By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Central Bank of the Bahamas believes that commercial bank ‘bad loans’ will dip below the $1 billion mark by the end of 2017, with institutions only requiring more capital if they increase by 200 per cent.

Unveiling the results from ‘stress testing’ associated with its 2015 first half Financial Stability Report, the banking sector regulator suggested that non-performing loan levels would gradually start to moderate over the next two years.

It is unclear whether the report was written after Baha Mar filed for Chapter 11 bankruptcy protection, which occurred on June 29, 2015, and might have led to a slightly more negative outlook from the Central Bank.

“The macro-economic outlook also weighs incrementally more favourably on the financial system, as it is expected to provide further scope for stabilisation and a gradual reduction in outstanding credit arrears, and give lending institutions more capacity to resolve distressed loan exposures,” the Central Bank concluded.

“The level of deterioration in the non-performing loan book continued in 2015, but is anticipated to improve slightly in 2016 and 2017.

“At forecasted levels over the three-year period, non-performing loans remain at the $1 billion mark in 2015, but real economic indicators suggest that in the following two years, levels should drop below the $1 billion mark.”

The regulator used ‘shocks’ of 100 per cent, 150 per cent and 200 per cent for its stress tests, and found: “At shocked levels, non-performing loans increase within the $1.7 billion to $2 billion range (at 100 per cent); $2.2 billion to $2.6 billion range (at 150 per cent) and $2.6 billion to $3.1 billion (at 200 per cent).”

The Central Bank suggests that recovery in the commercial banking sector will be slow rather than spectacular, with the work-out of distressed loans and bad borrowers taking several years to complete.

Its December 2015 report on monthly economic developments confirmed this trend, as total commercial bank loan arrears for the whole year dropped by 6.8 per cent to $1.205 billion. Non-performing loans, those more than 90 days past due, declined by 9.1 per cent to $889.2 million.

Much of the improvement to-date has come from loan write-offs, with provisions for bad mortgages having increased to more than 50 per cent.

Referring to the 2015 first half, the Central Bank said: “Banks’ credit quality indicators improved moderately, reflecting in part the modest growth in economic activity and loan write-offs.

“Total private sector loan arrears decreased by 7.9 per cent to $1.191 billion, a slowdown from the prior year’s 0.5 per cent expansion. Correspondingly, delinquencies as a proportion of total loans declined by 1.5 percentage points to 19.9 per cent, vis-à-vis a 0.3 percentage point increase in 2014.”

It added: “The fall-off in arrears reflected mainly a reduction in the non-performing segment by 6.3 per cent to $916.1 million, attributed to sustained loan write-offs, a turnaround from a 3.6 per cent rise in the previous year. Similarly, overdue obligations in the one-three months category contracted further by 12.7 per cent to $275.3 million, extending 2014’s 7 per cent fall-off.

“The half-year contraction in overall arrears was due to broad-based declines in the various components. Specifically, mortgage delinquencies fell by 5.8 per cent to $657.9 million, after a 0.7 per cent reduction in the preceding year, while the consumer segment declined by 12 per cent to $292.5 million, following a 2.3 per cent reduction in 2014.

“Similarly, commercial loan arrears decreased by 8.2 per cent to $241 million, relative to the prior year’s 5.6 per cent contraction.”