Banks in T&T are adjusting to new challenges this year, including lower oil prices, slower economic growth, tightening interest rates and political uncertainty in the run up to elections. But overall performance so far this year is largely positive, with the eight main banks remaining well capitalised and profitable.
T&T’s overall financial system represents about 16% of GDP, making it the second most important sector after oil and gas, which accounts for about 38% of GDP.
Recent bank earnings reports present a mixed but overall healthy picture. In the three months to end-January Scotiabank – one of the three Canadian majors operating in T&T – said it achieved TT$135m ($20.9m) in net after-tax profit, a little less than last year’s levels. Managing director Anya Schnoor said at the time of the results in March, “I think we decided in the first quarter to be a little bit conservative with our loan loss provisioning”, but she nevertheless called it an “excellent quarter”, highlighting loan and interest income growth.
State-owned Republic Bank Group, the largest indigenous bank, said its pre-tax profit rose by 2.1% to TT$572.7m ($88.8m) in the six months to end-March. Chairman Ronald Harford said that the improvement came despite subdued economic conditions but stressed growth in the loan portfolio and a reduction in loan impairment expenses.
Oil & gas downturn may limit loan growth
Stockbroker Bourse Securities noted that low oil and gas prices may cloud the outlook for T&T’s banks. “Should oil and gas prices remain low for a sustained period of time, the likelihood of a slowdown in domestic economic activity would increase, which could dampen demand for consumer and business loans,” it said in a recent report.
According to the World Bank, the country’s GDP grew by 2.1% last year and is forecast to expand by 2.3% in 2015, while the UN Economic Commission for Latin America and the Caribbean is estimating a 1% growth rate for 2015.
One challenge ahead is how to manage a cycle of tightening interest rates. At the end of March the Central Bank of T&T (CBTT) raised its “repo” rate by 25 basis points to 3.75%, the fourth consecutive 25-point increase since September last year.
The CBTT said three factors lay behind the latest decision: the US Federal Reserve’s “forward guidance” on its own hardening interest rate stance; concern over rising domestic inflation in T&T; and signs that the country’s non-oil sector could withstand monetary tightening relatively well, given that its short-term outlook was for “continued steady performance”, although at a slower rate than last year.
In theory, if nothing else changes, higher interest rates will simply boost the commercial banks’ revenues from loan interest payments. In practice, however, there are significant risks to consider either way. If the CBTT tightens monetary policy too much, activity and borrowing levels will fall, impacting the growth of the loan portfolio. If its stance is too lax, T&T could see a significant outflow of funds as investors move their money back into US securities.
Moody’s downgrade
The CBTT has reacted critically to a decision at the end of April by ratings agency Moody’s Investors Services to downgrade the country’s government bond and issuer rating to Baa2 from Baa1, and to change the outlook to “negative” from “stable”. Moody’s said the downgrade reflected persistent fiscal deficits, the negative impact of low oil prices on growth and what it described as a “weak macroeconomic policy framework.”
The CBTT said the decision was “unjustified”, stressing that the country remains an investment grade destination.
“The sound credit worthiness of T&T’s natural gas-based 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 said in a statement.
In the short term Moody’s decision to downgrade the government’s credit rating as a bond issuer will have very limited impact on the banks, which are seen as generally solid and well-capitalised institutions. However, the combination of imminent elections and low oil prices has introduced a degree of caution among investors, with many waiting to see how the transition to the next government plays out. Already known for their collective caution, it is likely that the banks will be looking to minimise risk in their lending policies for the remainder of the year.
Read More from OBG
