Disproportionate impaired loans in Caribbean weighing down Canadian banks
K. QUINCY PARKER
Guardian Business Editor
Published: Mar 03, 2015
As the extent of the damage suffered by Canadian banks in the Caribbean comes more clearly into focus, so too does the role the misfortunes of the region’s hospitality industry played in inflicting that damage, and so to does the question of how much is too much.
The long history of commercial ties between Canadian banks and the Caribbean cannot be disputed: Scotiabank goes back to 1889, RBC Royal Bank to 1882 and CIBC FirstCaribbean International Bank to 1920. That this association has been a boon for the banks also cannot be disputed.
For instance, banking reporter Tim Kiladze noted in a thorough piece for Canada’s The Globe and Mail that by 2008, the three Canadian banks reportedly
had $42 billion in assets across the English-speaking Caribbean, which Kiladze pointed out was 2.5 percent of their combined total assets, but more than four times those held by the 40-odd locally owned banks.
Then the financial crisis hit, and the aftermath was devastating. Proposed developments vanished into thin air in The Bahamas, for example, leaving communities in some instances with cleared ground and nothing else, and the Caribbean hospitality sector went from rampant to depressed.
Baha Mar provides a prime example.
Scotiabank was the lead lender in financing Sarkis Izmirlian’s $200 million acquisition of resorts on the Cable Beach strip, which he then planned to turn into the Baha Mar mega resort. The bank suffered a significant hit - $75 million - on the loan, and it led to the first ever recorded yearly net loss for Scotiabank (Bahamas). According to then Managing Director of Scotiabank (Bahamas) Kevin Teslyk, the situation was ultimately resolved through a debt-for-equity swap, with the bank taking a minor equity stake in the redevelopment and writing off a significant chunk of the loan amount owed.
Guardian Business has written about the woes experienced by Canadian banks across the region over the last two years. Despite the continuing recovery of the U.S. economy, which is buoying up the recovery of the Bahamian economy along with others in the region, some wonder if the damage suffered by the Canadian banks in the Caribbean may be too deep and any reversal of the fortunes too late.
These banks have seen job losses in the thousands around the world and in the Caribbean, branch closures and restructuring and attempts at every instance to cut costs. But even with record profits, it is a question of scale. Consider the figures contained in the 2014 annual reports of RBC and Scotiabank, and the figures taken from CIBC’s investor presentation for the fourth quarter of 2014.
CIBC is based in Barbados, with 69 branches across 17 countries in the region. Of the bank’s $13.4 billion in revenue in 2014, its Caribbean operations were responsible for $593 million. Of its $1.43 billion in gross impaired loans for the same year, however, the region was responsible for $835 million.
The Caribbean operations of Scotiabank and RBC fare little better.
Scotiabank, with 294 branches in 25 Caribbean and Latin American countries, showed 2014 revenue of $23.6 billion, to which LAC (Latin America and the Caribbean) contributed just $1.2 billion. Of $4.26 billion in gross impaired loans, LAC was responsible for $1.5 billion.
And RBC, with 93 branches in 18 Caribbean countries, showed revenue of $34.1 billion in 2014, with a contribution from LAC of just $861 million. Of RBC's $1.98 billion in gross impaired loans, the bank's Caribbean operations were responsible for $800 million.
It is clear that the impaired loans in the region are far out of proportion to the share of profits the region contributes. So, given the scale of these operations, it is no wonder that questions are being floated about whether any of these institutions will - as Kiladze puts it - “pull the plug”.
“Today, more than half of CIBC’s total gross impaired loans — or loans that show any signs of trouble — originate in the Caribbean. At Scotiabank, the equivalent share is 35 percent. In other words, this tiny cluster of islands has the potential to generate bigger write-offs than both banks’ monstrous Canadian lending portfolios. As for RBC, 11 percent of its Caribbean lending portfolio is impaired, versus just 0.33 percent of its equivalent Canadian business. Now we know why Caribbean loan margins were so fat. The outsized returns reflected higher risk. In finance, after all, there is no free lunch,” Kiladze said.