The diverse nations of the Caribbean are in an enviable predicament. This is because the area's largest foreign-owned banks do not belong to ailing US or UK banks but to robust Canadian firms - specifically, the Bank of Nova Scotia (Scotiabank), Canada's most international bank; the Royal Bank of Canada (RBC), North America's fifth largest bank; and the Canadian Imperial Bank of Commerce (CIBC), another leading Canadian bank.
This is not to say that these Canadian banks have escaped from the international financial crisis unscathed. The profits of all three Canadian banking groups fell significantly in 2008 compared with 2007, mainly because of losses and higher provisions in the US banking market.
But through a combination of regulatory discipline and cultural attitudes, Canada's banking system has long operated very conservatively. The upside is that the industry has been unique in the developed world in its ability to dodge the worst of the current crisis. There have been no bank bailouts or rescue plans in Canada and, most significantly for depositors and creditors, no serious risk of a systemic collapse.
Strong stance
"The strength and stability of the Canadian banking system is proven and that will be a strength going forward," says Ross McDonald, head of central American and Caribbean banking at RBC.
Suresh Sookoo, CEO of RBBT Financial Holdings, the second largest banking group in the Caribbean, based in Trinidad and Tobago, which merged with RBC's Caribbean retail banking operations last year, says that the industry has a similar advantage in the region. "We used to criticise [Caribbean] authorities for their archaic [banking] regulation. Now we realise it has saved us," says Mr Sookoo.
For example, because of regulatory restrictions, the amount of money that local pension funds and insurance firms are allowed to invest outside the area (normally only 20%, while 80% has to be invested in the local currency) prevented these institutional investors, and the Caribbean banks that own them, from getting involved in toxic US subprime mortgage investments.
Local licence
Canadian banks in the Caribbean tend to be mainly small, domestic banks operating under a local licence, according to Mr McDonald. "Banking [in the area] is of the vanilla envelope variety. We do bread-and-butter retail and commercial banking. We take local dollars and reinvest them to fund cars, vacations, second homes and businesses," he says.
However, while the international financial crisis does not appear to have had an impact on Caribbean banking yet, according to Mr Sookoo, the resulting world economic crisis, and especially the recession and rising unemployment in the US, is starting to have repercussions throughout the region and across most sectors.
Tourism is the main income earner for the Caribbean and one of the most important and most competitive lending segments both for Canadian and local banks - involving loans to hospitality businesses, tourist developers and resorts, and work with governments and developers.
Before the credit crisis, tourism accounted for more than one-fifth of gross domestic product (GDP) in the Caribbean and more than one-third of total employment, with about 22 million tourist arrivals a year, bringing in about $24bn in tourist receipts.
The aftermath of hurricanes that swept through the Caribbean islands in 2008, especially Jamaica and Cuba, coupled with economic recession in developed countries, has caused extensive damage and many small tourist industries have collapsed.
Winter, which has always been a major income-generating season in the region, was less profitable than usual in 2008. Benu Biddani, lead economist for the Caribbean at the World Bank, says that its not just the most affluent Caribbean countries, such as The Bahamas and Barbados (where 80% of tourist earnings come from the US and Canada), that have suffered declines in tourist bookings, arrivals and occupancy. The less profitable eastern Caribbean countries (Antigua and Barbuda, Dominica, Grenada, Guyana, Jamaica, St Kitts and Nevis, St Lucia and St Vincent) have also been affected, in their case by fewer tourists from the EU, especially the UK and Ireland.
The International Monetary Fund (IMF) has revised its 2008/09 economic growth forecast for the eastern Caribbean down from "5% to 7%" to "4% to 5%". In Jamaica, the National Planning Institute forecasts negative growth in 2009/10 and unemployment to rise to more than 12%. Trinidad and Tobago, the Caribbean's only oil and gas exporter and, until recently, the main economic engine helping to insulate it from the US slowdown, has been hit by the steep fall in fuel prices.
Mr Sookoo says that, as a result, Trinidad's plans to become an international financial centre have had to be put on hold. Trade with the US and the EU, the Caribbean's principal external trading areas, and foreign direct investment (FDI), which many countries rely on, (FDI fuelled 30% of GDP in Antigua and Barbuda, 28% in Grenada and 25% in St Lucia in 2007, says Ms Biddani), are projected to contract this year. New FDI-financed projects, for instance in Grenada, are already being suspended because of financing difficulties, according to the World Bank.
Finally, countries that could rely on remittances from emigrant communities in the US, Canada and Europe to support them in past crises may not be able to do so now. Early estimates from the World Bank suggest remittances to the Caribbean will slow significantly in the second half of 2008. This affects Jamaica, Guyana and Haiti, big recipients of remittances, and also RBTT's recently developed remittance services in the countries where it had a presence before its merger with RBC, namely Antigua and Barbuda, Aruba, Barbados, Grenada, St Kitts and Nevis, St Lucia, Netherlands Antilles, St Vincent, Suriname and Trinidad and Tobago.
History and experience
Despite all the bad news, Canadian bankers are confident that they have an advantage because of their banks' long history and experience in the Caribbean. This started in the 1800s, on the back of trade along the eastern seaboard. Canada's Maritime Provinces shipped flour, salt cod, potatoes and timber south in exchange for sugar, molasses and rum from the West Indies. The Bank of Nova Scotia opened a Jamaican branch in 1829 and RBC established a branch in Havana in 1898. RBTT's roots are in the Royal Bank branch, which opened in Port of Spain, Trinidad in 1910.
"We know these economies. We are part of the fabric of this region," says Pat Minicucci, regional head for Caribbean banking at Scotiabank. "We've seen ups and downs many times. We've gone through tough times before."
When many islands established their independence from the UK in the mid-20th century, many UK companies pulled out of the Caribbean and Canadian firms moved in, especially in banking and insurance.
In the wave of expansion in Canadian banking before the current crisis, it was the UK's Barclays that withdrew when it reached a $1.08bn agreement to sell its ownership stake in FirstCaribbean International Bank to Canada's CIBC in 2006. Barclays and CIBC founded the bank four years previously.
Profitable deal
The sale raised CIBC's shareholding to 87.4% in FirstCaribbean, which reported $10.9bn in assets, $9.2bn in deposits and $175.3m in earnings on October 31, 2008, down from earnings of $255.7m the previous year. The bank has a presence in 17 countries and is continuing to focus on retail, wealth management, corporate and capital markets business. "FirstCaribbean is an excellent fit for CIBC and well positioned for long-term success in a region that we believe has attractive growth prospects," said Gerry McCaughey, CIBC's president and CEO, at the time of the takeover.
Scotiabank made several acquisitions in the region between 2003 and 2008, including in the Dominican Republic (DR) where 9 million of the Caribbean's total 39 million people live. One acquisition was of DR's biggest pension fund by affiliates, and a related insurance company, both owned by Spain's BBVA Crecer. Scotiabank, as a result, became the only foreign bank in DR with full commercial and personal bank operations.
Simultaneously, Scotiabank expanded its local wealth management services and, in April 2008, made Barbados the headquarters of Scotia Private Client Group, offering high-net-worth clients throughout Latin America and the Caribbean investment advice, trust services, private banking and insurance. A tax treaty with Canada underpins offshore finance in Barbados.
Scotiabank is now the dominant bank in the region, with a presence in 20 Caribbean countries, and more than 150 branches.
"The Caribbean is a crucial region for Scotiabank both in terms of the scale of our operations there and our strategy," said Luc Vanneste, Scotiabank's executive vice-president and CFO, in a speech to a group of Caribbean investors last June. "It is an area in which we have a lot of confidence," he added.
Perfect match
Mr McDonald describes RBC's takeover of Trinidad's RBTT last June as "a match made in heaven". He says that RBC, although it had a strong brand presence in the area, had a franchise that was limited to the English-speaking Caribbean, principally Antigua and Barbuda, The Bahamas, the Cayman Islands, Dominica and Montserrat, whereas linking up with RBTT extends the Canadian bank's footprint into many important markets, notably Trinidad, Jamaica and the Netherlands Antilles. "[Another] beauty of the RBTT merger is that there is no overlap in significant countries," says Mr McDonald.
RBTT also had a much broader product line, including a small capital markets and small asset management, trust and pension fund business, which RBC did not previously have in the Caribbean. "The merger was more about scale than synergy. It was revenue-driven," says RBTT's Mr Sookoo. The merged bank will have a presence in 18 countries, $13.7bn in assets, 132 branches and more than 6000 employees.
But while the reasons for the merger were simple, carrying it out is proving complex. It is expected to take two to three years from the point of takeover on June 16, 2008. This is because when RBC, which previously owned RBTT, sold its entire stake in the Trinidad bank in 1987 (when Trinidad's government decided foreigners could not own controlling stakes in local banks), RBTT pursued a policy of growth through acquisition on its own. For instance, it acquired the onshore banking activities of the Dutch banking group ABN AMRO in Curaçao, Aruba and the Netherlands Antilles. However, RBTT has not yet established a unified technological platform for these acquisitions or even started making adjustments related to the RBC merger.
Another strength of the Canadian banks in the Caribbean, in addition to their reach across a variety of countries and economies, is their range of business lines and products, which ensure diversified revenue streams.
Scotiabank's Mr Minicucci says: "Our services span the entire spectrum of income earners." As full service financial institutions, CIBC's FirstCaribbean, RBC's RBTT and Scotiabank are able to provide local wealth management services for wealthy clients, remittances services for emigrants, tourism and hospitality finance, loans for small to medium-sized enterprises (SMEs) - which made up the majority of businesses in the Caribbean - and conglommerates, consumer credits and mortgages, as well as special products and services for the region's large and growing youth population.
One example is the recently launched Scotiabank Be Money, a line of banking designed specifically for young adults, which includes high-interest bearing savings accounts with no banking fees for students who are paying for tuition, or for 18 to 30-year olds who are already employed.
Another special line of banking in the area is financing reconstruction or after-recovery activities following natural disasters. The demand for such financing is increasing in line with the number of natural disasters in the Caribbean (on average, one major hurricane every two years).
Scope for growth
Canadian bankers are convinced that the growth opportunities in the Caribbean will justify their banks' recent expansion. "The upside is this [crisis] will pass and we will see opportunities for growth in various lines. Tourism will continue to be a favoured line, our relationship with SMEs will grow, our wealth management area will grow and there are opportunities in the youth market," says Mr Minicucci.
However, Mr Sookoo says that banking in the Caribbean has become "a free for all" with an increase in competition from international as well as local banks. Mr McDonald agrees. He says: "Some countries are over-banked. In Antigua, when it comes to providing a car loan or a mortgage, each client has two or three quotes from different banks."
Moreover, many Canadian bankers consider that the crisis is spreading. "Loan demand is tapering off," says Mr Sookoo. "The reality is that real estate prices are down considerably. And construction projects are not being completed," says Mr McDonald. "Customers are getting fewer tourists, their earnings are down. That leads to good old recession-type reactions. We are used to economic cycles in the region," he adds.
Mr Sookoo warns that average loan delinquency rates in the banking sector of less than 2% last December are expected to rise. But he hopes the non-performing loan (NPL) rates will not increase as much as they did in the early 1990s, when asset values declined and NPL rates soared to between 8% and 9%. "We are hoping [NPL rates] won't go so high this time," he says.
Support network
One positive development is that in these dire times, international financial institutions have been swift to lend support. For example, anticipating a sharp decline in FDI to the Caribbean in 2009, Washington's Inter-American Development Bank (IADB) and FirstCaribbean established the first risk-sharing guarantee facility for the region in December. This was set up to support long-term lending for infrastructure, tourism and medium-sized businesses that have the potential to generate jobs and boost productivity. The IADB approved up to $200m in partial credit guarantees to establish the risk-sharing facility, which will support at least $400m in FirstCaribbean lending to private companies on a trial basis in Jamaica, and then later in other countries such as The Bahamas, Barbados, Belize and Trinidad and Tobago.
Canada's Export Development Corporation (EDC), which provides credits, insurance and debt solutions to Canadian companies that export or invest abroad, is also ready and willing to assist. Nelson Nathan, EDC's regional manager for Mexico, central America and the Caribbean, says: "We are keen to support Canadian companies. We have a lot of funds available and we are more popular then ever."
EDC spends about $1.7bn a year supporting Canadian firms in the Caribbean and tends to focus on infrastructure, energy and environment projects. Recently, for instance, it partnered with RBC and Scotiabank in a $150m syndication to finance Columbus Networks, a Canadian television cable company, to run sea-based cable from Florida to Colombia through The Bahamas.
"Canadian banks have not been hit as hard by the crisis as UK or US banks. But definitely they are going to need more capacity [credit]," says Mr Nathan.
