representing commercial banks, BATT lobbied actively for FATCA compliance ahead of this new deadline. In a radio interview in December 2016, Baptiste, speaking as a BATT representative, announced that the association was concerned over the delay with compliance, fearing that “the country will be placed in an untenable situation” if the deadline was missed. The American Chamber of Commerce of T&T also expressed concern, emphasising the need for “co-operation between government and opposition” to show that the country is “committed to fighting money laundering, the financing of terrorism, and other financial crimes”.

Imbert subsequently announced a further extension of the deadline to end-September 2017. The passage of the legislation was first enabled by a unanimous vote in the House of Representatives on February 23, 2017, before being finalised on March 8 in the Senate, with 29 out of 30 MPs voting in favour. Imbert has since rejected concerns over the implications of the bill in the country, stating, “it is practical business and common sense”.

De-risking The Caribbean 

Changes in the approach to global banking regulations, together with increased risk-aversion, have had an important and largely unintended impact on the regional and local economic environment. The Caribbean, in particular, has been affected negatively by this “de-risking” trend among international banks, some of which have been ending their correspondent banking relationships with smaller local institutions.

Correspondent banking allowed local banks to carry out transactions on behalf of global banks based on jurisdictions, such as the US, UK and Europe. It also gave these institutions access to the international banking system, enabling them to carry out wire transfers, cheque clearing and currency exchange operations. Correspondent banking requires mutual trust; each of the banks involved must have faith in the other’s adherence to international standards of risk management.

Panama Papers 

However, global banks became cautious and concerned over the security levels in the Caribbean. This perception was heightened by the “Panama Papers” scandal of early 2016, when leaked documents from a law firm in that country showed evidence that its offshore banking centre was being used for money laundering and tax evasion. As a result, some international banks have opted to terminate relationships with the smaller institutions believed to be operating in riskier jurisdictions.

Speaking in November 2016, CBTT’s governor Alvin Hilaire noted the growing tendency of some large banks in developed countries to end their correspondent relationships with banks in smaller territories. The termination of these relationships, Hilaire warned, could negatively affect smaller economies, for example by reducing or limiting the flow of remittances and payments for cross-border goods and services. He said, “In the case of T&T, the incidence of withdrawal of correspondent banking services has so far been limited. However, there is an urgency for the country to fully adhere to tax compliance accords and international anti-money laundering/combating the financing of terrorism [AML/CFT] standards to forestall the possibility that the jurisdiction, and by extension domestic financial institutions, is characterised as lax in compliance, thereby hindering international financial relationships.”

Impact 

Anya Schnoor, Scotiabank’s managing director who also serves as BATT’s president, also stressed the negative effects of ending correspondent relationships, pointing out that a local institution that does not have a correspondent banking relationship with a lender in the US will not be able to issue credit cards that depend on the ability to settle with US-based companies, such as Visa and MasterCard.

The issue was highlighted at the summit of CARICOM leaders in Guyana in July 2016. Gaston Browne, prime minister of Antigua and Barbuda, urged the region to counter the de-risking trend by tightening up legislation on AML/CFT measures. The issue was also raised at the UN General Assembly in September 2016, when Frederick Mitchell, foreign minister of the Bahamas, said banks in the developed world were refusing to cash the cheques of some Caribbean lenders, “because they say the risk of policing the CARICOM banks on compliance to the new rules is too high, and the business they get is too low.” Mitchell described the closure of correspondent banking relationships as “immoral”.

At the 2016 High Level Caribbean Forum, held in Port of Spain in November, the IMF’s deputy managing director, Tao Zhang, described the termination of correspondent banking relationships as “a clear and present danger to the Caribbean.” A survey carried out by the Caribbean Association of Banks had shown that 12 countries in the region had experienced a drop in correspondent banking arrangements, including the Bahamas, Belize, Guyana, Jamaica, Suriname, T&T, and countries in the Eastern Caribbean Currency Union. The loss was particularly severe in Belize where it was described as “systemic”, affecting institutions that represent more than half of the local banking system’s total assets. The IMF called for a dialogue between countries, regulators and banks to preserve correspondent banking and to discuss collective solutions to mitigate the costs required to improve information exchange.

Legislative Agenda 

During the course of 2016 T&T’s commercial banks were lobbying the government to push forward with updating legislation and modernising the regulatory framework. In October, just after parliamentary approval of the FY 2017 budget, Schnoor said, “There is a tremendous legislative agenda that needs to occupy our focus at this time.” She argued that the government’s priorities should be, first, to pass local legislation bringing T&T into compliance with FATCA; second, to pass the Insurance Bill (a long-discussed piece of legislation intended to update and modernise insurance regulation); and third, to pass local AML/CFT legislation.

“It is very important that the country set the stage and get the apparatus to ensure that we are fulfilling all of our obligations,” she said. BATT was also eager to see progress on government promises to improve tax administration and collection by introducing a single, unified revenue authority.

Bottom Line 

Republic Bank, the market leader in T&T, is often considered a bellwether for both the economy, in general, and the banking sector, in particular. In FY 2016 (the year ending September 30, 2016) the bank reported total assets of TT$66.9bn ($10bn), an increase of 1.3% on the year-earlier period. Total deposits fell by 0.2% to TT$49.6bn ($7.4bn). After-tax profit was TT$946.3m ($141.4m), a decrease of 22.7% compared to FY 2015. Meanwhile, earnings per share declined from TT$7.59 ($1.13) to TT$5.87 ($0.88). ROA dropped to 1.42%, down from 1.97% in the preceding year, while ROE eased to 10.49%, from 14.09% in FY 2015.

Commenting on the fall in profits, Baptiste noted that, if three one-off charges were stripped out, overall profits would have increased by 0.7%, to TT$1.2bn ($179m). The one-off items included goodwill impairment and loan losses connected with the acquisition of HFC Bank in Ghana. Republic Bank also has Caribbean subsidiaries in Suriname, Cayman, Grenada, Barbados and Guyana.

In its annual report, the firm noted that T&T, its home market, continued to see weak economic performance in the energy and non-energy segments, but there were short-term prospects of a boost in construction activity due to increased government spending in FY 2017. Chairman of Republic Bank, Ronald Harford, told OBG, “Despite economic challenges in several of the countries where we operate, we are optimistic that, with our strong asset base and sound risk management policies, we will have a satisfactory performance in 2017.”

Scotiabank T&T, another large local player, reported that, in the year ended October 31, 2016, after–tax profits rose by 10% to TT$625m ($93.4m). The bank said increased profitability was driven by strong growth in retail loans. While overall lending rose by 1%, loans to retail customers grew by 10%. The year ended with total assets up by 5% to TT$23.2bn ($3.5bn), while deposits increased by 4.4% to TT$15.6bn ($2.3bn). Earlier, presenting the third-quarter results of FY 2016, Schnoor said that the bank’s performance reflected its strength and stability. Although the economic environment had been challenging, Schnoor highlighted growth in the loan and deposit portfolios and double-digit growth in retail banking. However, she also said that slower economic activity, increased government borrowing and the weakness of the T&T dollar against the US dollar would contribute to a “muted” market.

Another significant local institution, First Citizens Bank, had a 1.1% increase in profit in the year ended September 2016, reaching TT$637.2m ($94.2m), while total net income rose 13.2% to TT$2bn ($298m).

Technological Boost 

T&T’s banks continue to adapt to technological change. Most local banks now offer a range of online and mobile banking options. “Technology gives consumers unprecedented convenience, flexibility and power. They can bank how they want, when they want, wherever they want,” Hines told OBG. “We strongly believe that is where the future lies for banking services.”

Hines added that, after making the necessary adjustments, the costs to the customer are much lower than in-branch transactions. “Reducing costs, especially in a declining economy, is not a bad thing,” he said. As an example, Hines mentioned that his bank’s sales agents were using hand-held tablets to input loan application details during customer visits, with the data being immediately synced to a central database. The bank was also beginning to use data analytics to build up customer profiles to improve service delivery. Omni-channel banking was seen as complementary to the traditional physical branch network in the country, although Scotiabank would continue to review all its customer channels. Hines also believed that the internet of things – the increasing use of connected or “smart” devices from mobile phones to watches and motor vehicles – would have a major impact on the banking sector.

Outlook 

In an environment of constant evolution, 2017 will continue to be challenging for banks in T&T. “Hopefully, as we go through 2017, we may be sensing that we are re-entering into a growth environment,” Sa Gomes told OBG. “Hydrocarbons prices may have stabilised and production volumes increased, so that – by 2018 – we could turn the corner.” 

Hines also said that though lenders do not have the ability to predict the macroeconomic future in which banks will have to operate in, his institution was using scenario planning to position itself competitively for the possibilities. One of its main conclusions was that adapting to and incorporating new technology will be critical going forward. “The internet of things is real and has implications for everything. It will have an impact on the banking sector and, more broadly, on the economies of small islands,” he told OBG.