How the Caribbean is not so sunny anymore for Canadian banks
By John Greenwood From Financial Post
TORONTO • Canada’s big banks have a strong presence and a track record of profits in the Caribbean, but during the past few years the region’s economy has taken a nose dive — and so have bank earnings.
Canadian Imperial Bank of Commerce warned last week that it will take a $420-million charge to goodwill related to its subsidiary CIBC FirstCaribbean, which it blamed on “persistently challenging economic conditions and our current expectations for conditions going forward.”
In addition it took $123-million of additional loan losses. FirstCaribbean operates across 17 different countries and a range of banking businesses but the brief statement offered no further details.
The news comes less than four months after Royal Bank of Canada announced that it plans to sell its operations in Jamaica, which had 13 branches and 550 employees, at an estimated loss of $60-million.
RBC, Canada’s biggest bank by assets, provided limited disclosure about what led to the decision, though observers attributed the move to soured loans to resort developers.
Historically, Caribbean countries boasted numerous positive attributes as a place to do banking, including a thriving tourist trade, a growing economy and a flourishing offshore sector. Jurisdictions such as the Cayman Islands, Barbados and the Bahamas are among the most successful tax havens in the world, attracting a steady flow of well-healed tourists and lots of international business activity.
In 2006, when region’s economy was still bubbling, CIBC doubled the size of its stake in FirstCaribbean after it bought out its joint venture partner Barclays for US$1-billion.
Ben Nelms/BloombergCanadian Imperial Bank of Commerce warned last week that it will take a $420-million charge to goodwill related to its subsidiary CIBC FirstCaribbean.
According to the International Monetary Fund, RBC, CIBC and Bank of Nova Scotia are dominant players across the region with about 60% of total banking assets, almost as strong as their position in Canada.
But are those players starting to question their enthusiasm in the face of the region’s worrying economic malaise? How many more write-downs can investors expect? Will more banks exit hard-hit countries?
Last year, FirstCaribbean posted a loss of US$27-million, down from a profit of US$72-million the previous year. That’s well down from the US$261-million net income it made in 2007. RBC and Scotiabank don’t break out results for the region.
In a note to clients, Barclays Capital analysts John Aiken called the troubles at FirstCaribbean “disappointing,” and suggested that a “strategic review of the operation could unlock some value.” That’s bank-speak for CIBC should consider selling the business.
In the mid-2000s, the tourism industry was on a roll as more real-estate rich Americans came streaming through in record numbers, looking for a place to escape winter. Cruise ships were multiplying and it seemed everybody’s prospects were looking up.
The picture has changed dramatically since the financial crisis that began in 2008. With unemployment in the U.S. still stubbornly high, the middle class seems to be taking more modest holidays, with far fewer traveling to the Caribbean. The developed world is starting to recover from the turmoil but the numbers suggest that’s not the case in countries like Barbados and Jamaica.
The offshore sector remains a bright light, but it, too, faces headwinds as the U.S., Britain and other governments seek to clamp down on what they see as aggressive tax strategies by companies and individuals that cut of the flow of revenues into government coffers.
Across the region, countries are struggling with high debt and sluggish growth. Despite a $2-billion bailout, Jamaica continues to flounder on the brink of collapse with government debt well in excess of GDP.
Last year unemployment in Barbados stood at nearly 12%, but it the rate is forecast to rise to 15.6% in 2015, according to the IMF.
To cope with the pressure, indebted countries are hiking taxes, which only shifts the problem onto the shoulders of an already struggling population.
In light of such troubles, rating agencies have downgraded the bonds issued by many Caribbean countries, lowering their value. That in turn has forced holders — such as banks — to take losses.
But the economy moves in cycles, so at some point the sun will shine again in the Caribbean. The Canadian banks must be hoping it happens sooner rather than later.
IMAGE: Getty/ThinkstockAccording to the International Monetary Fund, RBC, CIBC and Bank of Nova Scotia are dominant players across the region with about 60% of total banking assets, almost as strong as their position in Canada. But are those players starting to question their enthusiasm in the face of the regions worrying economic malaise?
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