Trinidad and Tobago's banks benefit from international backing and state support

The commercial banking sector in Trinidad and Tobago is just one of the many sources of stability in the country’s economy and society. There are eight long-established banks in T&T, backed by major international groups or the government, some of which have a substantial presence outside the country.

These eight banks had total assets within the country of TT$131bn ($20.2bn) at the end of October 2014, according to the Central Bank of T&T (CBTT). The banks are well capitalised, conservative in their lending practices and well regulated. The trade association is the Bankers Association of T&T (BATT).

Central Bank

The role of the CBTT is defined by the Central Bank Act 23 of 1964, as amended. Other legislation that regulates the CBTT’s role includes the Financial Institutions Act 2008; the Insurance Act 6 of 1980, as amended; the Home Mortgage Bank Amendment Act 1 of 2007; the Exchange Control Act 24 of 1970, as amended; the Financial Obligations Regulations 2010; the Heritage and Stabilisation Fund Act 6 of 2007; and, lastly, the Unit Trust Corporation of T&T Act 26 of 1981.

Alongside its role as the banker of last resort to, and the regulator of, the commercial banks, and manager of the payments system, the CBTT issues currency and is the agency of monetary policy. It also acts as the banker and adviser to the government, and manages issues of securities on behalf of the state. The central bank oversees the foreign exchange reserves and is responsible for the portfolio of the Heritage and Stabilisation Fund, the sovereign wealth fund, whose assets under management at the end of June 2014 totalled $5.5bn.

Response to Downgrade

The CBTT monitors domestic and international economic developments. At the end of April 2015, ratings agency Moody’s Investors Service downgraded the T&T government bond and issuer rating from Baa1 to Baa2 and change the outlook from “stable” to “negative”, motivating this action as driven by comparatively weaker fiscal and monetary policy frameworks, in addition to " persistent fiscal deficits" and deteriorated economic growth prospects. The central bank issued a statement reassuring the international community that, “the sound credit worthiness of T&T’s natural gasbased economy is firmly supported by the country’s strong net external asset position (including assets in the Heritage and Stabilisation Fund), low external vulnerability and stable political system.” The CBTT hence defined the downgrade as “unjustified”.

Forex

The CBTT is also the key player in T&T’s foreign exchange market. It supplies US dollars to the market, in which it accounts for 20-25% of overall activity, according to the IMF’s September 2014 Article IV consultation staff report. The US dollars are sourced from the government, which receives tax payments in the form of foreign currency. The CBTT makes the foreign currency available by way of noncompetitive sales and a competitive auction.

The exchange rate is determined in non-competitive sales. Foreign exchange dealers are not permitted to sell foreign exchange at a rate that differs from the non-competitive rate by more than 1% in the week following the previous non-competitive sale. In essence, the CBTT makes administrative decisions in relation to the marginal quantity of foreign exchange that is provided to the market, and the price, as it manages a de facto crawling-peg currency regime.

Shortages

The IMF, along with various members of the business community who made their views known to OBG through interviews, indicated that there have frequently been shortages of foreign exchange in the T&T market – with the result that some local companies have had difficulties making payment to foreign suppliers.

In January 2015 the CBTT provided $400m in foreign exchange to the banking system, representing the largest foreign exchange intervention in a single month. The second-largest monthly sale, of $315m, had taken place in November 2010. The size of the sale was a response to demand for forex that remained unmet despite the CBTT’s sales of $1.7bn over the course of 2014. In May 2015 the CBTT announced that foreign exchange sales totalled $860m in the first four months of 2015, compared to $515m over the same period in 2014.

“The negative national sentiment surrounding sharply falling oil prices aggravated unsatisfied demand for foreign exchange as future demands from the public and business community have been brought forward,” the CBTT noted in a statement issued in late January. It also remarked that its interventions in the foreign exchange market contributed to absorbing excess liquidity from the system.

Regulatory Role

As the official agency responsible for fostering and promoting financial stability, the CBTT also regulates several institutions other than the commercial banks. It oversees the insurance sector, which includes seven active life insurers, 17 active general insurers and seven active composite insurers – although some of these firms are part of the same corporate group – along with adjusters, brokers, agents and salesmen working in the sector.

The CBTT is additionally responsible for around 150 private occupational pension plans, whose combined assets under management were around TT$46bn ($7.1bn) at the end of July 2014.

The CBTT oversees the T&T Unit Trust Corporation (UTC), a mutual fund company established in 1982 by an act of parliament that, as of early 2015, had around TT$20bn ($3.1bn) in assets under management. The CBTT also oversees Home Mortgage Bank (HMB), a specialist institution, governed by its own act, that is charged with developing the mortgage market, maintaining a secondary mortgage market and promoting finance for housing generally.

Important Institutions

The UTC and HMB are two of five institutions that have been identified by the CBTT as systemically important financial institutions. The others are the National Insurance Board of T&T (NIBTT), the central institution of the first pillar of the social security system, whose assets under management at the end of September 2012 were TT$22bn ($3.4bn); T&T Mortgage Finance Company (TTMF); and the Agricultural Development Bank of T&T (ADB). The CBTT hopes that possible future legislative changes will further extend its regulatory control over the NIBTT, HMB, TTMF and the ADB.

In 2005 the government agreed that a new Credit Union Act would transfer responsibility for T&T’s credit unions to the CBTT. The credit unions are among around 300 active cooperative societies, with more than TT$9.5bn ($1.5bn) in total assets. As of June 2015, the bill had yet to be passed and credit unions were still overseen by the Cooperative Development Division of the Ministry of Labour and Small and Micro Enterprise Development.

Other legislation that is being updated includes the UTC Act, the Occupational Pensions Plan Act, and the law governing real estate agents. As of mid-2015, a new and somewhat controversial Insurance Bill had yet to pass through T&T’s parliament. The central bank regulates five bureaux de change (of which the UTC is one) that are licensed to perform foreign exchange activity. Within the banking sector, as the CBTT defines it, the central bank oversees 17 merchant banks and finance companies.

Several of these are subsidiaries of the eight commercial banks and three financial holding companies. At the end of October 2014, these organisations had total assets of approximately TT$5.7bn ($879m). By this measure, they were no larger than they had been at the end of March 2011.

Insuring Deposits

The central bank appoints two of the five members of the Board of Management of the Deposit Insurance Corporation (DIC), established by the Central Bank and Financial Institutions Amendment Act of 1986, which amended the Central Bank Act. The DIC provides deposit insurance for depositors in all institutions that are permitted to operate under the Financial Institutions Act of 2008. Only deposits held within the country and denominated in T&T dollars are covered, up to a maximum of TT$125,000 ($19,275) per depositor. The DIC is funded principally through contributions and annual premiums paid by licensed financial firms.

Hard Numbers

Figures published by the CBTT highlight how the banking system is, indeed, awash with liquidity. As of the end of October 2014, commercial bank deposits with the CBTT amounted to TT$26.6bn ($4.1bn), or about one-fifth of total assets. Total loans to non-bank customers have dropped from 61% of deposits as of the end of October 2011 to 54% of deposits three years later.

Total loans have also fallen relative to total assets of the commercial banks, from 44% to 42%. However, the CBTT has noted that as a result of its liquidity management programme, the banks’ excess reserves actually started to fall in the first three months of the year. Indeed, the central bank raised its key repo rate by 25 basis points in March 2015 to 3.75% and again in June to 4%. The rate has now been raised five consecutive times.

Marla Dukharan, group economist of Royal Bank of Canada (RBC) Caribbean and chair of the Economics and Budget Subcommittees of the Bankers Association of T&T, noted the rise in excess liquidity has mostly been due to two factors. The first of these has been the relatively slow growth in credit to the non-bank sector post-crisis, which has been due to the general caution of the banks and the deleveraging by banks’ clients in the wake of the 2008-09 financial crisis and the collapse of the CL Financial group. “The other factor has been the relatively high and growing levels of spending (i.e., in excess of revenues) by the government,” she told OBG.

Lending

CBTT data confirms that lending has been growing at single-digit rates in recent years. Total loans grew by 6.8% in the year to October 2014, having risen by 2.7% in the preceding year, and by 4% in the 12 months to the end of October 2012.

In the two years to the end of October 2014, loans to businesses hardly rose at all, and loans to public sector entities were smaller than they had been in October 2011. Conversely, lending to consumers has been accelerating, with the annual growth rate rising from 4.5% in the year to October 2013 to 7.3% in the 12 months to the end of October 2014.

Meanwhile, there has been consistent double-digit growth in mortgages. Outstanding mortgage loans have increased from TT$11.3bn ($1.7bn) in October 2011 to TT$16bn ($2.5bn) in October 2014.

One consequence of the fairly lax fiscal policy is that the banks’ holdings of government bonds surged by almost 50% in the year to October 2012, and rose by 17.4% in the year to October 2014, following a period of consolidation in 2013. As of October 2014, the holdings of government bonds amounted to TT$16.1bn ($2.5bn), or more than half of total investments held by the banks of TT$30.1bn ($4.6bn).

As might be expected in a country that has typically run current account surpluses, net foreign assets have also risen quite strongly, increasing from TT$10bn ($1.5bn) at the end of October 2011 to TT$15.3bn ($2.4bn) at the end of October 2014.

On the liabilities side of the balance sheet, there has been a sharp deceleration in bank deposits in the last year, after several years of stronger growth. Total deposits expanded by 9.2% in the year to October 2012, and by 12% in the year to October 2013. In both years, deposits rose far faster than loans to non-bank customers. However, in the year to October 2014, deposits grew by just 4.9%, and more slowly than the increase in total loans.

Changing Slowly

By many metrics, T&T’s commercial banking sector has changed slowly, if at all, over the past five years. Eight banks operate 134 branches across the country. Collectively, their payrolls have contracted from 7926 people at the end of 2009 to 7658 at the end of 2013, according to data published by the CBTT. The fall in the size of the workforce is due to a reduction in branch staffing.

Over the four years to the end of 2013, the total number of deposit accounts rose from 1.7m to 1.8m, in a country whose population is approaching 1.4m. Over the same period, the number of loan accounts increased from 500,000 to 600,000. This was due mainly to the rise in credit cards outstanding, from 200,000 to 300,000. Collectively, the eight banks’ net profit after tax in 2013 was TT$2bn ($308.4m) or marginally more than it had been in 2011. Operating profit (i.e., operating revenues less expenses) fell from TT$2.3bn ($354.7m) in 2009 to TT$1.9bn ($293m) in 2013. Interest income has been falling, mainly due to the low interest rate environment.

The banks have sought to boost fee income, and have had a degree of success in doing so. However, this has not been sufficient to offset the decline in interest income. Total operating expenses have fallen broadly in line with total operating revenues. A sizeable drop in interest expense has been offset by strong growth in salaries/employee benefits and “all other” costs. In spite of the reduction in the size of the sector workforce, the total salaries/employee benefits paid by the banks increased from TT$1.2bn ($185m) in 2009 to TT$1.9bn ($293m) in 2013.

Capital

Thanks to the fairly retained net profits, the banks’ capital accounts have increased from TT$12.5bn ($1.9bn) at the end of 2009 to TT$17.2bn ($2.7bn) at the end of 2013. During 2013 the average total assets of the commercial banks amounted to TT$124bn ($19bn). In its Article IV report on T&T, which was published in September 2014, the IMF observed that capital amounted to one-quarter of risk-weighted assets. As assets have grown over time and profits, by various measures, have remained stagnant, a number of performance ratios have deteriorated since 2009. The total operating income, for instance, has slipped from 8.3% of average total assets in 2009 to 5.4% in 2013. Net profit after tax was equivalent to 16.1% of total equity in 2009, yet in 2013 that percentage had decreased to 11.9%.

Republic Bank

The roots of the largest indigenous bank, Republic Bank, lie in the establishment of the Colonial Bank, Trinidad’s first commercial bank, in 1837. Today it is a universal bank in T&T, with merchant banking, investment and wealth management subsidiaries. It also has banking subsidiaries in Barbados, the Cayman Islands, Grenada and Guyana, and operations in St Lucia. For the financial year to the end of September 2014, the group reported net profit after tax and minority interests of TT$1.2bn ($185m). At the end of the period, its asset base amounted to TT$59.4bn ($9.2bn). Republic Bank is listed on the T&T Stock Exchange (TTSE).

The bank was a key element of CL Financial, which failed following the global crisis of 2008-09. Its share register continues to include a number of entities that are related to CL Financial or to its life insurance operation Colonial Life Insurance Company (CLICO) – which are now effectively under government control. CLICO Trust Corporation is the largest shareholder in Republic Bank overall, with 24.8% of the stock. CLICO Trust Corporation holds the investment on behalf of CLICO Investment Fund.

T&T-based shareholders of some of CLICO’s products were offered long-dated government bonds. Many of these shareholders have chosen to exchange the bonds for shares in the listed CLICO Investment Fund. CLICO Investment Bank (in liquidation) holds another 10% of the stock. CLICO, the traditional life insurance company, which is still operating under the government’s control, holds another 7.3% of Republic Bank. Other than the CL Financial/CLICO entities, the largest institutional investor in Republic Bank is the NIBTT, which owns about 18% of the bank’s stock.

In Republic Bank’s annual report for the year to September 30, 2014, the managing director, David Dulal-Whiteway, highlighted a number of positive developments in the bank’s T&T operations. The quality of the loan portfolio in the country improved, with the result that the ratio of non-performing loans to gross loans was 3.5%, or 20 basis points lower than in the previous year.

Dulal-Whiteway observed that the net interest margin may improve in the year to September 2015 thanks to the CBTT’s decision to increase its repo rate by 25 basis points to 3% in September 2014.

Republic Bank’s total assets in T&T rose by 6.6% to TT$46.1bn ($7.1bn) over the year to September 30, 2014. Loans and advances in T&T increased by 10% to TT$19.3bn ($3bn). Because of the increase in the loan portfolio, net interest income in the country also improved by 4.6% to TT$1.6bn ($246.7m). As of the end of September 2014, the capital adequacy ratio of Republic Bank’s operating subsidiary in T&T had reached 25.77%.

First Citizens

The second-largest indigenous financial institution is the First Citizens Group. Like Republic Bank, it is a multifaceted universal bank that has a regional geographic footprint. Following an initial public offering (IPO) that was T&T’s largest, First Citizens was listed on the TTSE on September 16, 2013. The government retains a shareholding of 77.8%, through First Citizens Holdings. The NIBTT is the second-largest shareholder, with a 5.5% stake.

First Citizens Bank, the T&T commercial banking operation of the group, was created in 1993 from the merger of the Trinidad Cooperative Bank, Worker’s Bank and National Commercial Bank.

Today the group includes three securities firms, including First Citizens Investment Services, which is the largest full-service investment advisory, portfolio management and brokerage firm in the Caribbean, as well as trustee and asset management subsidiaries in T&T. First Citizens Group also has banking subsidiaries in Barbados and St Lucia, along with a representative office in Costa Rica.

At the end of September 2014 the group’s total assets amounted to TT$34.9bn ($5.4bn). Total funding amounted to TT$27.6bn ($4.3bn) and total loans reached TT$11.2bn ($1.7bn). Shareholders’ funds were TT$6.2bn ($1m), and net profit after tax for the year was TT$626.6m ($96.6m), or 3% more than in the year to the end of September 2013.

All 12 directors of First Citizens Group who had held office at the end of September 2013 resigned between May 12, 2014 and December 4, 2014 (but mostly in June and July). They were replaced by eight new directors, with the new chairman, Anthony Smart (a former attorney-general of T&T), and four others being appointed on June 17, 2014. Three other new directors had been appointed by the end of August. The resignation of the old board of directors was the government’s response to the controversy surrounding the IPO of First Citizens Group.

IPO Controversy

Launched on September 6, 2013, the government hoped to raise TT$1bn ($154m) from its offer. As is often the case for landmark privatisation deals, the stock had been offered at a discount so as to maximise the likelihood that it would perform well in the secondary market. Indeed, subscriptions amounted to $3.32bn ($512m).

Some 7.8%, or 3.8m, of the shares offered were allocated to the company’s workers. The remainder was offered to the public. However, a sizeable portion of the public allocation ended up in the hands of the NIBTT and UTC, with the result being that other investors generally received a small portion of the shares that they had applied for.

Only 60% of First Citizens’ employees applied for stock, even though they were able to buy on preferential terms. However, the chief risk officer, H. Philip Rahaman, applied for and was allocated 659,588 shares, or 17.4% of the total offered to employees. These shares were bought not through First Citizens Brokerage and Advisory Services, but through Bourse Securities, a separate firm which Rahaman had been dealing with for years. All relevant documentation was completed and forwarded to First Citizens Brokerage and Advisory Services.

Subhas Ramkhelawan, an independent senator and chairman of the TTSE, as well as the owner of Bourse Securities, is a relation of Rahaman. On January 14, 2014 Rahaman sold 96% of the stock for a profit of around TT$12.2m ($1.9m). He had earned a further TT$718,950 ($110,862) in dividends at the end of December 2013. He informed the Market Regulation and Surveillance Division of the T&T Securities and Exchange Commission (TTSEC), the relevant regulator, of the transaction. He also informed the corporate secretary of First Citizens. However, it appears that he failed to inform the TTSE within five business days, as required by T&T law. The transaction was reported to the TTSE on March 14, 2014.

The implication of all this is that Rahaman, acting in concert with family members who may have helped finance the transaction, was alleged to have improperly taken advantage of the undersubscription by other workers at First Citizens to the IPO, about which, due to his position as chief risk officer, he was particularly well informed. While it was not immediately clear whether any laws or regulations had been broken, the issue quickly became political.

Response

On February 14, 2014, the finance minister, Larry Howai, announced a forensic audit to be carried out by PwC, into the entire IPO. By mid-March, the TTSEC had raised concerns over best practice and conflict of interest, and recommended that Ramkhelawan be removed as chairman of the TTSE.

First Citizens dismissed Rahaman on March 25, 2014. The board that took action against Rahaman was chaired by Nyree Alfonso, a Port of Spain attorney, who was forced by the bank’s majority shareholder, the Corporation Sole, to resign from the post at the First Citizens annual meeting on May 12, 2014.

On April 10, 2014, Ramkhelawan resigned as chairman of the TTSE. As of mid-January 2015, the TTSEC was still investigating whether there was a breach of the Securities Act 2012 as amended.

Canadian Majors

Three of Canada’s largest banks use T&T as an element of their operations in the Caribbean region. Scotiabank T&T (ST&T) is an affiliate of Canada’s Scotiabank that is also listed on the TTSE. It has been operating in the country since 1954. Today ST&T has approximately 1350 employees, nearly 100 ATMs, 24 bank branches and three sales centres. The bank’s total assets at the end of October 2014 were TT$20.7bn ($3.2bn), or 6% more than one year previously. Deposits rose by 6% to TT$15.2bn ($2.3bn), while net loans to customers increased by 12% to TT$11.8bn ($1.8bn).

Elsewhere in the region, the Scotiabank group has widespread presence, with operations in 18 countries just in the English-speaking Caribbean. Gregory Hines, general manager of strategic planning and business analytics at ST&T, told OBG that ST&T has responded to the low level of interest rates by pursuing initiatives aimed at increasing its retail sales force productivity, as well rolling out new wealth and insurance products aimed at growing non-interest revenue. A decade ago, more than 70% of the bank’s revenues in T&T came from net interest income. At the end of the 2014 fiscal year, that figure was closer to 60%, and it is expected to continue falling as Scotiabank gains market share in the wealth and insurance segments. The bank’s ScotiaLife Insurance operation is the third largest in the life insurance market in terms of gross premiums written.

RBC acquired Royal Bank of T&T Financial Group in June 2008, and created RBC Financial Caribbean, its regional universal banking operation, which serves more than a million clients. Activities include personal and commercial banking, corporate and investment banking, wealth management, and trust and asset management services. The headquarters of RBC Financial Caribbean is located in Port of Spain.

RBC’s presence in the region dates from 1864, and in T&T since before 1914. The geographic footprint of RBC Financial Caribbean includes 93 branches in 18 countries and territories. RBC’s revenues from its Caribbean and US banking operations in the year to October 2014 were $782m, or 8% more than 2013.

Canadian Imperial Bank of Commerce (CIBC) First-Caribbean International Bank is listed on the TTSE, as well as on the exchanges of Barbados (where it is based), Jamaica, the Bahamas and the Eastern Caribbean. It is an element of Canada’s CIBC group, which is a 91.5% shareholder. Across the English- and Dutch-speaking Caribbean region, CIBC has 100 branches and offices in 17 markets. As with RBC Financial Caribbean and Scotiabank, it offers a full range of personal and corporate financial services.

The modern CIBC FirstCaribbean dates from the 2002 merger of CIBC West Indies Holdings and regional operations of Barclays Bank. Barclays’ existence there dates to 1836. In T&T CIBC FirstCaribbean operates one wealth management centre, one corporate and investment banking office and one ATM. Total assets at the end of October 2014 were $10.8bn. Drawn and undrawn loans to clients in T&T amounted to $279m and $89m, respectively.

The Others

Citibank’s subsidiary in T&T provides global transaction services, international trade services and channel financing solutions. Jamaica Money Market Brokers (JMMB) acquired a 50% stake in Intercommercial Bank Limited (IBL) in 2005. In October 2013 JMMB bought the other 50% from India’s Mittal family. JMMB is listed on the TTSE, as well as the stock exchanges of Jamaica and Barbados.

The bank has four branches and offers a range of personal and commercial banking products. As of the end of March 2014, IBL had total assets of TT$1.8bn ($277.6m) including loans of TT$814m ($125.5m). Deposits were TT$1.5bn ($231.3m). The T&T subsidiary of India’s Bank of Baroda has three branches, one of which is co-located with its headquarters.

Outlook

T&T’s commercial banks are well capitalised and backed by committed shareholders. Deposits and lending (except for mortgage loans) are growing at single-digit rates. The system is awash with liquidity, though efforts by the central bank to encourage a reduction in excess reserves have already had an impact in the first half of 2015. At the same time, downward pressure on net interest margins will continue to be an issue, with the result that banks will remain focused on boosting fee income and/or controlling costs to maintain growth.