By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Bank of the Bahamas (BOB) is seeking Supreme Court protection from the Central Bank, with the regulator demanding an “immediate” $50 million increase in loan loss provisions and legal action against “politically exposed” bad borrowers.

Legal documents obtained by Tribune Business reveal the extent of the stricken bank’s woes, with its problems so severe that its liquidity could deteriorate “quite literally on any day”.

Abhilash Bhachech, the Central Bank’s inspector of banks and trust companies, expressed concern that BOB’s application for a ‘stay’ of the regulator’s demands could undermine its ability to properly supervise the troubled BISX-listed institution.

He warned that imposing a ‘hold’ or injunction on the Central Bank could also “further erode depositor and public confidence” in BOB, as well as undermine “the retail banking system of the Bahamas” given the bank’s systemic importance.

Mr Bhachech, in two affidavits filed with the Supreme Court on May 2 and May 4, 2017, revealed that BOB had launched a Supreme Court appeal on April 7, 2017, against the Central Bank’s latest regulatory demands.

Explaining that these “supervisory mandates”, dated February 8, 2017, were issued “for sound prudential reasons”, Mr Bhachech alleged that they required BOB to “commence legal proceedings against its customers to realise on collateral from long-standing non-performing loans, specifically larger commercial exposures and exposures to politically exposed persons”.

The last phrase will likely add further fuel to the already-raging controversy as to whether bad loans to persons with political connections (PEPs) played a key role in Bank of the Bahamas’ collapse into the October 2014 taxpayer-financed ‘bail out’.

PEPs are persons who hold, or have connections - such as family links - to officials or politicians holding public office. Prime Minister Perry Christie and the Government have repeatedly denied that loans to ‘politically exposed persons’ or PEPs were involved in Bank of the Bahamas’s demise.

However, the controversy again reared its head over the weekend, as former prime minister Hubert Ingraham, in a speech not given because of bad weather to the FNM’s Friday rally in Freeport, demanded to know whether four current Cabinet ministers, one  PLP MP and a former PLP MP of “are on the list of non-performing loans [at BOB] to the tune of tens of millions?”

Alarmed that the identity of its ‘loan delinquents’ may become public, BOB and its attorney, Raynard Rigby, the former PLP chairman, are asking the Supreme Court to ‘seal’ the file - the same manoevere performed over the Government’s Baha Mar deal with the China Export-Import Bank.

The Central Bank is resisting this. Mr Bhachech said that while the regulator was “not averse” to customer and ‘bad borrower’ names remaining confidential, it felt “the principles of justice and the public interest” - given that BOB is “a domestic systemically important bank” - require that the court file remains open.

Mr Bhachech, meanwhile, said the Central Bank had also demanded that BOB “immediately increase its provisioning by at least $50 million, taking into account the appellant’s [BOB] state of affairs and its deficient provision levels when compared to industry averages”.

A third requirement was for BOB to “convert the first $10 million tranche of contingent convertible bonds to common equity Tier 1 capital, and all future capital injections must be paid in cash and constitute common equity Tier 1 capital”. The fourth, and final demand, was for BOB to produce an ‘action plan’ for the Central Bank’s approval - detailing how it would implement these measures - by March 15, 2017.

The $10 million bond issue referred to by the Central Bank was the first of three equal tranches, set to ultimately total $30 million, all of which are being 100 per cent financed by the Government as BOB’s 79 per cent majority shareholder.

Mr Bhachech, though, said that BOB, in a March 14, 2017, reply to the Central Bank, asked it to “reconsider” both the $50 million loan loss provisioning increase and the treatment of the contingent convertible bonds.

“Due to [BOB’s] non-compliance with the terms of the supervisory mandates letter, on March 28, 2017, the Central Bank issued a Notice of Contravention, imposing a fine in the sum of $100,000 against [BOB],” he alleged.

BOB subsequently submitted its ‘action plan’ to the Central Bank on April 7, 2017, but - the very same day - initiated the Supreme Court proceedings challenging the regulator’s demands, and seeking a stay of their imposition.

Mr Bhachech, in his affidavits, said the supervisory mandates issues to BOB had grown “in ascending degrees of severity”, with recommendations followed by “directives, supervisory intervention measures and then supervisory mandates”.

He added: “Deficiencies in compliance by [BOB] have been consistent over the years and remain”, pointing to the poor quality of its loan assets and “capital inadequacy”.

Describing BOB’s problems as “severe”, Mr Bhachech alleged: “Given the systemic importance of [BOB] and the persistent challenges faced by it in maintaining adequate levels of liquidity, funding, capital and earnings to support its business activities and the needs of its clients, [BOB] has been placed at Stage 4 (Risk of Imminent Insolvency and non-viability) on the Central Bank’s ladder of supervisory intervention.”

The only stage below this, Stage 5, is the suspension or revocation of a bank or trust company’s license, and Mr Bhachech alleged that BOB faced “increased risks” to its financial stability, asset quality and reputation”.

“While each is now at an advanced degree of severity, it may be considered that the liquidity risk [of BOB] may deteriorate at any moment; quite literally on the same day,” he warned.

Mr Bhachech revealed that the Central Bank had adopted enhanced regulation of BOB some 12 months prior to its October 2014 ‘bail out’, saying: “The liquidity adequacy of [BOB] is so fragile that daily monitoring of its liquidity reports has been conducted by the Central Bank since late 2013.

“The Central Bank has continued to observe volatility and wide swings in [BOB’s] liqudity reserves and lack of assured inter-bank funding. This chronic inadequacy has further impaired [BOB’s] ability to initiate or sustain new lending.”

Explaining why the Central Bank was so opposed to BOB’s ‘stay’ application, Mr Bhachech warned that if granted it would “pose a risk [to the bank’s] financial stability and may undermine public confidence in the domestic banking system.

“The Central Bank is concerned that a granting of the stay application may impede the Central Bank in its regulatory oversight, which may lead to events that may further erode depositor and public confidence in [BOB], given its history of not being able to mitigate its capital and liquidity shortfalls.

“The Central Bank is of the view that the stay application is inappropriate by reason (among other things) that it seeks to restrain for an undetermined duration the Central Bank as regards the regulatory requirements directed to [BOB] in, quite possibly, fluid or changing circumstances in which [BOB’s] financial condition may deteriorate. To do so might prejudice the well-being of [BOB] and, thereby, the retail banking system of the Bahamas.’

Mr Bhachech said the Central Bank was concerned that BOB would use any injunction to delay “making a realistic assessment” of the value of its loan assets, and the capital required to support provisioning “and subsequent write-offs”, further deteriorating asset quality.

He added that due to “apparent availability difficulties” on BOB’s part, discussions between it and the Central Bank over the ‘action plan’ did not start until April 24, 2017, lasting for two days.

Given the submission of the ‘action plan’, and discussions over it, the Central Bank said these actions were “inconsistent” with BOB’s move to initiate legal action in the Supreme Court.

BOB’s legal action, by extension, has brought the Government - as its majority shareholder through the Treasury and NIB - into conflict with the Central Bank.

The contents of Mr Bhachech’s affidavits are effectively a damning indictment of successive governments, BOB Boards and managements, and show that the BISX-listed institution’s survival is tenuous in the extreme.

Following losses of more than $120 million over the last three-and-a-half years, the legal documents reveal that BOB needs recapitalisation amounting to millions of dollars, or a similar amount of ‘bad loans’ need to be moved off its books. It represents potentially a huge further cost to the Bahamian taxpayer.

Bank of the Bahamas’ financials for the year to end-June 2016, as first revealed by Tribune Business, disclosed that 46.07 per cent, or $234.886 million of its total $510 million loan portfolio, was non-performing - meaning 90 days or more past due - at that date.

Meanwhile, the bank’s balance sheet at end-December 2016 shows that without the $100 million in promissory notes (bonds) issued to Bank of the Bahamas in October 2014 in exchange for the $45.2 million net ‘bad’ loans transferred to Bahamas Resolve, the institution would be insolvent with assets exceeding liabilities.

Bank of the Bahamas’ accumulated deficit now stands at almost $100 million, having totally wiped out the $54.622 million in ‘special retained earnings’ written back into its balance sheet via the Bahamas Resolve transaction.

Apart from the $100 million promissory note and Bahamas Resolve transaction, the Government injected a further $40 million into the bank last year by taking up its entire September rights offering.

And, with December’s $10 million bond issue the first of three equal tranches, it is likely the Government will end up infusing $70 million in capital into Bank of the Bahamas over a seven-month period.