Health Check: Deposit-Taking Finance and Trust Companies

The performance of deposit-taking finance and trust companies largely mirrors that of banks, with total assets experiencing a 4 percent increase during 2021(Figure 26). This asset growth was driven by higher deposit holdings at other financial institutions, and an increase in the loan book. As at March 2022, assets further expanded by 0.7 percent, when compared to year-end 2022.

Loans remained the major asset class, growing by 1.8 percent and accounting for over 71 percent of assets. The outturn for loans was mainly driven by increases in credit to individuals, largely for mortgages.

NPLs increased to 16.1 percent of total outstanding loans, up from 11.7 percent one year prior. The level of loan delinquency rose for all major sectors with the exception of health, manufacturing, agriculture and construction. However, the first three months of 2022 saw a modest improvement in credit quality as the NPL ratio edged down to 15.3 percent.

The broad distribution of NPLs across risk categorisations remained virtually unchanged up to March 2022, compared to former years. Approximately 83.6 percent of impaired loans fell into the “substandard” classification, while, 4.1 percent and 12.3 percent were in the “doubtful” and “loss” classifications, respectively. Provisions for non-performing loans slipped to 26 percent, down slightly from March 2021. This level of provisioning is consistent with regulatory requirements associated with the “substandard” classification carried by most impaired loans.

The sub-sector’s CAR improved marginally to 20.5 percent at March 2022, up from 19.5 percent one year earlier.

The profitability of the sector improved as measured by the return on assets which grew from 0.7 percent to 1.0 percent at December 2021, and 1.1 percent at March 2022. The slightly improved performance was the result of slightly reduced operating expenses and marginal growth in net interest income which combined to outweigh a decline in non-interest income.

The effective loan rate continued its gradual decline to 6.2 percent at March 2022, down from 6.5 percent at March 2020 and from 7.1 percent at December 2019. Meanwhile, the effective deposit rate also declined slightly to 2.0 percent at March 2022, down from 2.2 percent one year earlier, in the face of continued high levels of system-wide liquidity.

Total deposits at finance and trust companies increased by 4.3 percent in 2021 to $733.4 million, then declined 5.1 percent in the first quarter of 2022 to $696.3 million. The growth in 2021 was led by increased deposits of private individuals and non-financial business firms, while the decline for the first quarter of 2022 was driven by a reduction in domestic-currency term deposits of private individuals, as deposit rates continue to slide.

Liquidity indicators for the sector are typically much lower than that of the commercial banks, but finance and trust companies experienced a drawdown in liquidity between August 2021 and February 2022, with one liquidity metric falling from 8.2 percent to 5.1 percent over the period. However, enhanced regulatory monitoring resulted in a rebound in liquidity levels from that point, and liquidity within the sector subsequently increased from March 2022 and over the first half of 2022.

Adapted from the 2021 Financial Stability Report.