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Century after rum trade, Canada banks see Caribbean gains

Published: 
Sunday, July 27, 2014

Last week Sunday, in this space, the possibility that the Canadian bank CIBC might be looking to sell its FirstCaribbean International banking franchise was raised. On Thursday, the Bloomberg Web site carried an article headlined, “Century after rum trade, Canada banks see Caribbean gains,” which attempted to paint a picture that the economies of the Caribbean—and therefore the prospects of CIBC, RBC and Scotiabank—had turned around.

Here is an excerpt:
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 per cent in 2012 and 1.5 per cent 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 per cent this year and 2.6 per cent in 2015.

‘Modest’ growth
Scotiabank, which has fared better than its Canadian competitors in the region, is seeing loan losses decline and delinquencies stabilise 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 (US$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.”

The eight-company Standard & Poor’s Commercial Banks Index has returned 11 per cent this year, compared to the 2.8 per cent advance of the 24-company KBW Bank Index of US lenders.

Caribbean growth
The Caribbean economy grew 1.2 per cent in 2012 and 1.5 per cent 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 per cent this year and 2.6 per cent in 2015.