Rum-Trade Era Lenders See Caribbean Recovery: Corporate Canada

Jul 24, 2014 9:47 am ET

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July 24 (Bloomberg) -- The open-air Ballahoo Restaurant in Saint Kitts and Nevis overlooks a roundabout with a landmark green clock in the hub of the Caribbean country’s capital. Diners also get a bit of Canada with the view.

“We have three banks in this area -- FirstCaribbean, Royal Bank of Canada and we have Scotiabank,” said manager Delvin Nias, 34, who has an account at the Bank of Nova Scotia branch next door. “I can see all three of them.”

Scotiabank, Royal Bank and Canadian Imperial Bank of Commerce, which owns CIBC FirstCaribbean International Bank, are the dominant foreign lenders here and in other Caribbean nations with roots going back to the 19th-century rum-and-timber trade. While those businesses have faltered since the 2008 financial crisis sapped tourism and battered local economies, bankers see a recovery on the horizon.

“There are already signs in the tourism-focused countries that numbers are beginning to turn,” Kirk Dudtschak, Toronto- based Royal Bank’s president of Caribbean banking, said in a June 27 interview. “There are governments and countries that are taking their own restructuring seriously and that also is creating stability from an economic perspective.”

The Caribbean economy grew 1.2 percent in 2012 and 1.5 percent last year based on the average output of 19 nations, according to a report by the Caribbean Development Bank. Growth is forecast to climb to an average 2.3 percent this year and 2.6 percent in 2015.

‘Modest’ Growth

Scotiabank, which has fared better than its Canadian competitors in the region, is seeing loan losses decline and delinquencies stabilize in the English Caribbean and expects “modest” growth prospects in the next two to four years, said Dieter Jentsch, group head of international banking.

“The Caribbean is an important source of earnings for us,” Jentsch said in a July 11 interview at the bank’s Toronto headquarters. “The growth trajectory isn’t what it was historically, but it does have a very reasonable return on shareholder equity.”

Scotiabank has been posting “single-digit” increases in net income and asset growth in the Caribbean, trailing “low double-digit” profit growth in Latin America and Asia after excluding acquisitions, according to Jentsch. The bank’s Caribbean operations sailed through the financial crisis and regional downturn without losses.

“We’re still proud to say we were profitable in the Caribbean,” Jentsch said. “That in itself represents a collective win for the bank.”

Integration Costs

CIBC and Royal Bank haven’t done as well, grappling with integrating acquired assets while weathering the downturn. Both have reorganized their regional operations, resulting in restructuring charges and costs tied to the declining value of these consumer-lending business.

CIBC, Canada’s fifth-largest lender, took C$123 million ($115 million) in loan losses and a C$420 million goodwill impairment charge on FirstCaribbean in May. The Barbados-based bank had $199 million in losses for the six months ended April 30, and a $21.8 million loss for fiscal 2013, according to financial statements by the unit. The losses followed annual profit declines since 2008.

CIBC has said it remains committed to the Caribbean.

“Unfortunately, it’s going to take us longer because the economic environment has not started to improve like we felt it would,” Richard Nesbitt, who oversees the business for CIBC, said during a May 29 investors call. “And so that process is going to take longer.”

Kevin Dove, a CIBC spokesman, declined further comment.

Jamaica Sale

Royal Bank, with operations in 18 Caribbean nations, agreed in January to sell its business in Jamaica to Sagicor Group Jamaica Ltd. Royal Bank will record a C$37 million loss on the sale when it posts third-quarter results next month, adding to about C$60 million of costs taken earlier this year, the Toronto-based lender said June 27.

“We remain committed to the Caribbean,” Dudtschak said. “We believe we have turned the corner.”

Shares of Royal Bank and Scotiabank were little changed at 9:36 a.m. in Toronto, while CIBC fell 0.2 percent to C$99.72. The eight-company Standard & Poor’s/TSX Commercial Banks Index has returned 11 percent this year, compared to the 2.8 percent advance of the 24-company KBW Bank Index of U.S. lenders.

Declining Importance

“Given the difficulties that the region has faced and the growth that each of the three banks have had in other areas, the Caribbean has definitely declined in importance,” John Aiken, an analyst with Barclays Plc, said in a July 21 interview from Toronto. “I don’t believe that investors view the Caribbean operations as material to the overall results.”

Such misfortunes won’t sink the Canadian banks, which have less than 3 percent of total assets tied up in their Caribbean banking businesses. Still, it shows that the country’s lenders, touted as the world’s strongest for six straight years, aren’t immune to downturns beyond their borders.

Investors such as Som Seif, chief executive officer of Toronto-based Purpose Investments Inc., aren’t worried.

“The banks should be where they think that they can make money and can build a good business,” Seif said in an interview. “I don’t look at the Caribbean as being riskier necessarily than Thailand or Brazil, or even in the United States.”

The Caribbean has attracted Canada’s lenders for more than a century, with trade opportunities initially drawing Scotiabank and Royal Bank to the region. Foreign banks, primarily Canadian, account for about 60 percent of banking system assets in the Caribbean, according to a 2013 IMF working paper.

Caribbean Roots

Scotiabank’s Caribbean foray began with an office in Kingston, Jamaica, in 1889 -- eight years before the lender opened a branch in Toronto -- to assist trade between the regions. Scotiabank today operates in 21 Caribbean nations.

“We sold fish and brought back the rum from Jamaica,” Jentsch said. “It was a fair trade, or perhaps a better trade for us.”

Royal Bank entered the region in 1899 with an office in Cuba. More recently, the lender increased its bets by acquiring Trinidad and Tobago’s RBTT Financial Holdings Ltd. for $2.2 billion in 2008.

Royal Bank spent about 18 months reorganizing its Caribbean business by cutting jobs, streamlining head office operations and combining branches in the eastern Caribbean. The firm will have just under 90 branches when done, down from about 120, Dudtschak said. They’re now shifting focus to improving the business, implementing risk-based pricing for loans and raising fees to match competitors, he said.

Growth Potential

Royal Bank sees “significant” growth potential in Trinidad, with its energy-driven economy, Dudtschak said. He also sees improvements in Aruba and Curacao, both investment- grade countries with stable economies.

CIBC, with operations in 17 Caribbean nations, was a relative latecomer, opening branches in Barbados and Jamaica in 1920. The lender combined its banking operations in the region with Barclays in 2002 to create FirstCaribbean, and four years later bought Barclays’s 44 percent stake for $988.7 million.

The countries the Caribbean Development Bank use to determine the region’s economic output are Anguilla, Antigua and Barbuda, The Bahamas, Barbados, Belize, British Virgin Islands, Cayman Islands, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, Saint Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname, Trinidad & Tobago and Turks and Caicos Islands.

The bigger challenge for the Canadian banks may be winning business from Caribbean companies and serving the region’s residents while pursuing profits.

“People are more hesitant to trust banking or financial institutions,” said Ballahoo’s Nias, who also banks with the country’s homegrown lender. “We in St. Kitts face the same issues as everyone else, where banking is now becoming big business and the small people face challenges in even obtaining small loans.”