Doing Well, Aiming for More

Trinidad and Tobago’s six commercial banks are the most competitive in the Caribbean. They have reported steady growth and good returns on equity. They are also in sound financial health. They are rated investment grade by international rating agencies, their average capital ratio is 19.8%, well above the statutory minimum of 8% and the average ratio of non-performing loans is just 3%. While the local retail and commercial banking business is growing increasingly competitive, investment banking is a lucrative area that Trinidadian banks have yet to fully exploit.

Lyndon Guiseppe, head of corporate banking at RBTT Bank, a subsidiary of RBTT Financial Holdings Limited, says, “The market is over banked at a retail level, but not at the corporate banking level. All the major banks do business here.” Although there are six commercial banks, more than 60% of assets in the market are concentrated in the two largest banks, RBTT Financial Holdings Ltd. and Republic Bank. Ronald F. deC. Harford, managing director of Republic bank, says, “In a population of 1.2 million people, there are about 1.5 million accounts in the banking system. The penetration rate is about 80%.”

For years commercial banks could make tidy profits when interest rates were in the high teens. But the depressed US economy has brought the prime lending rate down to 12% in February, its lowest level in 15 years. As deposits accumulate in the banking system, there are fewer opportunities to lend these deposits as demand for corporate credit wanes. According to the Central Bank of Trinidad and Tobago, capital markets activity dropped by 17.9% to TT$782 million ($172 million) in 2001 while deposits increased by 17.7% to TT$20.48 billion ($3.29 billion) from a year earlier. The drop in demand for credit has intensified bank competition. “We operate in a small market and [before long] we will all compete in the same areas,” says Larry Howai, chief executive officer of First Citizens Bank, a commercial bank the government in 1993 created out of the remains of three bankrupt local banks. “By and large, there is a great similarity [between the products we offer] and it comes down to execution at the end of the day.”

All of Trindad’s banks have nonetheless reported consistently strong results for the past five years. An aggressive push into other Caribbean markets has helped boost asset growth and profitability. Total assets of commercial Trinidadian banks increased by 18% in 2001, to TT$37 billion ($5.9 billion) compared to a year earlier. The banks’ deposit base is stable, which has enabled the banks to engage in corporate and sovereign finance. However, there is not enough banking business in Trinidad to absorb the liquidity and this has pushed the banks into other markets in the Caribbean. Not only have they emerged as leading financiers of Caribbean governments; they are also buying up retail banks in other Caribbean countries. RBTT led the regional expansion of Trinidadian banks and now has 33 subsidiaries in 11 countries in the region, from Jamaica to Suriname. Republic Bank has also bought up retail franchises in markets such as Grenada and Guyana. Howai says First Citizens also plans to expand. “We are looking at growing by way of acquisitions in the wider Caribbean area. Now that we have an investment grade rating, we can raise financing internationally [to do this].” Standard & Poor’s awarded FCB a BBB- rating last July.

The Trinidadian government first wants to sell a stake in FCB to a foreign investor to gain international management expertise, and then sell shares to the public in an initial public offering on the local equity market. “First we will look for a major foreign institution to take up a block of shares,” says Howai. “It will benefit the bank to have a foreign investor with access to capital, and who has a strong international rating.”

RBTT Financial Holdings hopes to create economies of scale by managing its retail operations regionally. Terrence Martins, RBTT’s group chief executive officer, describes this as “a major business challenge, to rationalize our operating cost structure, eliminate process inefficiencies and redundancies and exploit synergies across the group.” Retail banking in other Caribbean markets is not without risk. Trouble in the region’s economies dented profits at RBTT Financial Holdings. After-tax profits from its eastern Caribbean subsidiaries’ fell 38% in 2002. RBTT’s growing non-performing loan portfolio in Jamaica and the Netherlands Antilles contributed to a TT$206 million ($33 million) increase in loan-loss provisioning last year.

A safer and perhaps more lucrative way to expand in the region is through corporate finance and investment banking. In the last five years, Trinidadian banks have emerged as leading financiers of companies and governments including St Kitts, Grenada and Belize. Citibank has long been a leader in financing the energy sector in Trinidad. According to figures from the Securities and Exchange Commission, Citibank arranged and placed more than $2.5 billion in local fixed income securities in Trinidad since 1997. RBTT leads the local banks in corporate and investment banking and is emerging as an important arranger of project and structured finance in the Caribbean. RBTT arranged two bonds, securitized on mortgages, for the Development Finance Company of Belize last April. First Citizens Bank is a newcomer, arranging $62.7 million in deals last year, including a $9.3 million bond for the government of St Kitts and Nevis, as well as a private placement for local retailer Courts Ltd. Howai says that corporate and investment banking now is the most important area for FCB. “We can make a big impact in terms of revenues especially in the energy and construction sector,” he says. He adds that his bank is in a good position to arrange smaller issues in the local fixed income market. “The slowdown in capital markets activity means that [investors] will look at a $50 million bond,” he says. “Before, they would not consider anything less than $100 million.” Banks also see potential in trade finance, particularly in the Spanish speaking Caribbean and Central America. Republic’s Harford says his bank has increased its trade finance lending and inter-bank lines to local companies as well as exporters in countries such as the Dominican Republic and Cuba. Republic Bank has been financing trade and is the only Caribbean bank with a representative office in Cuba.

As Trinidad’s banks venture into new territories, the rewards promise to be higher, but so do the risks. Because of this, the Central Bank wants to tighten up its supervision of commercial banks. Ewart Williams, governor of the Central Bank, stated last November that the government is drafting legislation to bring banks, insurance companies and pension funds under the supervision of the Central Bank rather than the Ministry of Finance and the Supervisor of Insurance. “This arrangement will enhance our ability to deal with the current reality of universal banking where banks, non-banks and insurance companies are all part of the same holding companies,” says Williams.