Sun | Dec 17, 2017

Jamaican banks stable but need better oversight - S&P

Published:Wednesday | November 22, 2017 | 12:00 AMSteven Jackson
The Bank of Jamaica building at Nethersole Place, Kingston.

Jamaican banks are more stable than they were two years ago, but their regulatory oversight is 'weak' and 'reactive', according to ratings agency Standard & Poor's (S&P).

S&P rates the banking sector of Jamaica as B/Stable/B and classified it as Group '9' under its Banking Industry Country Risk Assessment, alongside Lebanon, Kenya, and Argentina, according to the BICRA report on Jamaica released last week.

The rating agency uses BICRA to determine a bank's "anchor" as the starting point in assigning an issuer credit rating.

"The Jamaican banking system's industry risk has been stable over the past two years," stated the report.

"Weak banking regulation and supervision also negatively affect the banking industry risk, given that Jamaica lags behind international standards. The country's regulatory track record has been reactive rather than proactive, although the Government has implemented regulatory enhancements as a result of the International Monetary Fund programme," it said.

S&P added, however, that banking policy has improved, and it expects further progress in terms of liquidity and capital requirements.

"Our banking supervision assessment remains unchanged, however, we will closely monitor this new policy implementation in 2018 and 2019 to analyse the final draft resolution framework and how the policy compares to other frameworks in the region," the agency said.

 

FLAT PROFITS

 

Jamaica has eight commercial banking operations: National Commercial Bank, Scotiabank Jamaica, JN Bank, Sagicor Bank Jamaica, FirstCaribbean International Bank Jamaica, JMMB Bank, First Global Bank and Citibank NA.

S&P indicated that some players are experiencing flat profits due to risk mitigation, aggressive competition and rising operating expenses.

The rating agency also stated that Jamaica's creditworthiness continues to be limited by the country's fiscal flexibility because of the large amount of general government debt, which it expects to drop to "100 per cent" of GDP by the end of 2018. The national debt was estimated at $2 trillion in May.

The biggest structural barriers to improvements, it noted, are government debt levels, high security costs, perceived corruption, low productivity, a lack of business competition, and vulnerability to external shocks.

 

CREDIT RISK

 

"However, we perceive less pressure on Jamaica's banking system in terms of credit risk in the economy, which is reflected in a stronger economic risk score," S&P said.

"In our view, the improving trend in employment, stable lending rates, and inflation within the central bank's target will offset the possible negative impact from the potential increases in tax rates resulting from fiscal reform, lessening pressure on households' income capacity."

S&P expects Jamaica's per capita GDP will be close to US$5,200 this year.

The agency also noted that improved business confidence in Jamaica and the expected rise in GDP to 1.9 per cent for the next three years augur well for the banking sector, and sees credit expanding at about 12 per cent in 2017 and 2018, with total loans representing slightly less than 40 per cent of GDP.

"Therefore, we believe banks' asset quality metrics could keep improving during the next 12 months, reflecting lower credit risk in the economy," S&P said.

The rating agency said the Jamaica banking industry's "lending and underwriting standards are improving, driven by a more conservative approach and new credit enhancement mechanisms such as credit bureaus", but it also noted that factors such as the "payment culture, rule of law, and sector concentration will continue posing additional credit risks".

Requests for comment from the Jamaica Bankers Association and the Bank of Jamaica were unanswered up to press time.

steven.jackson@gleanerjm.com