Bowe: Subdued bank profitability in 2021, 2022

Profitability across local commercial banks continued to decline as 2020 came to a close and according to the top executive of a leading bank, it will be at least another 18 to 24 months before profits turn around in the banking sector.

In its just released Quarterly Economic Review, The Central Bank of The Bahamas reports that banks’ overall profitability contracted by $15.1 million or 36.8 percent to $25.9 million, compared to the same period in 2019.

Chief Executive Officer of Fidelity Group Gowon Bowe said profitability is going to remain subdued in 2021 and into 2022, largely because the economic downturn has had multiple impacts on the banking industry – subdued revenues, increased costs from the loan loss provisions and an inability of institutions to reduce overall overhead based on their status as social partners.

“Loan loss provisions will continue to be volatile and increasing, because we have uncertainty over whether borrowers will be fully repaying. So if you have the revenues being subdued, your expenses being increased by the actual loan loss provisions, then your profitability is going to remain low until those funds turn around. And it will be a slower turnaround, because in order for a loan to restore itself to full, borrowers have to make all of their delinquent payments current or they will have at least paid a consistent number of payments where they can restructure,” he said in an interview with Guardian Business yesterday.

“The short answer is yes, profitability will remain under pressure. The institutions that have the ability to reduce their costs without compromising security as well as the overall contribution to the economy will have an advantage, but that would be minimal until you have a significant reduction in loan loss expenses and an increase in the revenues.”

Interest income declined $3.2 million (2.2 percent) to settle at $144.6 million during the third quarter of 2020, while banks’ operating costs grew by 7.9 percent to settle at $101.8 million, the Central Bank states.

But while income from commissions and foreign exchange fees increased 18 percent to $9.1 million, Bowe said looking ahead he believes that component of profitability may face some challenges.

“The fees and commissions will be driven by transactions. Certainly what you will find is the move to digitization, which was necessitated by COVID-19, would mean that whether through savviness or necessity, customers will start using more cost-effective transactions – which is good for consumers but will not necessarily help the bottom line of financial institutions. Ultimately we’ll see that fees and commissions will also be subdued, because firstly you will have less activity, because during COVID-19 we have these restrictions and reduced economic activity. Secondly, people become wiser with the methods they use with the bank,” he said.

“With the costing, ideally if people are becoming more digitized, we will be able to reduce costs in some of the overhead that may have been necessary when we were doing things manually. But in the immediate term, most of the overheads will remain the same, the salaries, occupancy costs, utilities and the like.”

The CBOB stated that most profitability ratios trended downward over the review quarter, as the gross earnings margin narrowed by 24 basis points to 5.23 percent; the interest margin fell by 27 basis points to 4.91 percent; the commission and foreign exchange ratio increased slightly by three basis points to 0.33 percent; the net earnings margin ratio reduced by 30 basis points to 1.55 percent; the operating costs ratio increased by six basis points to 3.69 percent and as a consequence of the rise in bad debt provisioning, the net income ratio narrowed by 64 basis points to 0.94 percent.

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