How Commercial Banks Performed in 2020

Commercial banks are the dominant player in Barbados’ financial system, controlling 52 percent of its assets, with $13.2 billion. So it’s worth paying attention to how they are performing and to whether they remained sound during what was a very tough year. With that in mind, here are four things you should know about commercial banks in 2020.

Deposits were up, while Lending was Down

Given the challenges many households faced in 2020, it might be surprising to hear that the value of deposits at commercial banks actually increased during the year. Carlon Walkes, a Senior Economist at the Central Bank of Barbados and head of its financial stability unit, suggests two potential reasons for this. First, stay-at-home measures and work-from-home arrangements allowed some Barbadians to save on regular expenses such as gas (revenue from the fuel tax fell by 22 percent in fiscal year 2020/21 as compared to the year before). And second, many people who normally travel overseas for vacations did not do so due to the ongoing COVID-19 pandemic.

Fewer people travelling overseas is likely the reason that credit card debt fell by 13.4 percent during the year. Credit cards weren’t the only type of loans that were down (and yes, credit cards are loans);  overall lending decreased, and this was driven predominantly by less borrowing by households.

Liquidity Continued to Climb…

The combined effect of increased deposits and a reduction in loans was that commercial banks, already very liquid, became even more so. Liquidity is the availability of cash or assets that can easily be converted to cash, and Walkes explains that the current high levels have both advantages and disadvantages. “Higher liquidity is good because that means that the average depositor can access their funds held in the banking sector as they need to. But the flipside, the negative, is that it dampens [commercial banks’] profitability.”

In fact, Walkes notes that while after-tax profitability increased year-on-year because “in 2019, there was a significant one-off tax transaction that didn’t occur in 2020, so that influenced the improvement,” pre-tax profitability was lower because of a decline in income from loans and other fees.

…Which Allowed Banks to Offer their Clients Deferred Loan Payments

 The high liquidity came in handy as banks were able to implement moratoria programmes, which allowed their customers to defer payment on their loans. Default risk, the risk that borrowers will not be able to repay their loans, was the biggest threat confronting commercial banks in 2020, and through these moratoria programmes, banks were able to give their clients time to recover from what was hopefully a temporary setback without their loans going into arrears.

Walkes reveals that at its peak in April and May 2020, $2 billion, or 30 percent of all loans, was under moratoria, and that the majority of them were to households. By May 2021, however, loans under moratoria had fallen to $140 million, most of which were loans to the hospitality sector.

There are several reasons for the reduction in loans under moratoria: “Some borrowers economic situation improved, so they were able to become current on their debt. In some cases, the loans had to become classified as non-performing, unfortunately, because things didn’t improve for some borrowers. And then other [borrowers] would have sat down with the lenders and loans would have been renegotiated.”

The Sector is Well-Capitalised

The level of capitalisation, which is what allows financial institutions to withstand shocks, was also high. The Central Bank, which regulates commercial banks, requires them to maintain a capital adequacy ratio of 8 percent of risk-weighted assets; in 2020, in part due to one bank converting from being a branch to a subsidiary, capital adequacy rose to 16 percent. But even without that boost, it would have stood at 14.3 percent, well above what was required.

Commercial banks, like most entities, experienced challenges in 2020, but they were nevertheless able to remain sound. Walkes sums it up this way:

“Even though there would have been a deterioration in credit quality, the commercial banking sector remained stable because they hold adequate levels of capital. They are very liquid, and profitability is not a concern at this time.”

Good news for Barbados’ financial system.