What You Need to Know About Finance and Trust Companies in 2020

Finance and trust companies are in many ways similar to commercial banks in that, as at a commercial bank, you can open a savings account or get a loan. The major difference between the two is that they don’t issue cheques nor do they accept deposits that are repayable on demand.

However, while commercial banks dominate Barbados’ financial system, finance and trust companies are its smallest player with 4 percent of its assets. Even so, it’s important that financial regulators monitor their performance to ensure that the sub-sector remains sound.

With that in mind, here is a look at their performance in 2020.

Their Assets Decreased

In 2020, finance and trust companies had total assets of $991 million, $4.7 million less than in 2019. The decline continued in the first quarter of 2021, when assets fell by $7.7 million.

They Became Less Liquid

During the year, deposits decreased by 1.2 percent. According to the 2020 Financial Stability Report, a joint publication by the Central Bank of Barbados and the Financial Services Commission (FSC), this was because finance and trust companies, which have been paying higher interest on deposits than commercial banks, brought their rates more in line with market trends and experienced reduced balances from the hospitality sector.

At the same time, they recorded a 2.8 percent increase in loans, mostly mortgages to households. The combination of lower deposits and more loans meant that they recorded a decrease in liquidity – cash or assets that can easily be converted to cash to cover operating expenses.

They Recorded Less Profit

 The subsector collected reduced interest from loans, and as a result, earned less net interest income. Other forms of income, such as earnings from foreign exchange operations, fees, and commissions also declined. As a result, overall profitability decreased from 1.6 percent to 0.7 percent.

They Saw an Increase in Non-Performing Loans

Perhaps the biggest risk for financial institutions in 2020 and 2021, given the slowdown in the economy and the increase in unemployment, was that clients would not be able to repay their loans on time. Like other types of financial institutions, finance and trust companies saw an increase in non-performing loans – loans that have not been repaid in at least 90 days. They rose from 11.3 percent in 2019 to 11.7 percent in 2020, and then to 13.3 percent by the end of March 2021.

To mitigate the increase in non-performing loans, which was expected due to the hardships some of their clients were experiencing, finance and trust companies offered their clients moratoria – the opportunity to defer payments on their loans. At its peak in June 2020, 35 percent of all loans, with a value of $251 million, were under moratoria. By March 2021, the value of loans under moratoria had fallen to just $6 million.

They were Well-Capitalised

Despite the issues the subsector experienced during 2020, it was able to increase its capital adequacy ratio (CAR). Capital is what allows financial institutions to withstand shocks, and finance and trust companies were able to record a CAR of 18.9 percent at the end of March 2021 which is well above the required 8 percent. 

Finance and trust companies are a small subsector in the local financial system, but, like all players, their activities are monitored by financial regulators. The COVID-19 pandemic ushered in a number of financial challenges, but the high level of capital the subsector maintained is a necessary safeguard against any likely fallout.