How did commercial banks perform in 2020

How did commercial banks perform in 2020

Authors):

Central Bank of Barbados


Commercial banks are the dominant player in Barbados’ financial system, controlling 52% of its assets, with $ 13.2 billion. So it is worth paying attention to their performance and whether they have remained strong during this very difficult year. With that in mind, here are four things you need to know about commercial banks in 2020.

Deposits were up, while loans were down

Considering the challenges that many households faced in 2020, it may be surprising to learn that the value of deposits in commercial banks actually increased during the year. Carlon Walkes, senior economist at the Central Bank of Barbados and head of its financial stability unit, suggests two potential reasons for this. First, home support measures and work-from-home arrangements have saved some Barbadians on regular expenses such as gasoline (fuel tax revenues fell 22% over the past year). ‘fiscal year 2020/21 compared to the previous year). And second, many people who normally travel abroad on vacation have not done so due to the ongoing COVID-19 pandemic.

Fewer people traveling abroad is probably the reason credit card debt declined 13.4% over the year. Credit cards weren’t the only type of loan to go down (and yes, credit cards are loans); overall loans decreased, mainly due to the decrease in household borrowing.

Liquidity continues to rise …

The combined effect of increasing deposits and decreasing lending has been that the already highly liquid commercial banks have become even more liquid. Liquidity is the availability of cash or assets that can be easily converted into cash, and Walkes explains that the current high levels have both advantages and disadvantages. “Higher liquidity is a good thing, because it means that the average depositor can access their funds held in the banking sector as needed. But the downside, the downside, is that it cushions [commercial banks’] profitability.”

In fact, Walkes notes that while after-tax profitability has increased year over year because “in 2019 there was a large one-time tax transaction that did not take place in 2020, which resulted in influenced the improvement, “pre-tax profitability. was lower due to lower loan income and other fees.

… This has enabled banks to offer their customers deferred loan repayments

The high liquidity was helpful as banks were able to implement moratorium programs, which allowed their customers to defer payment of their loans. Default risk, the risk that borrowers will not be able to repay their loans, was the biggest threat commercial banks faced in 2020, and thanks to these moratorium programs, banks were able to empower their banks. clients time to recover from what hopefully was a temporary setback without their delinquent loans.

Walkes reveals that at its peak in April and May 2020, $ 2 billion, or 30% of all loans, were under moratorium, and that the majority of it went to households. By May 2021, however, default loans had fallen to $ 140 million, most of which was lending to the hotel industry.

There are several reasons for the reduction in moratorium loans: “The economic situation of some borrowers has improved, so that they have been able to update themselves on their debt. In some cases the loans had to be classified as non-performing unfortunately because things did not improve for some borrowers. And then others [borrowers] would have sat down with the lenders and the loans would have been renegotiated. ”

The sector is well capitalized

The level of capitalization, which allows financial institutions to withstand shocks, was also high. The Central Bank, which regulates commercial banks, requires them to maintain a capital adequacy ratio of 8% of risk-weighted assets; in 2020, partly due to the conversion of a bank from branch to branch, capital adequacy increased to 16%. But even without the boost, it would have come in at 14.3%, well above what was required.

Commercial banks, like most entities, experienced challenges in 2020, but they were nonetheless able to remain strong. Walkes sums it up this way:

“Although there would have been a deterioration in credit quality, the commercial banking sector has remained stable as it holds adequate levels of capital. They are very liquid and profitability is not an issue at this time.”

Good news for Barbados’ financial system.


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