Trinidad and Tobago's lenders enjoy profitability in a well-capitalised banking sector

Well capitalised and financially healthy, the banking sector in Trinidad and Tobago is led by eight main institutions. Despite economic growth slowing in 2015 and 2016, the country’s banks remain profitable and may even see benefits from the end of a long period of very low interest rates.

Industry Structure

The financial sector is regulated by the Central Bank of T&T (CBTT) and consists of commercial banks and non-bank financial institutions, as defined in the Financial Institutions Act of 2008. Commercial bank products and services include local-currency and US-dollar savings and investment instruments, foreign exchange dealings, money market instruments, trade financing, project financing, and the floating and underwriting of shares and bonds. Only commercial banks are allowed to accept demand deposits, offer cheque facilities and make short-term loans for durations of less than one year.

There are eight commercial banks in operation: Bank of Baroda, Citibank, Canadian Imperial Bank of Commerce (CIBC), FirstCaribbean International Bank, First Citizens Bank (FCB), Jamaica Money Market Brokers (JMMB) Bank (previously known as Intercommercial Bank), Republic Bank, Scotiabank and RBC Royal Bank (RBC). The largest of these lenders is Republic Bank, which was estimated to have nearly half the total loans and deposits in the system in 2015. Ranked in second place is FCB with an estimated 20% share of the market’s loan book. Scotiabank leads in the consumer loans and mortgages segment.

There are 16 non-bank financial institutions including ANSA Merchant Bank, Fidelity Finance and Leasing, First Citizens Asset Management, Guardian Group Trust and RBC Investment Management. There are also four financial holding companies.

Between them, the eight commercial banks have a total of 123 branches around the country, and directly employ a total staff of around 7400. There are an estimated 442 automatic teller machines (ATMs) in operation, representing an average of roughly one ATM per 3000 people. Four banks operate a shared ATM and point-of-sale network, while telephone and internet-based banking services are also available. All the country’s commercial banks are members of the Bankers’ Association of T&T (BATT).

Regional Centre

The country operates as a regional centre for a number of international banks. Citibank in T&T operates as a hub providing coverage for operations in Barbados and Bahamas. Three of Canada’s largest banks have an operational base in T&T serving the Caribbean region, while Scotia-bank’s local subsidiary is one of the largest banks. RBC Financial Caribbean’s regional headquarters is in Port of Spain. “The presence of international banks committed to and operating in T&T can be extremely beneficial. Through their presence clients and the government can leverage global and regional expertise, while utilizing innovative and world class products and solutions to meet their needs,” Catalina Herrera, country corporate officer at Citibank’s subsidiary in T&T, told OBG.

In Figures 

According to CBTT data, for the past five years growth in the financial sector (including finance, insurance and real estate) has outpaced economic expansion. In 2015 the nation’s GDP contracted by 2.1%, while the finance sector grew by 1.9%. The share of GDP accounted for by finance, insurance and real estate has held largely steady at around 11% since the start of the decade.

According to the CBTT, total assets of the country’s commercial banks inched up by 0.82% in 2015, reaching TT$134.8bn ($20.8bn) at the end of the year, up from TT$133.7bn ($20.6bn) in December 2014.

Meanwhile, deposits in the commercial banking system stood at TT$102.3bn ($15.75bn), a small (0.25%) fall on the TT$102.6bn ($15.8bn) registered the previous year. Of the total 36.4% were demand deposits, 31.7% were savings deposits, 22.1% were foreign currency deposits and 9.7% were time deposits. Consumer credit expanded by 8.1% in 2015 after registering 8.7% growth in 2014, with total outstanding commercial bank loans standing at TT$62.75bn ($9.7bn) at the end of 2015. Mortgage loans were up by 8.6% (down from 11% growth in the previous year).

A detailed breakdown of loans to private sector businesses in 2015, worth a total of TT$24.8bn ($3.8bn), showed that the largest categories were finance, insurance and real estate (24%), leasing and real estate mortgages (22%), and distribution (15%). Lending to businesses in the public sector reached TT$10.8bn ($1.7bn) in 2015, with the construction sector accounting for 29% of outstanding loans, followed by electricity and water companies with 28%.

Commercial banks’ investments fell 1.3% over the course of 2015, from TT$30.7bn ($4.73bn) in 2014 to TT$30.3bn ($4.66bn). Of the total, 43% were held in central government securities.

Excess Liquidity

CBTT data for 2010-15 also showed excess liquidity was a persistent, although currently diminishing feature of the commercial banking system. At the end of 2015 the banks had TT$18bn ($2.8bn) worth of cash reserves, which exceeded the required or statutory minimum reserve level of TT$13.3bn ($2bn) by a total of TT$4.6bn ($708.4m). Expressed as a proportion of total deposits, cash reserves were 22.9%, above the legally required 17% statutory reserve requirement. The excess liquidity portion was therefore equivalent to 5.9% of total deposits. The excess has been attributed to the build-up of wealth levels at a faster rate than investment opportunities during the years of high oil and gas revenues. According to CBTT data, excess liquidity reached a peak of 12.3% of total deposits in third-quarter 2013 but subsequently began to fall.

Available provisional data suggest excess liquidity continued to drop in 2015 and early 2016. In nominal terms the CBTT said excess liquidity fell to TT$4bn ($616m) in March 2016, about one-third lower than at the end of 2014. CBTT data for 2015 shows that T&T’s banks were in a strong financial position, with cash reserves equivalent to 22.9% of total deposit liabilities, down from 24.5% a year earlier.

A Good Year

Jason Julien, deputy chief executive at FCB, told OBG that 2015 had been a good year for T&T’s banking sector. “We continued to experience growth in 2015,” he said. “It was a year in which our industry, measured in terms of asset growth and profitability, once more outpaced the wider economy, as measured by the GDP growth rate, and that is a testament to the level of our capital, profitability, management systems, and just to the general robustness of the banks in Trinidad.” According to Julien, it also reflected good business strategies implemented in adverse macroeconomic conditions. Local banks with overseas operations had, for example, increased their activities in those markets enjoying stronger macroeconomic growth rates.

In addition, within T&T banks had diversified, leading to a reduction in their dependence on interest income by building up fee-based businesses. When the low-interest rate environment was most pronounced – in the first nine months of 2015 – banks took the opportunity to review the efficiency of their operations, increasing outsourcing and shared services in back offices.

“The year 2015 was characterised by additional investment in service efficiency, including call centres, online banking and self-service,” Darryl White, managing director at RBC Royal Bank, told OBG. “At the same time, there has been more restraint on expanding physical branches as the country probably has more than currently necessary.”

Perspectives

As interest rates began to rise further in the last three months of 2015, banks sought out new opportunities, such as securing higher net interest margins from mortgage business.

“In challenging times there are many opportunities for companies to diversify and expand their businesses overseas, for the government to look for efficiencies and to attract foreign investors, and for banks to support them in these initiatives,” Citibank’s Herrera told OBG.

Adding to this, Garvin Joefield, an economist at Republic Bank, told OBG that, “It is difficult for the economy to go through a challenging time like this and for the banks to emerge unscathed, so to speak. The banking sector did face some challenges in 2015.”

Joefield drew attention to some areas of concern, such as the fact that commercial bank lending to the private sector grew by only 6.1% in 2015 (compared to 7.3% in the previous year), despite a still fairly low interest rate environment, and significant untapped lending capacity among the banks. That would suggest that a difficult operating environment was limiting business growth, and that the banks might ultimately share some of the hardships being experienced by their key customers.

Chip Sa Gomes, the financial services sector head at local conglomerate ANSA McAL, told OBG, “We saw a lot of changes in 2015, including further softening of commodity prices, rising domestic interest rates and the depreciation of our currency, and these changes have been working their way through into 2016. There is a saying that in volatile times banks make more money, but that remains to be seen. If overall activity falls, our strategy will be to grow by expanding market share, for example by cross-selling more of our financial products.”

At Scotiabank Gregory Hines, general manager for strategic planning and business analytics, noted that based on banking data compiled by the CBTT, banks were seeing healthy loan growth in late 2015 and early 2016, driven mainly by consumer loan demand and a slowing system-wide rate of deposit growth, pointing to the end of an extended period of low interest rates. “With interest rates going up, the question on everyone’s mind is what is happening with the industry’s non-performing loans (NPLs) and the quality of assets, and what we are seeing so far from the central bank data is that asset quality remains very good and there are no concerning upward trends in delinquency or bad loans,” Hines told OBG.

In fact, NPLs stood at around 3.4% at the end of 2015, down from 4.3% of the total loan book in late 2014, and from a peak of 7.5% in 2011.

Capital Leader

According to a 2015 survey carried out by London-based magazine The Banker, in 2014 T&T’s banks continued to dominate the Caribbean when ranked by the value of their Tier-1 capital. Out of the top 10 of the regional list, five names were based in Port of Spain, Trinidad’s capital. The leader, RBC Financial Caribbean, recorded $2.6bn of Tier-1 capital, more than twice the size of second-placed CIBC FirstCaribbean International Bank, which is based in Barbados. Trinidad’s Republic Bank, First Citizens and Scotiabank were in fourth, sixth and eighth positions, respectively.

None of the local banks, however, feature in the “most improved” table, which was led by Finabank, a small Surinamese lender that expanded its Tier-capital by 227.28%. Overall, aggregate pre-tax profits in the region were lower than previously recorded, showing a decrease of 23.58% to $1.03bn.

Recent Results

In March 2016 Scotiabank T&T reported TT$566.1m ($87.2m) of after-tax income in the year to October 31, 2015, an increase of 1.1% on the year-earlier period. Total revenues in the same period for its retail, corporate and commercial banking segments were TT$1.2bn ($184.8m). Net income after tax for the insurance segment rose by 13% year-on-year, making insurance responsible for around 20% of the bank’s profits after tax.

Anya Schnoor, Scotiabank T&T’s managing director, said the bank’s acquisition strategy had contributed to growth in loan assets and revenue during 2015. She noted that after an extended period of declining interest rates, they were now beginning to move up. Brendan King, the chairman of the bank, said in 2016 the bank planned to focus on improving customer service in a contracting economy.

According to separate data released by the bank, it was the market leader in 2015 measured by return on equity (ROE) and return on assets (ROA) which stood at 15.59% and 2.64%, respectively. Scotiabank said these figures compared favourably with Republic Bank (ROE 13.62%, ROA 1.97%), First Citizens (ROE 10.03%, ROA 1.74%) and RBC (ROE 4.54%, ROA 0.91%).

Bond Rating

Also in March 2016 CariCRIS, a regional ratings agency, reaffirmed its high creditworthiness rating on a TT$1bn ($154m) bond issue by Republic Bank, which it scored at “AA+”. The rating was supported by Republic Bank’s strong market positions in T&T, Barbados, Grenada and Guyana, alongside recent acquisitions in South America and West Africa, with the agency noting that Republic Bank is the largest bank in T&T and the third largest in the Caribbean by assets. Other positives included a healthy resource base derived from a high level of retail deposits, geographic diversity and low funding costs. The rating was tempered by weak asset quality in subsidiaries in Barbados, Grenada and Ghana, and downside risks in T&T due to the fall in oil prices.

In the financial year ending September 30, 2015, Republic Bank reported diluted earnings per share of TT$7.57 ($1.17), representing a 2.4% increase in year-earlier levels. Profits before tax rose by 4.1% to TT$1.63bn ($251m). CariCRIS said that, “Republic Bank recorded a good financial performance given the growth in income and profitability measures, albeit at lower levels, and favourable efficiency in spite of the challenging economic environment.” US ratings agency Standard & Poor’s had given Republic Bank a “BBB+/A-2” rating in November 2015 which it said reflected its “strong” business position.

Recording Profits

CIBC FirstCaribbean International Bank reported earnings per share of $0.054 in the nine months to July 31, 2015, in contrast to a $0.11 loss experienced in the same year-earlier period. Net income for the period was $87m, compared to an earlier loss of $175.8m. Stockbrokers Bourse Securities, which gave CIBC FirstCaribbean a “hold” rating, said the bank was beginning to reap the gains of a cost-control exercise begun in 2014, although this was partly offset by a less optimistic economic outlook in some of its key markets in Barbados, Bahamas, the Cayman Islands, eastern Caribbean and Jamaica.

First Citizens Group was also profitable, reporting after-tax earnings of TT$630.4m ($97.1m) in the financial year to September 30, 2015, up 0.6% from the previous year. Karen Darbasie, the group’s CEO, said that there had been significant growth in customer loans and investment portfolios. Amid signs of recession in the local economy the bank was focusing on its non-interest income-generating products and also reported that it was seeing a positive impact from its expansion into Barbados and Costa Rica.

Foreign Currency Scarcity

Since the current oil price downturn began in late 2014 one of the most difficult challenges for the local business community has been the shortage of foreign currency in general, and of US dollars in particular, an issue which has had a significant impact on the relationship between commercial banks and their corporate clients. Because of reduced oil and gas revenues, dollars have become scarce. The CBTT has tried to ease the problem re-establishing the pre-April 2014 foreign exchange distribution system that limits the number of licensed authorised dealers to eight as opposed to 12 and injecting some US dollars into the local market, drawing down foreign currency reserves to do so.

As total foreign currency reserves act as the country’s principal safety buffer, the central bank has not wanted to reduce them too quickly or too sharply. At the end of October 2015 the CBTT made a special injection of $500m into the foreign currency market to ease some of the pressure on the T&T dollar.

Queueing Up

Local bankers explain that what has developed is a kind of queuing system. Many of their customers, particularly in the manufacturing and retail sectors, need to regularly buy dollars to pay for imports and other operations. One of the banks’ main sources of foreign currency are the regular sales carried out by the CBTT. The central bank gives prior notice of its intended currency sales to the banks, stipulating the exchange rate at which it is willing to sell. The currency is then allocated to the banks according to historical market shares. Although the allocation system used by the previous government was modified, with currency now being distributed to a smaller group of institutions, bankers say it has not changed the underlying mismatch between supply and demand: Julien described the net result to OBG as getting “a slightly larger share of a smaller cake”.

The banks have regularly received less foreign currency than they need to meet the requirements of their clients. In light of such a shortfall, the client would have to face the task of trying to renegotiate payment terms with foreign suppliers, or in future, trying to hedge by making multiple currency purchase requests to different banks. The shortage of US dollars has been an impediment to many businesses and has caused tension in bank-customer relations. In addition, this is also leading to an increase in the use of credit cards. “Credit cards are cannibalising consumer loan growth. Annual credit card transactions are valued at TT$1.2bn ($184.8m), of which 90% are for pure consumption. For banking, this implies a higher level of risk and less control on foreign currency demand,” White at RBC told OBG.

The sensitivity of the issue for all involved was highlighted in December 2015 when the new government dismissed Jwala Rambarran, the governor of the central bank. Relations had already become tense because Rambarran had reported the economy to be in recession, without coordinating the announcement with the Ministry of Finance. But the central issue leading up to his replacement was that he also released the names of companies that had bought one-third of all foreign exchange sold by the CBTT over the preceding three years. Rambarran said he had done so because the population had a right to know that a large part of the reserves were being used in the import and distribution trades. The dollars had been used for the purchase of vehicles, payment of credit cards, medicine and manufacturing among other items. In contrast, the government took the view that revealing the identity of the companies involved was a violation of their right to commercial privacy and a breach of rules set out by the CBTT. The BATT said that it regarded publication of the information as a breach of confidentiality.

In the mid-year budget review in April 2016 Colm Imbert, the minister of finance, announced a series of measures designed to preserve foreign currency reserves. These included a 7% tax on online purchases from international suppliers starting in September 2016, and a 50% increase in Customs duties on imports of luxury motor vehicles (those with engine capacity of over 1999 cc). A further 15% increase in petrol prices was also announced, implying a reduction in energy subsidies payable in foreign currency.

End Of An Era

The CBTT has been following a moderate interest rate tightening cycle, raising the main policy rate, the repo, by 25 basis points in July, September and again in December 2015 to reach 4.75% by the end of the year. Although the existence of excess liquidity within the commercial banking system has moderated the upward effect on commercial lending rates, they too have been tightening (see analysis). There was some uncertainty over the direction or speed of future adjustment to the repo rate given that in December 2015 the government had dismissed Rambarran after a series of public disagreements. Alvin Hilaire, the new governor of CBTT, gave no immediate indication of his thinking on interest rates, saying only that, “We are looking at what happens every day and will adjust policy to suit.”

Playing The International Card

A number of T&T’s banks are active at the regional and international level, either because they are part of global or regional financial groups or because, as locally owned institutions, they have begun to expand overseas. One example of the latter is locally owned Republic Bank, which through its parent, Republic Financial Holdings Limited (RFHL), has developed an international footprint. In March 2016 Nigel Baptiste, the recently appointed president of RFHL, visited the holding’s subsidiary in Ghana, HFC Bank Ghana. Baptiste also sits on the board of RFHL’s bank subsidiary in Guyana. He was quoted saying that the Ghanaian market was a good fit with RFHL’s investment focus. HFC Bank is ranked 16th in Ghana by value of assets, and its local management says it aims to become number three within the next three years.

Another one of T&T’s indigenous commercial banks, First Citizens, has a subsidiary in Costa Rica, which it aims to use as a hub for Central and South America, along with an operation in Barbados. The bank points out that while T&T is an energy exporter, both Costa Rica and Barbados are energy importers, so operations there help build in some counter-cyclical diversification into its portfolio of business assets.

In a significant development in late 2015 National Commercial Bank Jamaica (NCBJ), the largest commercial bank in Jamaica, agreed to buy a 29.9% stake in the T&T-based regional insurance and financial services group, Guardian Holdings. While the move was focused on insurance and had no immediate impact on T&T’s commercial banking sector, it was a reminder of the potential for future new entrants to join, or realignments to be made, among the existing players. The last new entries into the commercial banking sector were the Bank of Baroda and CIBC FirstCaribbean, which began operations in 2008.

Four years prior to that, JMMB acquired 50% of Intercommercial Bank, a stake it subsequently raised to 100% in 2013. Management restructuring had been completed as of May 2015, and the bank was then rebranded as JMMB Bank the following year.

Comings & Goings

While there have been no indications of banks wishing to leave the local market, analysts suggest some international banks may consider doing so as their strategies evolve. Economist Terrence Farrell mentioned that possibility at a business conference in late 2015. He described the region as “well banked”, citing IMF data indicating total bank assets are equivalent to 124% of regional GDP. Foreign-owned banks dominate the industry at the regional level, with 60% of assets, he said, but the numbers were falling as a result of two earlier waves of departures. Farrell said RBC, CIBC FirstCaribbean and Scotiabank might be reassessing their strategies. RBC had recently sold its retail banking operation in Jamaica to Sagicor Financial, as well as selling its Suriname subsidiary to Republic Bank. Scotiabank was reducing its lending to public sector entities.

At the same time, the new government has expressed its intention to increase efforts to attract foreign institutions as anchor tenants of an international financial centre to be located in the Invaders Bay area of Port of Spain. “The International Financial Centre could include one or more Chinese banks as anchor tenants, dedicated to servicing China’s considerable lending programmes in Latin America and the Caribbean. The presence of these Chinese institutions should also serve as a strong attraction for other international banks to the International Financial Centre,” Imbert said in April 2016.

E-Banking 

A number of local institutions have been developing their mobile and online banking services. Most were nevertheless cautious when asked about possible future branch closures resulting from an eventual shift to greater use of online banking. Some institutes expressed the view that the current generation of high-value retail banking customers – the wealthier segment of the market – are still very comfortable transacting their business in a face-to-face manner inside a bank branch. Instead, it is the younger generation of newer clients that prefers to manage accounts and make payments online.

However, bankers in T&T have said that it will take between five and 10 years for this group to increase its earnings and wealth and become the most important core customer group and a key driver of bank strategies. Therefore, it is necessary for banks to concentrate on developing their digital and mobile channels now, gradually building up their capacity and security, knowing that full use may not come until a decade’s time, and it is at that point that it will be possible to review and reduce the number of physical branches that are currently available.

Scotiabank’s Hines stresses that digital technology changes are becoming increasingly important for the industry. “It is driving efficiency, allowing us to get closer to our customers, creating new channel opportunities and streamlining our processes: it is real, and we are going to see more focus on this by the traditional banks as they meet the changing expectations of our customers,” he said.

Outlook

Republic Bank’s Joefield told OBG that most banks made a profit in 2015, but that “2016 could be the year in which, although they are expected to still record profits, those profits may grow at a slower rate or remain flat.” His outlook was based on an assessment of the different lending markets. He believed the best segment of the loan market in 2016 could be the manufacturing industry, on the hypothesis that tourism expected to have a good year in the Caribbean, and CARICOM economies together form the single largest export market for T&T-based light manufacturing companies.

Yet after its slow growth last year, overall credit to the corporate sector, might contract in 2016, with weak oil prices constraining economic activity. Joefield expected credit to the real estate sector to be positive, but to be led primarily by residential mortgage demand rather than by commercial development. Consumer credit on the other hand had proven resilient in 2015. So he concluded that it is likely to continue to grow in 2016, but “it may be a notably slower rate of expansion”.

At FCB, Julien acknowledged that 2016 would be a difficult year for the banks, but noted, “we have been here before”. He told OBG, “Even if 2016 turns out to be a year in which oil prices remain very low and one in which economic growth is subdued, we will come out the other side intact, because of how the banks here run their operations, because of our credit policies and because of the level of capital that we hold. We have to focus on being efficient, on having strict credit policies to manage NPLs and defaults, and on increasing exposure to markets that make sense in this economic climate.”

RBC’s White said that, “In 2016 the banking sector will face modest exposure from the knock-on effects of the energy and government revenue crisis. Delinquency from contractors is expected to rise in the short term; however, the government is expected to repay outstanding debts in the first half of the year.”