Non-performing loans rise to 12 per cent

Hasn’t slowed down: Bermuda’s non-performing loans rose to 12 per cent at the end of the fourth quarter of 2012. Since Bermuda entered the recession in 2008, NPLs have steadily risen, including 11 straight quarters of it increasing. One out of every eight loans are now behind in payments. *Chart by Gary Foster Skelton, figures from the BMA

According to the authority, in December of last year, 12 per cent of the total loans on the island were nonperforming. That number had increased from 10.8 per cent in December 2012 and seven per cent in December 2011. In March 2008, the number was even lower: two per cent.

It was the 11th straight quarter that NPLs rose, starting back at 5.4 per cent at the end of the first quarter in 2011. 

“The quality of Bermuda banks’ loan book continues to decline,” said Craig Simmons, an economics lecturer at Bermuda College.

He added: “A related and more bothersome statistic is NPLs to bank capital, which presently stands at 45 per cent.  The banking sector’s capital is the difference between its assets and liabilities; it’s the sector’s net worth or equity.  One interpretation is that banks are undercapitalized; they are weak and vulnerable to another economic or financial shock.”According to Mr. Simmons, excessive credit growth, where credit grew faster than nominal GDP is the root of the current state of affairs.

From 2001 to 2011, said Mr. Simmons, excessive credit growth averaged 4.6 per cent.  An economy is considered at a high risk of overheating if excessive credit growth is more than five per cent, he said, citing The Economist magazine.

“Perhaps now is a good time for the regulator, Bermuda Monetary Authority, to consider macroprudential regulation of financial services,” he said. “The goal of macroprudential regulation is to moderate the supply of credit or loans during booms.  The main tools include the use of: leverage or capital-to-asset ratios; loan-to-value ratios (LTV); and loan-to-deposit ratios.”

HSBC

An HSBC spokeswoman told the Bermuda Sun: “At HSBC, we continue to work with customers to identify appropriate solutions around their lending needs and obligations. However, we do see the impacts of the island’s economic challenges on our borrowers resulting in situations where a minority are having difficulty in meeting their loan repayments.”

“We encourage customers to contact us when faced with challenges, so we can understand their specific circumstances. We have specialists available who are willing to work with customers, to look at their financial budgeting and help them to understand the options that are available to them. We can then assess the customers’ circumstances and consider alternatives that will help the customer through their difficult period.”

Butterfield Bank, meanwhile, said the bank is not in a position to comment on how various banks calculate non-performing loans or the way the BMA aggregates data. The bank, according to a spokesman, can only offer perspective on the performance of Butterfield Group’s own loan portfolio.

A Butterfield statement released at the end of April said “non-performing loans, which include non-accrual loans and accruing loans past due by 90 days or more, totalled $108.6 million on March 31, 2014, down $8.1 million from year-end 2013. The decrease is driven by the proceeds from the sale of the hospitality loan (the sale of the Pink Beach Club) partially offset by an increase in non-performing residential mortgages.”

Clarien Bank, formerly Capital G, in its year end statement last year, said: “ For the year ended Dec. 31, 2013, loans amounting to $33,789…that would otherwise be in arrears and impaired based on the present value of collateral related cash flows only, have had their terms renegotiated.”

The statement continued: “A substantial portion of the loans and mortgages receivable is due from residents of Bermuda and is secured by residential property in Bermuda. The Bermuda economy is largely dependent upon tourism and international business services and the health of these sectors depends to a large extent upon the strength of the United States and European economies. Therefore an adverse change in these sectors in future periods may have a material adverse impact on the carrying value of the bank’s loans and mortgages receivable.”

“The type of collateral held can include, but is not limited to: residential real estate, commercial properties, other properties, land and debentures covering business assets such as receivables and equipment, automobiles, other chattels and cash deposits. 

Guarantees from third parties are also taken, however the bank does not rely extensively on guarantees.”