Last year, once again, most of the six commercial banks in the system posted strong profitability. And several continue to expand their reach beyond Trinidad, cementing the country’s image as the financial centre of the English-speaking Caribbean.
Most of the optimism reflects the country’s bubbling economy – currently the most dynamic in the Caribbean – which rests on the energy sector and looks unlikely to cool soon. Indeed, with oil and, increasingly, liquefied natural gas, greasing the country’s economic engines, banks are enjoying the economic stability that many of their Latin American and Caribbean counterparts crave.
“The market is liquid, the economy is doing well and there is plenty of room for growth in Trinidad and abroad,” says David Dulal-Whiteway, managing director of Republic Bank. The institution, which has nearly 50 branches and 3000 employees in Trinidad, is in healthy shape, ending 2004 with a 13% annual increase in profit. Republic stands in second place in terms of overall asset size in Trinidad, just behind Royal Bank of Trinidad and Tobago Limited (RBTT).
Increasing competition
Still, while banks are in the black, competition is intensifying. In a country of 1.3 million people, there is only so much room for organic growth and most commercial banks only have a small number of customers who go beyond basic savings and current account services. While there is growth in credit cards, averaging about 10%, Trinidad is not experiencing a boom.
“We’ve seen a steady expansion in credit in the past five years but there is still a long way to go,” says Larry Howai, CEO of First Citizens Bank.
About 25% of his bank’s customers hold credit cards but while growth may not be robust, it is responsible. Citizens Bank, like its local rivals, enjoys low rates of non-payment.
It helps that Trinidad is forming a centralised clearing house so banks can settle payments among themselves. This will follow last year’s creation of an automated credit bureau, maintained jointly by financial institutions.
“Traditionally, it has been difficult for us to perform background checks, so that has kept us conservative when it comes to granting credit,” Mr Howai tells The Banker. “But moves are under way to make things easier. We should see a reasonable level of loan growth this year.”
Interest rate caution
Mr Howai, who is also the president of the local bankers’ association, adds that banks are careful not to allow US$ account interest rates to rise above local rates because it would then become more profitable to hold US dollars rather than Trinidad’s currency.
“Right now, we are extremely focused on providing the best service possible,” says Richard Young, managing director of the local unit of Canada’s Scotiabank, another significant player. “When I came here 10 years ago, Scotia was more control-oriented, probably too rigid. We pushed our products and didn’t listen enough to our customers. I can’t stress to you how important it is for us now to be sales and service friendly.”
At a more sophisticated level, demand is up for services that address wealth management and mortgages. The latter is being helped by an overall real estate boom, which is being driven largely by gains in the energy sector. A government-sponsored drive to offer more affordable housing is also helping. The programme involves building about 10,000 low-cost homes, tapping both public and private funding. Banks are eager to help fund the construction and mortgages the project involves.
“Before, we only handled mortgages at a handful of locations,” says Mr Dulal-Whiteway. “Now, we have several dozen locations handling home loans. We’re also holding mortgage fairs in shopping malls, where people can talk to bank representatives and developers in a natural, low-pressure environment. Many people still think that a mortgage is a mysterious product for an exclusive few.”
The wheels turn more slowly when it comes to developing online banking and more electronic-based services. However, some banks, namely RBTT, are looking ahead and investing considerably in order to modernise their computer systems. RBTT has reportedly spent $200m on upgrading its technology in order to handle more interaction between its subsidiaries overseas and develop online services.
Republic Bank is attempting to encourage more of its customers to use basic electronic services. The bank is sending out its employees to approach customers queuing in branches and persuade them to conduct basic transactions at the ATMs. “It is less about building trust in electronic services than breaking old habits,” says Mr Dulal-Whiteway.
Left out of the banking scenario are the high-rolling energy companies that currently fuel Trinidad’s economy. Although Trinidad does not subscribe to any exchange controls, companies such as BP and Spain’s Repsol prefer to avoid local institutions and any risk they may carry. Instead, such companies centralise their banking activity in, say, London or New York. “For the most part, the big players in the oil and gas sector are already hooked up abroad,” says Mr Young.
Merger activity
Some institutions are anxious to make their mark in the region. Jerome Sooklal, the CEO of RBTT, says his bank’s strategy is to expand its services through mergers and acquisitions. The expansion effort will be led by Nigel Romano, whose last posting was with US-based Citibank in Indonesia. RBTT reportedly has the cash to move on its strategy. One analyst, who prefers to remain unnamed, estimates the bank has about $5bn in cash resources.
Acquisition by acquisition, Republic Bank has built up its presence in the Caribbean. “We have a vision of being a leader beyond the English-speaking Caribbean,” says Mr Dulal-Whiteway. His bank controls, or has hefty stakes in, numerous subsidiaries overseas, including Barbados National Bank, which controls nearly 30% of the nation’s local market, Grenada’s National Commercial Bank, and East Caribbean Financial Holding, the parent of the Bank of St Lucia.
In 2003, Republic Bank faced its trickiest acquisition when it bought Banco Mercantil, a failing institution in the Dominican Republic. The takeover, which cost about $20m after recapitalisation costs were included, came at time when the Spanish-speaking country’s economy was stuck in the mud following a fall in tourism since September 11. The exchange rate of the Dominican peso, which had stood at about 17 to the US dollar, dropped to 35 pesos in August 2003, the week Republic bought Banco Mercantil. In 2004, Republic absorbed $9.2m in losses stemming from the purchase as it rode out the difficult times.
Investor confidence
Yet the numbers from the Dominican Republic are once again profitable, partly owing to cost cuts, including layoffs. Investor confidence is also up as the country’s president, Leonel Fernández, has pledged to stick to the International Monetary Fund’s austere policies. “At its core, the Dominican economy has strong fundamentals. Interest rates have dropped and the real potential of the country’s economy is visible again,” says Mr Dulal-Whiteway. “We see a growth pattern there that will only benefit us.”
Banks are also keen to build their name in Central America, especially considering the efforts to finalise the Central American Free Trade Agreement, which would increase trade ties between the sub-region and the US. Scotiabank recently acquired El Salvador’s Banco Comercio. RBTT is considering opening an agency office in Costa Rica and Republic Bank also has interests in the region.
Other banks prefer to avoid acquisition-related headaches altogether. “Our strategy is bricks and mortar. We’re not looking to buy banks outside Trinidad,” explains Mr Howai of First Citizens, which was established in 1993 when the state merged three indigenous institutions into one. “Rather, we will identify large corporate accounts abroad that we can serve. For example, we handle the accounts for St Lucia’s largest electricity firm, one of the best-run companies in the Caribbean. That way, we get the top business but not the retail banking headache that comes with a large merger or acquisition.”
The financial sector’s growth and the move by institutions into secondary markets highlight the need to amend current laws to manage the financial system. In 1993, landmark reforms were passed to shore up guidance and supervision. Lending limits were established along with other protective measures. Since then, the Central Bank has issued guidelines on how to protect customer information and has detailed responsible lending practices.
The government recently appointed its first financial services ombudsman to address the banking and insurance sectors. Indeed, supervision of the insurance sector, which suffers from long lag times in resolving claims, is only now being addressed seriously.
“It’s an area that has always lagged in terms of supervision, partly because insurance here didn’t start picking up until the 1990s,” says Wendy Ho Sing, deputy inspector of financial institutions at the Central Bank, who cut her teeth in Canada as a banking relations manager for the province of Ontario.
Ms Ho Sing’s supervision of the insurance sector requires inspectors to visit Trinidad’s 47 insurance firms, scrutinising everything from internal controls and corporate governance to international operations.
Regional expansion
There is a strong consensus that more attention must be paid to commercial banks’ business outside Trinidad. Last year, Fitch Ratings bumped up RBTT in its long-term foreign currency rating. But the agency also stuck to its warning that, while RBTT’s acquisition-led regional expansion offered more opportunities, it also left the bank exposed to economic and political troubles on the ground.
But better oversight of banks’ offshore operations will only come when financial leaders in the Caribbean begin to work together closely. Last September, a group of high-level Caribbean financiers gathered in Miami to talk about regional integration. Trinidadian financiers led many of the discussions. They will no doubt benefit most from persuading smaller countries that house Trinidadian subsidiaries to open up their self-contained financial systems.
