The announcement last week of the decision by the local arm of Canadian-owned, regional banking giant RBC to offer voluntary separation and early retirement packages to specific groups of employees within its T&T operation should come as no surprise to anyone objectively analysing the income and expenditure of the local commercial banking sector.
Like all of the other banks operating in T&T, RBC has allowed its employee costs to escalate in the last decade as it has sought to remain competitive with other financial institutions, some of which have offered their employees double-digit wage increases in the last two collective bargaining cycles.
Such double-digit wage agreement over a three-year collective bargaining period might have been appropriate for a commercial bank operating locally when the economy was buoyant and profits were growing by equal or greater measure.
But the period of enhanced profitability enjoyed by local banks has been replaced by reduced profitability or profits that are growing by one or two per cent.
The main reason for the sluggish growth in profits at local commercial banks is that potential borrowers generally tend to adopt more cautious habits, in terms of taking loans, during periods of economic decline and uncertainty, such as T&T has experienced for the last two years.
That's reflected in a Central Bank report late last year that in August and September 2016, commercial bank lending to the business sector registered year-on-year declines of 2.8 and 1.9 per cent.
This slowdown in lending–which is where banks make most of their profits–has been fortified by the fact that the Central Bank, under dismissed former governor, Jwala Rambarran, increased the repo rate on nine occasions between September 2014 and December 2015, signalling to commercial banks that they should increase the cost of borrowing to both new and existing borrowers.
Periods of economic decline and uncertainty may also contribute to some borrowers failing to satisfy their debt obligations in a timely or regular basis, which may be a particular problem among construction companies given the fact that the Government has been slow to pay contractors for work done since its election in September 2015.
This may lead to some local commercial banks having to book higher loan loss provisions in the near future, which will further impact on their profitability.
RBC's decision to offer some of its employees voluntary separation and voluntary early retirement packages must be seen in the context of unsustainable salary increases in the past, an economy in decline, slowing demand for loans as a result of higher loan rates, and the possibility of customers defaulting on loans.
Against this background, it is clear that local commercial banks have to make substantial cuts to their operating expenditure, while maintaining an acceptable level of service.
It is quite likely that other commercial banks operating in T&T will be forced to follow RBC's decision to go the voluntary route in reducing their operating expenditure.
In doing so, it is hoped that all banks adopt first-world industrial relations practices and make these difficult voluntary separation/early retirement exercises as painless as possible.
All banks offering such packages to employees are encouraged to recognize the long and, in many cases, meritorious service that many of these departing employees would have given to their institutions