Monday, July 20, 2009

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Royal Fidelity shows stresses of downturn By VERNON CLEMENT JONES ~ Guardian Business Editor ~ vernon@nasguard.com: A newly released annual report is suggesting that even early on in the economic downturn Fidelity-RBC banking venture was grappling with a spike in non-performing accounts and loan loss provisioning out of step with that growth. "As of 31 December 2008, principal balances of non-performing loans and advances to customers totaled $2,554,596... representing 27.26 percent of total loans and advances to customers," reads Royal Fidelity's consolidated balance sheet for 2008. It was published yesterday. The importance of so large a percentage of loans at least 90 days past due is heightened by the dramatic change it represents from the merchant bank's prior year. Then past due accounts held an aggregate value of only $68,955, or a meager 1.06 percent of the loan book for business, jointly owned by RBC and Fidelity since the latter bought 50 percent of the bank's ordinary shares in 2007. The next year's tenuous result reflect the economic troubles coming on strong after September and the collapse of investment house Lehman Brothers. It would seen sent world markets already teetering on the brink of collapse over the edge. It's in part reflected in the disappointing performance of the RF international mutual fund last year. Royal Fidelity, which has its fingers not only in wealth management services but private and corporate banking, is not unlike the retail banks in this jurisdiction. It appears to have suffered direct fall out from the economic ebb transferred to The Bahamas, a contagion spread by decimated foreign direct investment and visitor arrival numbers that effected the local market. The same as for the commercial banks, RF results indicate its loan loss provisioning hasn't necessary kept pace with its non-performing loans. "The provision for loan losses represents 20.55 percent... of loans and advances to customers and 75.41 percent of total non-performing loans and advances," read the consolidated balance sheet as of December 31, 2008. It's worth noting that an outstanding balance on a $3.2m promissory note, and reflected in the 2008 financials, was repaid last March. Still, growing business in this market remains a challenge for the industry as a whole. Last February, Guardian Business reported that Royal Fidelity won commitments from only about two groups for a pension plan developed with the Bahamas Chamber of Commerce last year. The deal was demonstrative of the kind of large-scale business the merchant bank is now pursuing. While it was also preparing proposals for 20 other employer-members of the Chamber looking to set up retirement funds for their workers, one of those largest prospects told Guardian Business it was little prepared to make that commitment during this recession. The current position of its loans portfolio vis a vis debt to loan loss provisioning is unclear. Still as Guardian Business reported in May the Central Bank has identified the growing gap between the two as a problem for the whole commercial sector. "While banks maintained a fairly stable rate of loss provisioning against total loans," reads its economic report for March, "these trailed the pace of increase in arrears, resulting in declines of 2.1 percentage points in the ratio of provisions to total arrears to 21.7 percent." The discrepancy has actually grown since the dark days of September and the resulting uptick in layoffs as area hotels and, indeed, businesses across all sectors felt the brunt of the global recession. Of more concern, said one analyst this week, is the likelihood unemployment and the resulting economic strain on borrowers — both commercial and retail — will further diminish their ability to repay loans. The net effect would be a spike in the number of delinquencies, which even as early as March had outpaced provisioning by nearly 50 percent. For its part, RF maintains "provision has been made for potential loan losses." Thursday, July 2, 2009