Financial system stable, but new report raises $91b debt alarm

Following a March 30 assessment of the Jamaican financial sector in 2020, the central bank-led Financial System Stability Committee, FSSC, pronounced that the system is stable, at least for the short term.

However, the committee, a statutory body that keeps watch over the health of the financial system and is chaired by Bank of Jamaica Governor Richard Byles, is sounding the alarm over rising risks that it says are a potential threat over the medium to long term.

The Financial Stability Report, released by the central bank last week, details the existence of $91.3 billion worth of bad debt and loans for which repayment has been suspended due to pandemic-induced hardships negatively impacting borrowers’ ability to repay.

Of particular concern is the inability of a large number of borrowers to repay loans to the 11 deposit-taking institutions, DTIs, in an environment where personal loans accounted for the bulk – 51 per cent – of all loans by banks and near banks. Many of these borrowers were previously employed or operate businesses in the tourism sector, which has been devastated by the economic fallout from the pandemic that has added some 43,000 Jamaicans to the unemployment line.

To manage this credit risk, tame bad debt and give breathing room to their clients, banks have suspended loan repayments for seriously affected borrowers. As of January 2021, the moratoriums on loans had risen to $62 billion, according to BOJ figures, with $51.6 billion being business loans, $11.3 billion individual consumer loans, and $643 million owed by the Jamaican Government.

Non-performing loans also grew by 41.9 per cent to $29.3 billion, a pace that was ten times faster than the 4.1 per cent NPL growth recorded in 2019.

“In the context where personal loans remained the largest loan category for DTIs, the capacity of households to service debt deteriorated during the review period. However, the corporate sector reflected a notable expansion in credit,” said the report.

“In particular, the tourism sector became DTIs’ second-largest non-financial corporate sector loan exposure. This result was coupled with a deterioration in loan quality, particularly from the tourism sector, which served to increase the risk of default from the corporate sector,” it said.

The report also noted that in an environment characterised by a 10.2 per cent contraction in economic activity, as well as heightened uncertainty among households and businesses, the exposure of banking institutions to household, corporate and public-sector debt showed no significant deviation from historical averages. However, it also noted that there was a notable increase in the ratio of household debt to disposable income in 2020, indicative of rising household sector indebtedness, lower disposable income, and potential future losses for DTIs.

Against the background of a slowdown in credit growth to 10.1 per cent for 2020 compared to 16.4 per cent for the previous year, the deterioration in asset quality – as measured by the ratio of NPLs to total loans – was said to have been marginal, rising to 2.8 per cent at December 2020 compared to 2.2 per cent at the end of 2019.

“This slight deterioration in loan quality occurred within the context of the significant contraction in the Jamaican economy due to the COVID-19 pandemic,” said the report, which made note that whereas commercial banks held their NPLs steady at 2.2 per cent at end-December, building societies slipped from 2.3 per cent to 2.7 per cent.

Notwithstanding the worsening asset quality, the report indicated that the banking institutions are currently adequately capitalised to deal with the growth in bad debt. Stress test results at the end of 2020 showed that they were capable of absorbing hypothetical shocks of a 30 per cent or much greater increase in NPLs.

“Reverse stress-testing results showed that the DTI subsector remained generally robust when hypothetical shocks, which ranged between 200 per cent and 450 per cent, were applied to NPLs. In particular, it would take a hypothetical increase of 259 per cent in NPLs at end-2020 for the CAR (capital adequacy ratio) of the DTI sector to fall below CAR benchmark of 10 per cent,” the report noted.

Household NPLs as a share of total household loans increased to 4.3 per cent at the end of 2020 from 3.4 per cent the previous year, amid lower income attributed to the impact of the pandemic. This ratio was said to be still below the historical 10-year average of 5.3 per cent, although a more massive loan deterioration was cauterised by moratoriums on loan repayments.

The debt-servicing capacity of households, as measured by household debt to disposable income, continued to deteriorate, falling by more than 10 percentage points in 2020 to 71.5 per cent and was well above the 10-year annual average of 49.3 per cent.

Household sector debt as a share of the banks’ credit portfolios was said to have declined marginally to 60.9 per cent, which was above the historical average of 51.6 per cent.

A further breakout showed that the decline in household debt was accounted for mainly by a drop in one major component, consumer loans, which was down by just under one per cent compared to an expansion of 12.6 per cent for the prior year.

Contrastingly, mortgages as a component of household debt grew by just over 10 per cent, relative to a slower 4.7 per cent the year before. The increase in mortgages was said to have been driven by greater competition as well as lower mortgage rates among building societies and commercial banks.

Of the total $528 billion in personal or household loans issued by banking institutions last year, mortgages accounted for $218 billion, or 41.3 per cent.

The FSSC members currently comprise Chairman Byles, Financial Secretary Darlene Morrison, Senior Deputy Governor Wayne Robinson, Deputy Supervisor Maurene Simms, Financial Services Commission Executive Director Everton McFarlane and Jamaica Deposit Insurance Corporation CEO Antoinette McKain, as well as former Chief Risk Officer of the International Monetary Fund David Marston, and retired UWI Mona academic Professor Claremont Kirton, both of whom were appointed in January 2020 for a term of three years.

huntley.medley@gleanerjm.com