One cannot look at the prospects for Trinidad’s commercial banking sector without first remarking on the country’s extremely strong macroeconomic fundamentals. In an August piece for its Global Economic research group, Scotiabank’s Tuuli McCulley noted that: “The strong external position makes the country… resilient to tight global credit conditions”.
In line with other commentators, Ms McCulley forecasts strong growth of more than 6% through 2009, with trade and current account surpluses remaining sizeable, although lower than 2007’s massive current account surplus of more than 25% of GDP.
She noted that “the government aims at diversifying the oil-based economy and is committed to policies that target an achievement of ‘developed nation’ status by 2020”. McCulley’s main concern is inflation, which at more than 11%, considerably exceeds the central bank of Trinidad & Tobago’s 6% inflation target.
Trinidad’s commercial banking market is highly concentrated, with the two largest commercial banks, RBTT and Republic, accounting for about 60% of total assets according to regional rating agency CariCRIS. Trinidad-based CariCRIS calculates that in 2007 the Trinidad & Tobago banking sector recorded the highest average capital adequacy ratio in the Caribbean region, at 19%. Its funding profile (as measured by deposits to total interest-bearing liabilities) was also very high at 86%, with only very conservative Barbados being higher at 90%. The ratio of non-performing loans of Trinidad’s commercial banks was also the lowest in its Caribbean peer group at 2.5%, while its average return on assets of 3.8% is the highest in the region.
Scotiabank
Named The Banker’s Bank of the Year for Trinidad & Tobago in 2007, Scotiabank Trinidad & Tobago increased its after-tax profits by 17.8% to TT$371m ($61.8) for its last full financial year, ended October 31, 2007. This represented Scotiabank’s 15th consecutive year of increased profitability. This excellent performance has continued into this year, with after-tax profits for the first half of the year ended April 30, 2008 up nearly 20% to just over TT$212m. The bank has just over TT$13bn in assets (just under TT$9.9bn representing loans to customers), supported by just over TT$1.7bn in shareholders’ capital.
Managing director Richard Young, a former partner in Price Waterhouse, notes that “all our business areas are doing well”, with the retail side of his business growing due to “a sales process second to none” using best practices out of Canada.
Mortgages are the anchor product for cross-selling across Scotiabank’s four major product lines of lending, protection, savings and investment and day-to-day banking, and the overall business split is approximately 55/45 between commercial and retail. Commercial was doing well due to the strong economy, the universal Scotia Life product had increased from 6% to about 10% of gross profit in a year, and the bank was winning new mandates in the area of capital markets. Another area of expansion was catering to the needs of small business.
BNS Trinidad had “no exposure to the international credit crunch”, and so far has been “shielded from its effects by its own strong economy”, says Mr Young.
Republic Bank
Republic Bank is the second largest bank in Trinidad & Tobago, and the third largest bank in the English-speaking Caribbean after First Caribbean and the RBC Financial Group, following the latter’s acquisition of its principal competitor RBTT Holdings – although if all the BNS subsidiaries in the region were counted collectively, Republic Bank would be pushed into fourth place.
For its calendar year ended September 30, 2007, Republic recorded net profits of just under TT$1.34bn, or a 110% increase on the previous year. Excluding the one-time gain of TT$370.2m from the sale of its shareholding in First Caribbean International bank (FCIB), what managing director David Dulal-Whiteway describes as “profit on core performance” is TT$966m, an increase of 19% on last year.
Republic’s profit of TT$937m for the first nine months of the financial year almost equalled last year’s ‘core’ performance. Excluding a net gain of TT$82m from the allocation of shares in VISA, core earnings for the first nine months of TT$855m are 26% above comparable core earnings of TT$677m as at June 30, 2007.
Total assets of just under TT$41.6bn at the end of June are 11.4% above the TT$37.4bn in assets as at September 30, 2007.
Commenting on Republic Bank’s recent performance, executive director Nigel Baptiste notes that every line of business was seeing double-digit growth, whether it was commercial (defined as a working capital facility of less than TT$500,000), corporate, retail or its mortgage business.
He adds that while Republic is much bigger in wealth management than its principal local banking competitor RBTT, it is smaller in the area of capital markets, where “we have been more conservative but are still very strong among large corporations”.
He sees Republic’s biggest challenge as the recent sharp increase in Trinidad’s interest rates, which could make it a challenge for customers to meet their obligations. The prime lending rate is now 12.75%, while the typical borrower would pay an extra 2% to 3% on their loan.
As a result, Mr Baptiste says: “We are seeing a slowdown in some sectors, such as construction, with a marked slowdown in private sector construction, particularly residential. This is due to a combination of the rise in interest rates, cutbacks in expatriate employment by the energy companies, whose executives were really fuelling the high to upper-middle end construction boom, and the fall in affordability of housing for the average Trinidadian after a period where housing prices more than tripled.”
Commenting on the effects of the credit crunch, Mr Baptiste argues: “Republic is a very conservative bank that has never gone after short-term gains, unlike some of our competitors. We have no direct exposure to the international credit crunch so we have no markdowns.”
He believes the main impact has been to reduce Republic’s credit lines. “Our biggest exposure is through lines of credit from the major international banks, some of which have been cut back. For example, if you used to have a $50m line, today you might have only a $20m line.” However, he notes that even this impact is very limited “as we weren’t using the lines much anyway”.
On October 5, 2007, Republic sold its remaining banking operation in the Dominican Republic, Banco Mercantil, which it acquired in 2003.
“Rather than being a failure of risk management, I would characterise our experience in the Dominican Republic as more a problem of culture management,” says Mr Baptiste. “There is a big difference between English common law and Spanish civil law, where if what is agreed is not written down it doesn’t count, whatever the original intentions of the parties may have been. There was divergence between ourselves and the Central Bank with respect to certain understandings on the acceptance of responsibility for off-balance-sheet transactions and the accuracy of the financial records of the bank being acquired.”
He noted that the bank had started off in a deficit position, with a small market share (and a very concentrated customer base) and as a formerly failed financial institution, it was “hard to gain the confidence of the local public”.
Jamaica is high on the list in terms of expansion beyond the six Caribbean countries where Republic now has a presence, which include Grenada, Guyana, Barbados, Cayman and Cuba, while Mr Baptiste argues that as a result of its Dominican Republic experience, Republic is much better equipped to go into another Spanish-speaking environment.
First citizens
Government-owned First Citizens bank came into existence with the merger of three failed banks in September 1993. Larry Howai, who was there at the beginning, became chief executive on September 1, 1996, and continues to oversee First Citizens to the present day.
While the bank is 100% state-owned, Mr Howai notes that First Citizens “has been run like any other commercial bank”.
Describing its operation as very “stingy”, Mr Howai explains that First Citizens still has the same number of employees (1300) as it had in 1993, but with a 19% growth in total assets in its last financial year ended September 30, 2007, First Citizens is now managing more than five times (over TT$15bn) the TT$3bn that it had in 1993.
This cost-conscious approach means that, at its current level of 42% (even lower than the 44% recorded at its year end), First Citizens has one of the best efficiency ratios (defined as operating expenses to net interest income) in the Trinidad banking sector, with after-tax profits exceeding TT$400m for its last financial year.
According to Mr Howai, this is possible partly because First Citizens has consistently been a leader in technology and the introduction of electronic banking services. First Citizens was the first bank in Trinidad to introduce internet banking in 2000, and is now expanding its corporate electronic banking services.
Its existing “private banking” offering is not based on offering “exotic products” but a “higher quality of service”, which is a key element of its overall competitive strategy, says Mr Howai.
First Citizens is looking at expanding into new areas such as wealth management, as well as geographical diversification outside Trinidad. Any significant geographical or other expansion will, however, be dependent on its ability to raise more capital, as it is not listed, and currently pays its government shareholder a substantial dividend of TT$130m each year. This is kept constant to retain capital for growth, and consequently the payout ratio declines every year.
“If we could do an IPO, we could see very significant growth in earnings,” says Mr Howai. “We are probably the only bank in Trinidad to see consistent double-digit growth in earnings over the past 12 years, and we expect to continue that rate of growth going forward.
“The intention is to sell new shares, not the government’s existing shares, to raise additional capital to expand the business.”
First Citizens is still seeing strong growth in business in areas such as corporate lending (both in Trinidad and abroad), credit cards and mortgages, the latter growing at a rate of 25%, partly due to rising real estate prices.
With respect to credit quality, international rating agency Standard & Poor’s re-affirmed its counterpart credit rating and credit default ratings at BBB+/A-2 on August 8, 2008, on the basis of its sound asset quality, above-average capital, and its consistently low non-performing assets, averaging only 1.2% between 2004 to 2007.
However, Mr Howai notes that the combination of “mark-to-market accounting, higher inflation and the consequent tightening of monetary policy by the Central Bank” means that their biggest challenge was interest rate risk. He argues that a good borrower for a mortgage, for example, at an interest rate of 7%, could become a subprime borrower at an interest rate of 11%.
“By and large, the major Trinidadian banks were not exposed to the international credit crunch,” says Mr Howai. First Citizens itself was not directly exposed to the international credit crunch at all “as we did not buy any of that kind of paper”.
Contemplating Trinidad’s economic outlook, Mr Howai is still optimistic that “even apart from oil and gas, the economy will remain strong”.
RBTT
Royal Bank of Canada (RBC) closed its $2.2bn acquisition of Royal Bank of Trinidad & Tobago (RBTT) in June. This makes it the second-largest banking group in the English-speaking Caribbean, with combined total assets of $13.6bn, of which RBTT represents $7.5bn in assets and RBC represents $6.1bn at the end of 2006.
According to RBC’s head of Caribbean banking, Ross McDonald, RBC’s purchase of RBTT is “a marriage made in heaven. Our network fits almost perfectly with RBTT. Where we are strong it is not a major force, and vice versa.”
RBC Caribbean was predominantly based in the Bahamas, the Cayman Islands and Barbados, while RBTT had leading positions in Trinidad & Tobago, Netherlands Antilles, Aruba and Suriname, as well as being Jamaica’s third largest bank.
Mr McDonald, who is based in the Bahamas, says that having a head office in the region is a competitive advantage. As a result of the deal, RBC now has a true regional head office in Port of Spain, with its overall number of employees increasing from 1500 to 7000, while the number of branches has increased from 46 to 130. As its networks don’t overlap, it is not a cost-driven acquisition but about expanding the business.
Mr McDonald believes the acquisition gave RBC a leadership role in the English-speaking Caribbean, as well as critical scale. On top of that, he believes that when carrying out due diligence, it became very clear that a cultural affinity still existed despite the 20-year gap since RBC had divested RBTT. In addition to the cultural fit, RBTT has a strong management team “that has done a great job in the past 10 years”, and RBC was pleased to acquire its new “highly scalable” banking technology.
Formerly, RBC’s existing business in the Caribbean had been confined largely to its retail and commercial lines. With the acquisition of RBTT, the combined retail business will be much more powerful from a marketing and product perspective. Moreover, in buying RBTT, RBC acquired a capital markets and wealth management business (the latter mostly in Trinidad) in the region’s biggest economy, which is also the region’s largest generator of capital. RBC Caribbean has also been unaffected by the financial crisis from a balance sheet perspective because it was not buying and originating those type of securities.
RBC already had a strong offshore capability in the Caribbean, which will be enhanced by RBTT, making the acquisition a nice fit. In Mr McDonald’s view, “to deliver the one-stop shop instead of just a piece of the customer solution” RBC needed the regional product capability RBTT brought.
The relatively strong position of Canada’s banks show that this ‘full service’ model still works, despite the problems in the US which has been operating this model for a shorter period of time.
For its part, RBTT was attracted by RBC’s strong international brand, balance sheet strength, technology, corporate governance and operational execution ability in areas such as data mining.
Asked how Royal Bank of Canada’s recent purchase of Trinidad’s leading commercial bank and capital market player would affect Trinidad’s pan-Caribbean capital market drive, Senator the Honourable Mariano Browne, minister of state in the ministry of finance, notes that RBC’s acquisition of RBTT was highly positive from the perspective of the Trinidadian debt market as it increases the potential capital base available for RBTT’s strong regional syndicated loan business.
Referring to the negative impact of RBTT’s delisting on the liquidity of the Trinidad Stock Exchange, Mr Browne takes a philosophical approach. “It is true that there is one fewer ‘tile’ but that is not a disaster. What it does say is that there is much more work to be done to list more companies and that needs work. The positive is that a foreign company saw an opportunity for an investment that should have sent a very positive vibe to all.”
COUNTRY FACTS
Population: 1.05 million
Population growth rate: -0.891%
Area: 5128 sq km
Real GDP growth: 5.5%
GDP per capita: $18,300
Key sectors:
• Agriculture: 0.6%
• Industry: 61.9%
• Services: 37.5%
Labour force: 615,000
Unemployment rate: 6.5%
