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Health Check: Commercial Banks

Commercial banks successfully navigated the pandemic through a combination of strong capital buffers and effective forbearance programmes. The easing of pandemic restrictions in the latter half of 2021 facilitated the recovery of employment levels and business operations, which spurred commercial banks’ performance in the same period.

The financial stability indicators suggest improved capital adequacy, credit risk, liquidity and profitability. In 2021, the regulatory capital of banks recorded growth of 8.3 percent. The growth in capital raised the capital adequacy ratio (CAR) to 16.8 percent from 16 percent a year earlier, well above the prescribed 8 percent benchmark. All individual banks maintained a CAR above the benchmark, ranging from 12.2 percent to 24.3 percent. The CAR levels strengthened further during the first quarter of 2022, reaching 17.3 percent for the sector.


With regained confidence in the economy, households and businesses, particularly the tourism and distribution sectors, increased their demand for bank credit. Total new lending for 2021 rose by 3.7 percent, a recovery from the decline registered in 2020. Within the business sector, new credit demanded in 2021 was primarily put towards working capital and refinancing.

While the demand for credit revived, the stock of loans in 2021 fell by 2 percent as repayments exceeded new credit. All key sectors registered declines, with the exception of utilities, manufacturing, agriculture, hospitality and other deposit-taking institutions. The exposure to the personal sector, the largest single loan segment, fell by $134 million, as the sector’s repayments exceeded new credit. During the first quarter of 2022, commercial banks’ loan balances declined further, largely in the personal and tourism sectors. However, there were modest increases in the loan balances of the distribution sector.

As some level of normalcy was restored in the economy, the loan moratorium previously offered by commercial banks was largely phased out during 2021. Nonetheless, non-performing loans remained stable. A notable increase in NPLs was recorded in the real estate sector due to a few specific firms. The NPL ratio was marginally higher at 7.4 percent than for the comparable period in 2020, due to a larger contraction of loan balances. However, the ratio subsequently improved to 7.0 percent as at March, 2022, given a further decline in NPLs during the quarter.

As credit quality improved, commercial banks lowered their provisions which fell from approximately $270 million at end 2020 to $250 million as at March, 2022. Given a much smaller decrease in NPLs in 2021, the provisions-to-NPLs ratio fell at end 2021, from 62 percent in 2020 to 59.6 percent in 2021.

Even as loan balances were reduced, loans remained the largest component of commercial banks’ assets. Total assets rose by 4.1 percent to reach $13.8 billion or 141.5 percent of nominal GDP at end 2021. The growth in assets was largely reflected in a 21 percent rise in cash balances held at the Central Bank.


Furthermore, commercial banks increased their sovereign exposures as spikes in foreign currency deposits enabled them to raise their foreign investments, particularly in US treasury bills. Investments in local fixed income securities also rose modestly, but interest remains tepid in local currency denominated government securities. During the first three months of 2022, commercial banks’ assets continued on their upward trajectory, with deposits at the Central Bank rising steadily.

Domestic currency deposits grew by 4 percent, a slower pace than the 6 percent growth recorded in 2020. The continued deposit growth partly reflected the monetary effects of the fiscal relaxation and was mirrored in the $170 million expansion of holdings of individuals. This growth persisted into the first quarter of 2022, with deposits reaching $10.7 billion. Abundant liquidity continued to erode interest in the provision of and the demand for time deposits. Consequently, transferable deposits remained as the predominant category of domestic-currency deposits, amounting to 96.3 percent of total domestic-currency deposits.

Foreign currency deposits represented approximately 8 percent of total deposits at year-end, as the stock of foreign currency deposits grew by 26 percent. Foreign-currency deposits, expanded across most sectors, with individuals and business firms registering the largest increases. This growth reflects increased demand for foreign currency accounts following the liberalisation of these deposit accounts in August 2019. The growth of foreign currency deposits was sustained into the first quarter of 2022, in part the result of the strong upturn in tourism-related activities.

Despite the build-up of both foreign assets and liabilities, the net foreign position remains stable.

Liquidity in the commercial banking system has been mounting for the past decade with consistent increases in liquid assets being recorded for the past five years. In 2021, liquid assets grew by 17.4 percent. The loans-to-deposits ratio continued its decline to 53 percent at year-end. The liquid asset ratio rose to 28.4 percent at the end of 2021 and 31 percent by the first quarter of 2022.

Moreover, excess cash holdings of commercial banks continued to increase during 202. At the end of 2021, commercial banks held $2.7 billion in excess cash, which represents an increase of $0.5 billion from that of end 2020. A further increase of $0.3 billion was recorded during the first quarter of 2022

Interest rates

The profitability of banks increased by $48.3 million. However, the low interest rate environment coupled with the lower stock of loans, led to a deterioration of banks’ net interest income. Those losses were outweighed by gains from reduced provisions and the favourable effect of increased fees and commissions income on non-interest income. Consequently, this was reflected by the improved return on assets (ROA) ratio of 1.1 percent. The average ROA for the preceding 12 years (2009-2021) measures 0.94 percent, a notable decline from the average ROA of 2.1 percent for the period 1996 to 2008 when there was stronger economic growth.

Since the elimination of the minimum deposit rate in 2015, interest rates on deposits have gradually declined and remained low during the review period. In 2021, the average interest paid on transferable deposits was approximately 0.04 percent while the average interest paid on other types of deposits stood at roughly 0.2 percent.

Loan rates continued to decline and by the first quarter of 2022, the effective interest rate on loans had fallen from 5.8 percent at end 2020 to 5.4 percent at March, 2022. As a result, the implicit spread narrowed to 5.4 percent at end 2021 compared to 6.3 percent in 2015. While the lower deposit rates caused the implicit spread to rise in 2015, lower loan rates are now pushing the spread downward. Prime lending rates and mortgage rates have also been moving downward, measuring 4 percent and 4.7 percent, compared to 7.7 percent and 6.1 percent, respectively.

Adapted from the 2021 Financial Stability Report.