Health Check: Finance and Trust Companies

Following the consolidations of 2018 and 2019, the sub-sector of deposit-taking finance and trust companies now consist of four financial institutions. As for other financial institutions engaged in deposit-taking and loan activity, the fallout from COVID-19 forced institutions to work closely with their customers in an attempt to weather the global pandemic.

Total assets experienced year-on-year declines of $4.7 million during 2020 and $7.7 million during the first quarter of 2021. This downward trend was seen across all asset classes except for investments in securities, shares and other equity. The net effects were 0.5 and 0.8 percent declines in 2020 and over the first three months of 2021, respectively.

Loans increased by 2.8 percent during 2020 but fell marginally over the first quarter of 2021. The 2020 outturn was mainly a result of a modest increase in mortgage lending to households which raised lending to private individuals. Loans for real estate also registered modest growth.

Loan payment moratoria programmes in 2020 lessened the impact of the pandemic on the non-performing loan (NPL) ratio, which was 11.7 percent at December 2020, compared to 11.3 percent one year earlier. However, a second wave of the pandemic in the first quarter of 2021 resulted in a further increase to 13.3 percent, at March 2021. In 2020, loans to individuals and to the real estate sector were the main drivers of this increase in delinquency at $6.7 million and $6.6 million, respectively.

The broad distribution of NPLs across risk categorisations remained virtually unchanged up to March 2021, compared to former years. Approximately 81.2 percent of impaired loans fell into the “substandard” classification, while, 4.3 percent and 14.5 percent were in the “doubtful” and “loss” classifications, respectively. Provisions for non-performing loans slipped to 27 percent, down from 28.1 percent at March 2020. This level of provisioning is consistent with regulatory requirements associated with the “substandard” classification carried by most impaired loans.

The sub-sector’s capital adequacy ratio (CAR) improved marginally to 18.9 percent at March 2021, up from 18.4 percent one year earlier. The profitability of the sector deteriorated as measured by the return on assets, which fell from 1.6 percent to 0.7 percent at December 2020, and remained unchanged at March 2021. Operating expenses contracted, but a decrease in non-interest income largely attributed to smaller earnings from foreign exchange operations, fees and commissions contributed to the weaker performance.

The decline in profitability was also affected by the compression of net interest income. The effective loan rate continued its gradual decline to 6.5 percent at March 2020 from 7.1 percent at December 2019. Meanwhile, the effective deposit rate also declined slightly to 2.2 percent, in the face of generally high levels of liquidity.

Deposits at finance and trust companies continued to edge downward over the past year. Total deposits declined from $721.6 million in 2019 to $713.3 million and $705.4 million at December 2020 and March 2021, respectively. This decline was due to these institutions reducing interest rates in line with market trends and a reduction in balances held by the hospitality sector. The general distribution of these deposits remained largely unchanged with half belonging to private individuals.

The trends in loans and deposits dampened liquidity among deposit-taking finance and trust companies. Excess local cash and domestic-currency transferable deposits in other financial institutions as a percentage of domestic-currency deposit liabilities declined from 9.6 percent at December 2019 to 8.7 percent at end-December 2020 and to 7.6 percent at March 2021. The loan-to-deposit ratio increased from 101.2 percent in the first quarter of 2020 to 106.3 percent one year later, also reflecting a reduction in liquidity.

Adapted from the 2020 Financial Stability Report.