Economic recovery in Trinidad and Tobago produces gains for banks

The banking sector in Trinidad and Tobago remained profitable and consolidated its financial stability in 2017, in conjunction with broader improvements in economic health. Banking is poised to play an important role in supporting the country’s continued development, with executives in the sector expecting T&T’s solid economic performance in 2018 to continue into 2019. In a May 2018 public address, Colm Imbert, the minister of finance, announced that the country was on the road to an economic rebound. In the near term, domestic banks are seeking to hone their competitive edge and enhance their capacity for dealing with technological change as the economy evolves and expands.

Recovery in 2018 has come on the back of rising energy prices and the completion of new energy projects. Catalysing stronger and more sustainable growth over the medium term will depend on the ability of Prime Minister Keith Rowley’s government to deliver reforms, manage a new generation of public-private partnerships, and kick-start new private sector investment and entrepreneurial activity. Within this environment, T&T’s banking sector seems to be well positioned for strong and steady growth. “The year 2018 will remain one of continued adjustment, yet it seems that conditions will be more favourable than in recent years,” Darryl White, CEO of RBC Royal Bank Trinidad and Tobago, told OBG.

Economic Headwings

The local banking sector has been supported by the moderate economic expansion experienced in late 2017 and early 2018. Banks largely weathered the storm as the economy struggled for several years through early 2017, enjoying growth in real estate mortgage lending and private sector credit growth in 2017.

Although the more dynamic players have recorded improved performance in 2018, the sector still faces significant challenges, with volatility in global oil markets and declining prices for petroleum and related products weighing on international economic growth. The energy sector is still the primary economic engine for T&T’s economy and with its growth still weak, the banking sector has had to diversify and look for strategies to benefit from efforts to increase non-oil exports such as steel products, sugar, cereal and beverages. Construction activities, agriculture, tourism and professional services have also played a key role in these diversification efforts, which have yielded positive returns on investment for financial sector players.

“While there is much discussion on the need of further diversification for the economy, the real issue is what to diversify in,” Mitchell de Silva, country officer of Citibank T&T, told OBG. “There is a very limited list of scaled tangible commodities and services that the country can be globally competitive in. Additionally, this process should be followed by a non-tangible diversification of thinking and methodology; this is required at all levels of society.”

Performance

Although banking continues to see the effects of sluggish growth in non-oil sectors, institutions generally remain profitable, with high levels of capital and relatively strong assets. In the first quarter of 2018 T&T’s commercial banks had assets worth TT$136bn ($20.2bn), and non-bank financial institutions had assets worth TT$8.8bn ($1.3bn). Throughout 2017 the sector reported capital adequacy ratios of more than 20%, and profitability levels were roughly on a par with those recorded in 2016. Profitability has since seen a moderate rise: commercial banks recorded 2.6% returns on assets and 20.1% returns on equity in the second quarter of 2018, up from 2.4% and 18.6%, respectively, in the same period of the previous year.

The primary driver of domestic bank profitability is the high net interest margin. While the ratio of interest margins to gross income has eased slightly, from 67.6% in the second quarter of 2017 to 67.4% in the same period of 2018, this remains high, boding well for further profitability gains.

Financial institutions have remained not only profitable, but also well protected from potential volatility. As of June 2018 risk-weighted assets held by commercial banks stood at 22.3%, up from 21.4% in June 2017. Stress tests by the central bank show that in a variety of potential foreign exchange and interest rate shock scenarios, these assets would remain well above the 8% statutory minimum. Healthy profitability levels and low non-performing loan ratios are further signs of health, with executives focused on maintaining long-term stability and solvency rather than maximising short-term profits.

The twin-island nation’s banking sector is conservative and profitable, with the high net interest margins and stable income growth anticipated to continue in the coming years. The sector also remained largely protected from economic headwinds, as banks have managed their businesses well and avoided excessive or imprudent lending. The country enjoys a relatively high level of capitalisation: domestic banks are endowed with sufficient reserves to weather any short-term macroeconomic hiccups in the coming months.

Portfolio Makeup

Positive economic indicators have seen private sector credit as a percentage of GDP rise from 39.4% in 2017 to 40.9% in the first half of 2018, with banking growth remaining sound and stable. This expansion has persisted in spite of several recessions over 2012-17, and unemployment has remained stable and relatively low over this period, having peaked at 5.4% in early 2012.

With the bulk of the workforce employed and earning income, demand for loans has remained strong, and citizens have been able to continue servicing their loans even in times of economic distress. The country recorded 5416 passenger car sales in the first half of 2018, up 0.1% year-on-year (y-o-y). Credit card loans have notably outpaced this, with commercial banks’ TT$3.19bn ($473m) in outstanding loans representing 7.3% y-o-y growth. Increases in credit card activity and automotive sales both indicate a pickup in banking transactions as the country sees a gradual economic rebound.

In June 2018 domestic commercial banks managed a collective portfolio of TT$57bn ($8.5bn) in credit to the private sector, comprising TT$19bn ($2.8bn) in business loans, TT$17bn ($2.5bn) in consumer loans and TT$20.7bn ($3.1bn) in real estate mortgages. The latter saw particularly robust growth, having expanded by 9% y-o-y, while business and consumer loans increased by 1.7% and 7.6% y-o-y, respectively. With activity spread across these segments, banks have been able to distribute risk across operators.

According to data from the central bank, in the second quarter of 2018, 3.3% of all loans in the country were non-performing. While this was a moderate y-o-y decline from 3.4% in the second quarter of 2017, it represented a slight increase from 3.2% in the first quarter of 2018. The consistently low rate of non-performing loans is a positive sign of financial sector stability and health.

In light of these positive indicators, in May 2018 the central bank announced it would adopt a 4.75% repurchase rate, a 0.5% overnight interbank rate and an 8.92% weighted average lending rate on new loans. In mid-August 2018 the central bank reported a lending rate of 9.13%, though savings accounts had a deposit interest rate of only 0.15%. This disparity between lending and deposit rates is the primary driver of bank profitability.

Industry Structure

The sector comprises eight active banks, 16 non-bank financial institutions and four financial holding companies, with the four largest institutions by capitalisation in mid-2018 being Republic Bank, FirstCaribbean International Bank, NCB Financial Group and Scotiabank Trinidad and Tobago, with market capitalisation of $2.47bn, $2.06bn, $2.01bn and $1.68bn, respectively. All of these entities operate under licences issued in compliance with T&T’s 2008 Financial Institutions Act.

Unlike non-bank financial institutions, banks are licensed to receive deposits from customers, which are repayable on demand. Banks are also permitted to extend short-term loans for periods of less than one year, and they are the only institutions allowed to open chequeing accounts. T&T’s bank deposits are protected by an obligatory insurance mechanism called the Deposit Insurance Corporation. The central bank is tasked with overseeing market operations, controlling inflation, managing currency stability and various other regulatory responsibilities.

Regulatory Framework

Furthermore, the authorities are improving financial transparency, with the framework for anti-money laundering (AML) and combatting the financing of terrorism (CFT) defined within the Proceeds of Crime Act, the Anti-Terrorism Act and the Financial Intelligence Unit of T&T Act. In October 2017 the Financial Action Task Force, an international watchdog, found that although T&T had made significant upgrades to its AML/CFT laws since the group’s previous evaluation, further reforms were still needed.

In November 2017 the Financial Action Task Force labelled T&T as a country with significant AML/CFT deficiencies, and in February 2018 it ruled that it would keep T&T in its International Cooperation Review Group until further improvements were made. In June 2018 global accounting consultancy Deloitte published a report, which likewise found that while the country has improved, it should continue working to confront policy shortfalls.

In efforts to address this, the central bank monitors local banks’ adoption of the International Financial Reporting Standards 9 guidelines. In February 2017 T&T’s Congress voted unanimously to approve the Foreign Account Taxation Agreement between T&T and the US. The legislation enables T&T’s Board of Inland Revenue to report accounts held by US citizens to the US Internal Revenue Service. In a related move, the Senate approved a new insurance bill that updated insurance regulations in June 2018.

Legislative Agenda

In 2018 the banking community has continued to lobby the political establishment to draft new AML/CFT legislation. In July 2018 the IMF released a statement, reporting that in order to be removed from the Financial Action Task Force’s list of sovereigns with AML/CFT deficiencies and limit potential negative consequences for financial institutions, the government would need to strengthen this framework. Domestic banks are continuing to improve due-diligence practices and purge problematic accounts related to companies in high-risk industries, including gambling and smaller financial institutions. Executives argue that improving AML practices must be prioritised if T&T’s financial sector wants to remain competitive with other countries in the region.

The legislature is also working to update the Electronic Transactions Act to allow customers to capture and submit digital photos to deposit cheques more conveniently via banking apps. Furthermore, the authorities are continuing to work towards implementing Basel II standards (see analysis).

Success Stories

The general solidity of the banking sector plays out at the company level. The central bank injected TT$46.5bn ($6.9bn) in reserves into the sector between 2014 and mid-2018. Banks remain well capitalised and profitable, enjoying some of the lowest non-performing loan ratios in the region. Republic Bank, the largest institution by market capitalisation in the country, is often seen as a barometer for the economy as a whole. In its FY 2016/17 (ending on September 30, 2017) Republic Bank recorded profits of $197m, up 38.7% from $142m in FY 2015/16.

Customer deposits also rose, albeit at a more moderate pace of 1.6%, from TT$49.6bn ($7.4bn) in FY 2015/16 to TT$50.4bn ($7.5bn) in FY 2016/17. Over this same period, interest income increased by 5.6%, from TT$3.6bn ($534m) to TT$3.8bn ($564m), while net loan impairment losses saw a 61.5% decline, from TT$412.6m ($61.2m) to TT$158.7m ($23.5m). Like other financial institutions, Republic Bank continues to benefit from significant interest income.

Republic Bank was not the only player to record solid earnings during 2017. In Scotiabank Trinidad and Tobago’s FY 2016/17 (ending October 31, 2017), the fourth-largest financial institution by market cap reported profits of TT$657.7m ($97.5m), up 5.2% from TT$625.2m ($92.7m) in FY 2015/16. Meanwhile, it recorded assets of TT$24.4bn ($3.6bn) in FY 2016/17, up from TT$23.3bn ($3.5bn) in FY 2015/16. Scotiabank’s balance sheet also reflects improvements in T&T’s economy, with deposits growing by 5.1%, from TT$17.6bn ($2.6bn) in FY2015/16 to TT$18.5bn ($2.7bn) in FY 2016/17, and the portfolio of loans to customers increasing from TT$13.3bn ($2bn) to TT$14bn ($2.1bn) over this same period.

On a less positive note, Scotiabank Trinidad and Tobago also saw its loan-loss provision rise by 37.5%, from TT$76.8m ($11.4m) in FY 2015/16 to TT$105.6m ($15.7m) in FY 2016/17. In June 2018 Scotiabank reported that in the first quarter of 2018, the bank’s after-tax profits were down TT$24m ($3.6m), a 7% y-o-y decline, due to increased loan-loss provisions and the rising corporate tax rate (see Tax chapter).

In its FY 2016/17 (also ending October 31), First Citizens – ranked sixth in market capitalisation, with $1.3bn – saw a 0.7% rise in its net income to TT$641.9m ($95.2m). At the end of FY 2016/17 First Citizens reported that it had assets of $38.9bn.

New Technologies

Local banks have mirrored regional and global trends, adapting to technological change in the financial industry, expanding from their traditional base of services, and creating new online and mobile banking options. While the market remains dominated by cash and chequeing, it is following the global trend towards digital banking, with notable opportunities to adopt financial technologies. “Banks in T&T are not reacting as quickly as they do in the US or Europe, because the local environment is not as competitive,” George Sheppard, CEO at local financial advisory firm Sheppard Securities, told OBG. “While I think banks could be more proactive in adopting technology, I expect these market changes will be well received.”

Banks are also working to use technology to improve flexibility and convenience for customers while reducing costs, as online services have lower operational costs than in-branch transactions. Furthermore, lenders are embracing big data and the internet of things to better address their customers needs and offer new services. “All banks here are encouraging customers to adopt digital banking channels, including online and mobile platforms, as well as ATMs,” Reshard Mohammed, vice-president and CFO of Scotiabank Trinidad and Tobago, told OBG. “While T&T has not yet achieved the digital penetration levels of more advanced economies, all local banks offer online banking, so we must educate customers on the benefits of this technology.”

Challenges

While it has remained relatively strong, the sector will likely face persistent challenges, even as the economy is expected to continue to rebound in 2018 and 2019. If broad and robust economic growth does not return, the performance of financial institutions could be restricted by the relatively high levels of household debt.

Additionally, as is the case across the Caribbean – and indeed many emerging markets throughout the world – banks in T&T will need to ensure they are protected from risks related to climate change and natural disasters. T&T has also been affected by fallout effects from the 2016 Panama Papers scandal, which damaged the reputations of various financial institutions across the Caribbean.

The financial sector will continue to be affected by a broad trend of global banks working to reduce the risk of their holdings, which, in some cases, entails ending relationships with small banks in the Caribbean. Efforts by some large banks to exit the region shows a lack of trust in local institutions and regulatory bodies. T&T, like many other countries in the region, is affected by this global shift. Despite these significant challenges, T&T’s banking sector has a solid foundation on which to build future growth.

Outlook

Until the economy fully recovers from the turmoil of the mid-2010s, banks will be looking to adopt cost-saving technologies and work creatively to offer an array of financial services in various sectors. “As T&T’s economy picks up steam, the banking sector will come up against new opportunities for continued growth,” Roberta Braga, associate director of the Adrienne Arsht Latin America Centre at the Atlantic Council, a Washington, DC-based think-tank, told OBG. “The country’s financial system remained relatively stable during the recession, with credit quality, capital and profits hovering at a more or less consistent rate.” According to Braga, the economic rebound that began in late 2017 is opening new doors to stimulate growth in banking.

Indeed, the general outlook for both the sector and the wider economy is favourable. In the absence of a major influx of new competition from regional banks or financial technology companies, banks will continue to profit from wide net interest margins. In the lead-up to 2020 T&T’s banking sector is likely to continue on its slow and steady growth trajectory. While banks are well insulated from the risks of sudden shocks, they are also not likely to experience a major boom in near-term growth.

As domestic financial institutions work to provide services to a broader range of residents and continue to develop ties between public and private sector stakeholders, expansion is more likely to be organic than exponential. “The banking sector is well capitalised,” Sheppard told OBG. “The financial environment is very stable because net interest margins are very high, so sector players should continue to see steady growth through the early-to-mid 2020s.”