Last Fri­day, the Cen­tral Bank of T&T pub­lished its Fi­nan­cial Sta­bil­i­ty Re­port (FSR) 2023, which iden­ti­fied four key risks fac­ing the lo­cal fi­nan­cial sys­tem: sov­er­eign ex­po­sure; cy­ber­se­cu­ri­ty; low­er liq­uid­i­ty buffers; and high­er cli­mate-re­lat­ed in­sur­ance costs.

In­ter­est­ing­ly, the 2019 FSR—which would have analysed the state of the fi­nan­cial sec­tor in the year be­fore the COVID-19 pan­dem­ic—iden­ti­fied three vul­ner­a­bil­i­ties in the fi­nan­cial sec­tor. Those were grow­ing house­hold in­debt­ed­ness, high sov­er­eign con­cen­tra­tion in the fi­nan­cial sys­tem, and rapid dig­i­tal­i­sa­tion in the fi­nan­cial ser­vices in­dus­try.

It is sur­pris­ing that the Cen­tral Bank should have re­moved in­creas­ing house­hold debts from its list of the top risks/vul­ner­a­bil­i­ties to the fi­nan­cial sec­tor.

In the 2019 FSR, the Cen­tral Bank stat­ed the vul­ner­a­bil­i­ty of grow­ing house­hold in­debt­ed­ness “has per­sist­ed since the 2017 FSR and is re­flec­tive of house­hold debt that con­tin­ues to rise at a steady pace, along­side a pro­cliv­i­ty by the bank­ing sec­tor for con­sumer-ori­ent­ed lend­ing.”

By the end of 2019, ac­cord­ing to the Cen­tral Bank, “Es­ti­mates sug­gest that house­hold debt grew by $2.4 bil­lion (4.2 per cent) in 2019, to to­tal $58.3 bil­lion. The ra­tio of house­hold debt to GDP rose by 80 ba­sis points (0.80 per cent) to 35.5 per cent – con­tin­u­ing the slow­down in the pace of growth ob­served since 2017.”

The 2019 FSR in­di­cat­ed that de­spite the slow­er ac­cu­mu­la­tion of house­hold debt in T&T, “dis­cus­sions with the In­ter­na­tion­al Mon­e­tary Fund on the fi­nan­cial sec­tor high­light­ed that the lev­el and dy­nam­ic of house­hold debt in Trinidad and To­ba­go is among the high­est in Latin Amer­i­ca and the Caribbean...

“House­hold debt can pose risks to fi­nan­cial sta­bil­i­ty as the ma­jor­i­ty of ex­po­sures are held by com­mer­cial banks which de­pend on con­sump­tion-dri­ven cred­it to fu­el prof­itabil­i­ty.”

For the pur­pose of the FSRs, the Cen­tral Bank de­fines house­hold debt as com­pris­ing “cred­it ex­tend­ed to house­holds in­clud­ing open ac­counts, per­son­al loans, cred­it card fa­cil­i­ties, mort­gage ad­vances, in­stall­ment sales trans­ac­tions, and lease agree­ments.”

The lev­el of house­hold debt re­port­ed in the 2023 FSR is note­wor­thy: “Es­ti­mat­ed house­hold debt grew over 2023, at 4.9 per cent (year-on-year), to $65.5 bil­lion. This rep­re­sent­ed 35.5 per cent of gross do­mes­tic prod­uct (GDP), well be­low the his­toric high of 42.0 per cent amid the pan­dem­ic shock (De­cem­ber 2020).”

What is in­ter­est­ing is that house­hold debt at the end of 2023 was 12.34 per cent high­er than in De­cem­ber 2019, and ac­count­ed for the same per­cent­age of GDP, 35.5 per cent, but the in­debt­ed­ness of T&T’s house­holds does not ap­pear to be one of the top risks/vul­ner­a­bil­i­ties on the Cen­tral Bank’s radar.

The 2023 FSR not­ed, “Con­sumer loans, sup­plied by the con­sol­i­dat­ed bank­ing sec­tor, ac­count­ed for ap­prox­i­mate­ly 65 per cent of es­ti­mat­ed house­hold debt. This sub­set of loans grew more ro­bust­ly over the year at 7.2 per cent.”

If house­hold debt at the end of 2023 was $65.5 bil­lion, and con­sumer loans ac­count­ed for about 65 per cent of house­hold debt, then con­sumer debt to­talled ap­prox­i­mate­ly $42.57 bil­lion at the end of 2023.

The Cen­tral Bank re­port states that re­al es­tate mort­gages dom­i­nat­ed the con­sumer loan port­fo­lio with 44.6 per cent. By my cal­cu­la­tion, that means mort­gage loans amount­ed to about $18.98 bil­lion as at De­cem­ber 31, 2023.

It is al­so quite in­ter­est­ing what the Cen­tral Bank re­port out­lines about ve­hi­cle loans: “In par­tic­u­lar, loans for mo­tor ve­hi­cles re­bound­ed strong­ly in 2023, af­ter sev­er­al pe­ri­ods of de­cline, main­ly due to the pur­chase of new ve­hi­cles. At the same time, as­set qual­i­ty in the mo­tor ve­hi­cles port­fo­lio de­te­ri­o­rat­ed—the stock of new mo­tor ve­hi­cle non-per­form­ing loans (NPLs) more than dou­bled over the year.”

The re­port states that the to­tal stock of non-per­form­ing loans ex­ceed­ed $1 bil­lion at the end of 2023—the first time since June 2021—as the growth in non-per­form­ing loans picked up. De­spite the growth of non-per­form­ing loans, the growth in the over­all loan port­fo­lio con­tributed to a sta­ble con­sumer non-per­form­ing loan ra­tio, at 2.8 per cent, the re­port states.

“Stress tests in­di­cate that the com­mer­cial bank­ing sec­tor will breach the reg­u­la­to­ry min­i­mum cap­i­tal ad­e­qua­cy ra­tio (10 per cent) when 7 per cent of to­tal con­sumer loans are writ­ten off,” ac­cord­ing to the 2023 FSR.

If con­sumer loans to­talled $42.57 bil­lion in 2023, and 7 per cent of $42.57 bil­lion is about $3 bil­lion, is the Cen­tral Bank re­al­ly say­ing that its stress tests in­di­cate that the com­mer­cial bank­ing sec­tor would breach its reg­u­la­to­ry min­i­mum cap­i­tal ad­e­qua­cy ra­tio, if banks were re­quired to write off $3 bil­lion in con­sumer loans?

Ac­cord­ing to the Cen­tral Bank, the bank­ing sec­tor’s av­er­age cap­i­tal ad­e­qua­cy ra­tio re­mained ro­bust, with an am­ple Tier 1 ra­tio, which large­ly com­pris­es com­mon eq­ui­ty Tier 1 cap­i­tal. De­spite a 0.67 per cent de­cline, the reg­u­la­to­ry cap­i­tal ad­e­qua­cy ra­tio stood at 18 per cent as at De­cem­ber 2023.

“Al­though, the bank­ing sys­tem reg­is­tered an in­crease in to­tal qual­i­fy­ing cap­i­tal of 4.1 per cent ($965.7 mil­lion), the de­cline in the cap­i­tal ad­e­qua­cy ra­tio was main­ly due to the 7.3 per cent ($7.2 bil­lion) rise in cred­it risk-weight­ed as­sets (RWA) amid the in­crease in the long-term ex­po­sure to cor­po­rate and se­cu­ri­ties firms and ex­po­sures to re­al es­tate mort­gages (com­mer­cial and res­i­den­tial),” the FSR stat­ed.

The re­port not­ed that at the end of De­cem­ber 2023, stress test re­sults in­di­cat­ed that “the com­mer­cial bank­ing sec­tor was gen­er­al­ly re­silient to var­i­ous shocks, ow­ing to ro­bust cap­i­tal buffers and ad­e­quate pro­vi­sion­ing lev­els.”

Sov­er­eign (T&T) debt

The Cen­tral Bank re­port notes that do­mes­tic sov­er­eign ex­po­sures in the ma­jor reg­u­lat­ed fi­nan­cial in­sti­tu­tions were el­e­vat­ed in 2023, ex­plain­ing that “fis­cal short­falls re­sult­ed in in­creased do­mes­tic fi­nanc­ing, par­tic­u­lar­ly through the com­mer­cial banks.

“In light of fre­quent and size­able gov­ern­ment bor­row­ing, large sov­er­eign ex­po­sures on fi­nan­cial in­sti­tu­tions’ bal­ance sheets re­main a source of vul­ner­a­bil­i­ty,” states the 2023 FSR.

The re­port al­so states that, as a re­sult of the mag­ni­tude of the ex­po­sures in re­la­tion to sec­toral bal­ance sheets, the sta­bil­i­ty of fi­nan­cial in­sti­tu­tions is in­ex­tri­ca­bly linked to the health of the sov­er­eign.

“Sov­er­eign hold­ings (do­mes­tic and for­eign) ac­count­ed for 31.4 per cent of ag­gre­gate bank­ing and in­sur­ance sec­tors’ as­sets in 2023. This rep­re­sent­ed an in­crease of 1.3 per­cent­age points over the pre­vi­ous year, main­ly at­trib­ut­able to bank­ing sec­tor loans to the Gov­ern­ment and Gov­ern­ment-re­lat­ed en­ti­ties,” the re­port states.

The re­port al­so not­ed that the share of do­mes­tic cen­tral gov­ern­ment se­cu­ri­ties and loans climbed from 38.6 per cent of to­tal sov­er­eign hold­ings in 2019, to 45.0 per cent in 2023.

“While do­mes­tic sov­er­eign ex­po­sures rel­a­tive to to­tal as­sets in­creased over the year, the five-year trend showed that it re­mained low­er than dur­ing the pan­dem­ic years (2020 and 2021), and on­ly slight­ly above pre-pan­dem­ic (2019) lev­els,” the re­port states.

“Giv­en the mag­ni­tude of these ex­po­sures, sov­er­eign dis­tress may neg­a­tive­ly af­fect fi­nan­cial in­sti­tu­tions’ bal­ance sheets via a rise in pub­lic sec­tor non-per­form­ing loans and a de­te­ri­o­ra­tion in mar­ket val­ues. Knock-on ef­fects in­clude high­er fund­ing costs, dis­or­der­ly as­set sales, low­er in­come and prof­itabil­i­ty, liq­uid­i­ty pres­sures, or windups.”

De­spite these con­cerns, the Cen­tral Bank con­cludes that the bank­ing sec­tor’s main fi­nan­cial sound­ness in­di­ca­tors (FSIs) of as­set qual­i­ty, cap­i­tal ad­e­qua­cy, and prof­itabil­i­ty “re­mained sta­ble de­spite chal­lenges in 2023.”