By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A BISX-listed bank is calling for regulatory reforms that will create a “level playing field” between supervised and non-traditional lenders over providing credit to Bahamian borrowers.

Commonwealth Bank, in its just-released 2022 annual report, indicated that it is being placed at a competitive disadvantage by having to compete for market share and clients with lending niches that are not subject to the same level of oversight.

“Any efforts of the Central Bank to support and expand credit growth are welcomed,” it told its shareholders. “However, the credit market has significantly expanded outside of the traditional financial institutions licensed by the Central Bank to organisations that do not have to adhere to debt service ratio limits and other prudential requirements which protect the borrower as well as the industry.

“Accordingly, regulatory changes which would allow a level playing field for all participants in the credit industry can contribute to our improved competitiveness.” Tangela Albury, Commonwealth Bank’s chief financial officer, told Tribune Business the concerns related to the expansion of unidentified “private lending institutions” that do not have to comply with borrower debt service ratios and other restrictions imposed on commercial banks by the Central Bank.

This, she argued, could result in Bahamians’ debt levels spiralling out of control to the point where consolidation and other tools are of little help. “We have seen a significant expansion of private lending institutions not subject to the lending constraints imposed by licensees of the Central Bank,” Ms Albury said.

“There are no publicly available statistics on the size of the institutionalised private lending market because they are also not subject to the reporting requirements of the Central Bank. The key factor is the customers’ DSR (debt service ratio) limit or restriction imposed on licensees of the Central Bank, which institutionalised private lenders are not subject to. Without these limits, borrowers obtain financing at high rates and high debt service ratios.

“They then seek consolidation financing from commercial banks to regularise their position and often repeat the cycle. This results in very high DSR levels and, eventually, we are unable to help them through our refinancing or debt consolidation programmes. The goal is to be a provider of credit today, but also assist Bahamians in managing their finances prudently.”

Calling for commercial banks and “private institutionalised lenders” to be subject to the same regulatory restrictions, Ms Albury added: “The credit bureau remains in its infancy, and as it seeks to grow and influence lending decisions, it will need to factor in the impact of borrowing through institutionalised private lenders to provide a holistic picture of borrowers’ financial position.”

Commonwealth Bank, meanwhile, suggested there were grounds for “cautious optimism” that lending conditions will improve in line with the strengthening economy throughout 2023.

“We recognise that the bumper level of profitability that the bank [experienced] in 2022 is driven by the strong rebound of the economy of The Bahamas after the severe economic shocks brought about because of the COVID-19 pandemic,” Commonwealth Bank acknowledged.

“As the economy continues to normalise, and the rate of profitability trends towards historic averages, we plan to focus on the organic growth of our loan book and yields, delinquency management, and improvements in the way we service our customers, which we expect to sustain the bank’s normal level of profitability. Our benchmark for 2023 performance is our pre-Dorian and pre-COVID-19 normalized financial performance, and we expect to match or exceed that in 2023.

“This will be challenging as The Bahamas is not immune from the global economy and its current inflationary trends. In particular, the US economy, which is the primary source for our tourists. We are also at risk for the effects of climate change, notably the frequency and severity of storm patterns which have non-controllable impacts on the economy,” the BISX-listed institution added.

“These events ultimately impact lending conditions for the bank. We remain cautiously optimistic on these issues, and are satisfied that we will maintain a fortified balance sheet to help the bank navigate these challenges.” Commonwealth Bank generated record total comprehensive income of $76.7m in 2022, as opposed to a $30m loss the year before, as it was able to recover and write back many of the loan loss provisions it was forced to take during the COVID pandemic.

“Notwithstanding the economic rebound, with personal lending at our core, good loan performance is key,” Commonwealth Bank told shareholders. “The critical business elements that have contributed to the growth and success of the bank have been our attention to the management of credit risk and delinquency. To accomplish this, the bank committed to flexible but prudent underwriting decisions which created sustained improvement in the quality of loan assets.

“In addition, the bank worked closely with delinquent borrowers to find the best options, while complying with regulations, to recover their credit standing and allow for future bank borrowing. The result was a sustained reversal of the impairment expense in 2022 of $27.3m when compared to the same period in 2021, which reflected an impairment expense of $93m.”

Elsewhere, Commonwealth Bank added: “The bank experienced growth of its non-interest income through the recovery of its net premium income arising from its credit life insurance business, as death claims significantly decreased by 52 percent in 2022 when compared to the same reporting period in 2021....

“The improvements in profitability have affected all the relevant financial ratios positively. Return on assets was 4.28 percent, up from -1.75 percent in 2021. Return on equity was 28.85 percent compared to -11.82 percent in 2021. Earnings per share (EPS) of $0.26 were up from -$0.10 in 2021.

“The bank continues to remain focused on being the complete personal banker for all Bahamians, not just preferred segments. This business posture means that the demographic profile of our customer base is widespread, and as a practice, we place strong weight on our risk management structure to promote making sound business decisions by balancing risk and reward,” shareholders were told.

“Our loan customers in the tourism and leisure sectors do create elevated levels of credit risk in our loan assets due to the inherent sensitivity of the tourist product to a myriad of local and global events. However, the bank is committed to finding the best pricing options for all loan customers and servicing all segments of the Bahamian economy.”