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.”
