Health Check: Commercial Banks

Despite recording a negative return on assets, Barbados’ commercial banking sector remained profitable and largely able to withstand shocks, reports the 2018 Financial Stability Report (FSR), a joint publication by the Central Bank of Barbados and the Financial Services Commission.

The report also reveals that while the sector’s total assets fell to $12.77 billion in 2018, an underlying decline of 1.4 percent from the previous year, it remains the dominant player in Barbados’ financial system, controlling more than half (51 percent) of the system’s assets.

Debt Restructuring and IFRS 9

Many of the challenges commercial banks faced in 2018 related to the domestic debt restructuring the Government undertook toward the end of the year, and to the implementation of International Reporting Standard 9 (IFRS 9), a new, more stringent accounting standard. Per the report:

“Over the 12-month period ending December 2018, the banking sector expended roughly $285 million in loss provisions in order to meet the new requirements under IFRS 9. These additional funds, which represented more than half of net income generated for the period, were required to cover the sector’s approximately $2.3 billion exposure to the Government of Barbados.”

Interest Rates

Beyond its analysis of the impact of debt restructuring and IFRS 9 on the sector, the Financial Stability Report notes that commercial banks have continued to offer low interest rates on deposits since the removal of the minimum savings rate in 2015. Banks now pay an average of 0.1 percent on savings accounts, a small decrease from 2017, and charge 6.5 percent on loans.

For the past three years, Barbadians have been shifting their savings away from commercial banks to credit unions in search of a higher interest payments, and this trend continued in 2018. Although overall deposits at commercial banks actually increased slightly during the year, this was due to larger deposits from business and other financial institutions; individuals continued to look elsewhere.

Commercial banks also recorded a decrease in loans issued in 2018.

Non-Performing Loans

The Financial Stability Report also looks at non-performing loans, loans that borrowers have not made payments on in at least three months. Non-performing loans at commercial banks, which have been in decline since their peak in 2012, fell to 7.4 percent in 2018. Of those non-performing loans, more than half were classified as “personal” loans, loans owed by individuals, including those taken out for mortgages.

Stress Tests

After reporting on the sector’s performance in 2018, the Central Bank and Financial Services Commission conducted a series of stress tests, hypothetical scenarios, to assess commercial banks’ ability to withstand adverse conditions. For the 2018 report, these included an increase on non-performing loans, defaults from their largest borrowers, and large scale, sudden withdrawals from savers.

By and large, the report found that the sector could withstand these pressures, although in some scenarios individual banks did not.

The 2018 Financial Stability Report shows that the commercial banking sector, while less robust than in previous years, remains sound and resilient.

Read the 2018 Financial Stability Report’s section on the commercial banking sector.