Health Check: Commercial Banks

The pandemic influenced the performance of the banking system in 2020, but the sector remained stable. During the review period, commercial banks remained well capitalised. The sector’s capital adequacy ratio (CAR) rose to 16.0 percent, partly driven by the conversion of a bank from a branch to a subsidiary. However, absent the conversion, the underlying CAR steadily increased from 13.5 percent to 14.3 percent, as banks rebuilt regulatory capital, in particular Tier 1 capital. All individual banks remained well above the 8 percent benchmark level with ranges between 12.1 percent to 24.6 percent at the end of 2020.

The improved capital adequacy reflects the strengthening of the sector’s after-tax profitability and the rising share of zero risk weighted assets, resulting from claims on the Central Bank of Barbados rather than loans to the private sector. Pre-tax profitability weakened as fee and other income fell significantly as fees associated with loans and advances and non-loan fees were down. Furthermore, net interest income contracted by 6.6 percent due to declines in loans to the non-financial private sector and deposits in banks abroad. In addition, non-interest expenses rose sharply owing primarily to the increased loan provisioning, but operating expenses decreased for the first time since 2014.

The after-tax return on assets (ROA) of 0.8 percent was an increase of 20 basis points from the previous year when the one-time write-off of deferred tax assets following the reduction in corporate tax rates depressed after-tax profitability.  

Commercial bank assets increased by 3.1 percent during 2020, slightly faster than the previous year. However, with customer deposits maintaining a moderate growth path and loans continuing on a downward trend, commercial bank deposits at the Central Bank continued to rise. As a result, commercial banks’ liquid assets ratio continued to trend upwards.

Loans

Total loans fell by 2 percent. New credit declined by over $510 million, but repayments also slumped as banks offered loan moratoria of up to six months to customers affected by COVID-19 in anticipation of a deterioration of loan portfolios. At its peak, 38.2 percent of loans provided by banks were subject to moratoria. However, by March 2021, most of these loans returned to a normal payment pattern or were restructured to provide cash flow relief to borrowers.

The decline in loans was mainly driven by the personal sector, with household credit-card debt falling by 13.4 percent, a likely reflection of the dip in overseas travel. Loans to the tourism sector recorded a 16.1 percent reduction, mainly owing to the early repayment of a foreign-currency loan by a hotel group during the first quarter of 2020. However, there was increased lending to utilities, public sector corporations and the real estate sector.

Over the first three months of 2021, total loans remained depressed, falling by 1.7 percent. The decline in the personal and real estate sectors outweighed new credit extended to the tourism sector, which also continued to benefit from moratoria.

Loans in the moratoria programme were not classified as non-performing, and at the end of 2020, the NPL (non-performing loan) ratio stood at 7.3 percent, a 0.7 percentage point increase from 2019. In relation to the sectoral distribution of NPLs, increased personal, tourism and distribution loans were recorded as non-performing loans in 2020.

As the temporary support to customers wound down, the reported credit quality started to deteriorate in early 2021, and during the first quarter of 2021, the NPL ratio rose to 7.9 percent as the value of tourism-based NPLs expanded.

Provisions to NPLs grew from 59.4 percent to 62.0 percent in 2020, as banks raised their reserves to protect against losses from the expected rise in loan defaults.

Interest Rates

The low deposit interest rate environment persisted into 2020. Interest paid on transferable deposits stood below 0.1 percent, while the expense on “other deposits” edged downward to 0.4 percent. As the share of transferable deposits expanded, the effective interest rate on deposits was virtually zero, while the effective rate on loans edged downwards to 5.8 percent as the interest income on loans contracted. Thus, the implicit spread was 5.8 percent.

Domestic-currency deposits recorded a 6 percent growth in 2020 as individuals and the business sector’s holdings rose, largely reflecting the positive effects of the moratoria on savings and the relaxed fiscal stance. Transferable deposits continued to be the domestic deposit of choice, as they accounted for 95.9 percent of total domestic-currency deposits, as lower interest rates on fixed deposits made such accounts less attractive.

Liquidity significantly expanded throughout 2020 and into the first quarter of 2021. The excess cash ratio rose from 19 percent to 23 percent during 2020, as banks increased their cash holdings in relation to deposits. The excess securities ratio increased as the required securities ratio fell from 17.5 percent to 5 percent in April, 2020. This policy measure was discontinued with the passage of the new Central Bank of Barbados Act in December. In the first quarter of 2021, the excess cash ratio reached 26.5 percent.

The net foreign currency position suffered a modest deterioration during 2020, principally due to the reduction in foreign currency loans which now account for 1.8 percent of the total loans. Foreign currency deposits grew by 4.3 percent, raising their share of total deposits to 6.6 percent. This increase was boosted by the business sector, real estate, renting, and other business activity in particular. Commercial banks maintained adequate levels of foreign exchange for trading as evidenced by minimal purchases from the Central Bank in 2020.

Adapted from the 2020 Financial Stability Report.