Canadian banks get burned in the Caribbean
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May 29, 2014  |  Vote 0    0

Canadian banks get burned in the Caribbean

A cloudy economic outlook for the Caribbean took some of the shine off Canadian bank earnings this quarter


A cloudy economic outlook for the Caribbean took some of the shine off Canadian bank earnings this quarter.

Canadian Imperial Bank of Commerce blamed losses on its CIBC First Caribbean subsidiary for a sharp decline in its net income, while Scotiabank set aside more money for soured loans.

The latest quarterly results show that while the banks’ operations in this region are much smaller than their Canadian personal and business banking and wealth management segments, they can affect the bottom line.

“I don’t think we as analysts realized how much it had an impact to the overall company until CIBC came out with its big charge,” said Dan Werner, equity analyst at Morningstar.

CIBC reported profit for the second-quarter of $306 million, or 73 cents per share, compared to profit of $862 million or $2.09 per share in the year-earlier period.

Its net income still came in ahead of Bay Street expectations on an adjusted basis, and the bank announced a hike in its dividend on Thursday.

CIBC first said in mid-May that it would take a $420 million non-cash goodwill impairment charge related to its Caribbean operation. The bank also said it recorded $123 million in incremental loan losses for the unit because of difficulties in the region’s economic recovery.

Executives said on a conference call on Thursday that the bank is still committed to the region.

“The business has historically been a good investment for us,” chief operating officer Richard Nesbitt told analysts, adding that he believes the division can return to its past profitability levels.

“What you’re seeing here is we continue to believe we can get there. Unfortunately, it’s going to take us longer because the economic environment has not started to improve like we felt it would.”

In its latest report on the Caribbean, the International Monetary Fund warned that “economic activity in Latin America and the Caribbean is expected to stay in low gear in 2014.”

Lower commodity prices will likely offset the effects of higher demand from a recovering U.S. economy, the IMF said in its April, 2014 report.

The region is expected to grow at 2.5 per cent in 2014, down from 2.75 per cent in 2013. A modest pickup to 3 per cent is expected for 2015.

“For the region at large, the outlook remains clouded by downside risk, including renewed bouts of financial market volatility and a sharper-than-expected decline in commodity prices,” the IMF said.

Commodities such as oil, bananas, and sugar, as well as financial services and tourism are the driving forces in the diverse economies in this region, which includes Trinidad & Tobago, Jamaica, Haiti, Dominican Republic, The Bahamas, and Barbados.

Though it is prone to cyclones, floods, and other natural disasters, robust GDP growth in previous years, a young population and rising middle class have drawn international investments, including that from Canadian banks.

“The economies down there were growing pretty well,” Werner said. “At the end of the day, you can’t fault the banks for wanting to enter new markets and gain new customers. It’s part of growing a business.”

However, tourism, in particular, has suffered in the wake of both the Sept. 11 terrorist attacks in the U.S. and the 2008 financial crisis.

“It seems the economic recovery in the region has been slow to materialize and the results are coming in worse than expectations,” said Tom Lewandowski, analyst at brokerage Edward Jones.

Scotiabank posted a $168 million increase in provisions for bad loans in its international banking segment. It cited the impact of acquisitions and lower commercial recoveries in Peru.

Its gross impaired loans for the second quarter increased by $267 million in its international banking segment due to large increases in Latin America.

In January, Royal Bank of Canada announced plans to sell its Jamaican banking operations to financial firm Sagicor Group Jamaica Ltd. The purchase price was not disclosed.

At the time, Royal Bank noted that it has operated in Caribbean for over 100 years and said it remained committed to the region, but said it would focus on areas where it has a bigger market share.

The World Bank has a sunnier view of the prospects for the Caribbean and Latin America, forecasting growth of 2.9 per cent this year, accelerating to 3.7 per cent in 2016.

“For the first time ever, the number of people belonging to the middle class now surpass the number of poor, a sign that Latin America and the Caribbean is progressing toward a middle-class region,” the World Bank said in a report.

Still, these segments account for a “a mini-proportion” of the overall business, Lewandowski said.

“I think what happens in their domestic banking, wealth management or capital markets segments is going to be more important to me than what’s happening down there,” he said.

“I’m not going to get overly concerned or overly optimistic based on what’s happening in the Caribbean.”

- With files from The Star’s wire services

Toronto Star

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