Standard & Poor's Ratings Services, which scores 86 banking systems across the globe under its Banking Industry Country Risk Assessment (BICRA) methodology, awarded T&T a BICRA score of 5, suggesting that T&T's banking industry can be considered to be of "medium risk" compared to the other rated banking systems across the globe.
The BICRA scores were released by Caribbean credit rating agency, CariCRIS on Monday (Oct 20). S&P's range goes from 1 (lowest risk) to 10 (highest risk). Countries with a score of 1 include Canada and Switzerland. Other countries with a score of 5 include Colombia, Panama, China and Turkey. Countries whose banking systems are considered to be riskier than T&T include Ireland, Jamaica, Venezuela and Greece. S&P classified the banking sector of T&T as "A/Stable/A-1" in group 5 under its Banking Industry Country Risk Assessment (BICRA). Other countries in group 5 are Colombia, Panama, China, and Turkey. S&P's bank criteria use BICRA economic risk and industry risk scores to determine a bank's anchor, the starting point in assigning an issuer credit rating. S&P said the anchor for banks operating only in T&T is "bbb- " which is the lowest notch in investment grade.
"Trinidadian banks benefit from operating in a country with a historically solid fiscal and external position. We believe that T&T's stable political and macro-economic framework, reflected in the A/Stable/ A-1 sovereign rating, also supports its economic resilience."
The offsetting factor is the economy's heavy dependence on the energy sector, S&P said. "T&T has a stable political environment, although its domestic institutions still lack the sophistication of more developed economies," S&P said. "The two main political parties share essentially the same economic view, creating a stable environment for foreign direct investment."
S&P said the "heavily managed exchange rate" constrains monetary flexibility. Credit growth has been recovering mostly due to stronger growth of mortgage lending, despite still sluggish economic performance, S&P said. The rating agency said: "However, we consider that a somewhat higher loan concentration in the real estate sector poses risk.
Also, in our view, payment culture and rule of law are weak." Although the banking sector has remained stable during the past few years, S&P believes that the high market share of government- related entities create market distortions.
"Currently, deposits comfortably fund the sector, and the excess liquidity in the economy results in the banking sector's external creditor position," S&P said. T&T's banks' risk stable S&P views the T&T banking sector's economic risk as stable. Although the economy has been growing thanks to recovery of the energy sector, other sectors of the economy are growing at a slower pace. S&P's projections assume that the GDP will grow at 2.5 per cent to 3.0 per cent in 2014, with the caveat that projecting energy output and prices is inherently uncertain.
"We expect the country to remain in a net external asset position in the coming years, thanks to persistent current account surpluses. While we expect sound credit growth for the next two years and lower delinquency as economic activity improves, we believe that the banking sector's exposure to the real estate sector will remain high," S&P said.
Industry risk trend is also stable. In S&P's view, T&T will likely continue to introduce financial reforms to gradually align with international regulatory standards. S&P expects excess liquidity risks to slightly lessen as credit continues growing.
GDP per capita was US$19,087 at the end of 2013, but it is still below the pre-2009 level, S&P said. "Although GDP per capita is relatively high, we are applying a '-1' notch adjustment, as we believe that the country's GDP and wealth growth are driven mainly by energy revenues," S&P said.
S&P said its economic outlook for the country is better, with an expected GDP growth of 2 per cent to 3 per cent through 2015. "The increase in exploration activities in the oil and gas sector in recent years should maintain energy production for the coming decade, contributing to economic growth," S&P said.
Why all the liquidity S&P said credit growth stagnated during the 2009 recession, but during the prior five years, lending to the private sector had grown on average of 17.8 per cent annually.
Despite lower interest rates, economic uncertainty and weaker private sector confidence have hampered credit demand and increased liquidity among commercial banks.
Credit began to recover in the fourth quarter of 2011 as lending for businesses and mortgages picked up. The mortgage volume continued to grow even during periods of overall credit contraction as customers took advantage of lower interest rates, S&P said. Mortgage loans, which grew about 12 per cent in 2013, have been "the main engine" behind credit growth, S&P said.
While credit from commercial banks to the private sector grew only by 1 per cent on an annual average between 2010 and November 2013, the average annual consumer mortgage lending growth was 9 per cent, according to S&P. "There is certain rigidity in T&T real estate market prices, but this has not been the case for high-end properties whose prices dropped during the recession. As a significant proportion of real estate loans are allocated to these types of properties, this had an effect on banks' loan books," S&P said.
Non-performing loans (NPLs) were about 5.6 per cent as of September 2013, down from the 6.8 per cent peak of March 2012. The drop was due to the banks' stronger underwriting standards and efforts in restructuring loans and write-offs. Real estate loans continue to generate the bulk of NPLs, about 37 per cent.
With GDP per capita of US$19,087 for 2013, S&P said it views "the household debt capacity" of the average T&T family as satisfactory. Nevertheless, leverage measured as domestic credit to the private sector as a percentage of GDP has been historically low –about 38 per cent as of December 2013– because the large energy companies, part of the most dynamic sector in the economy, usually borrow abroad in foreign currency.
S&P said credit to the private sector rose to $37.4 billion in 2012 from $33.1 billion in 2011, and it expects it to reach $38.3 billion by December 2013. S&P said it expects credit growth to increase by 8 per cent to 10 per cent in 2013-2015 and credit to private sector should remain below 40 per cent.
Relaxed underwriting standards On lending and underwriting standards, S&P said: "We regard T&T's banking sector to have overall "relaxed" lending and underwriting standards. This assessment is mostly based on the sector's somewhat large exposure to real estate, which has resulted in a sharp increase in NPLs in the past few years." S&P said: "Lending for construction of luxury apartments has resulted in high delinquency, while the level of past-due consumer mortgage loans has remained low." S&P said that although there's no sub-prime lending, it views the sector's average loan to value of 80 per cent to 85 per cent as aggressive. S&P said: "We assess the payment culture and rule of law in T&T as 'weak.' The constitution and common-law practice protect property rights, and the judiciary system is independent and sound. However, bankruptcy laws are outdated and the legal process is lengthy. According to a Doing Business 2013 survey, resolving insolvency in T&T takes four years on average, and recovery rate is only at 18.4 per cent."
Earlier this year, the Bankruptcy and Insolvency Act of 2006 that was proclaimed earlier this year updates many of the provisions of the law.