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Banks are comfortably capitalised, says BOJ

Published:Sunday | November 27, 2022 | 12:06 AM

Financial institutions are strong enough to withstand worsening conditions, according to the most recent Bank of Jamaica stress test. The central bank conducted stress tests in recent weeks to ascertain the resilience of financial institutions to...

Financial institutions are strong enough to withstand worsening conditions, according to the most recent Bank of Jamaica stress test.

The central bank conducted stress tests in recent weeks to ascertain the resilience of financial institutions to withstand the impact of further increases in bond yields as well as the deterioration in the quality of selected loans, according to the latest Macroprudential Policy Report published by the BOJ for the September quarter.

The prudentials cover 11 financial institutions, comprising eight banks, one merchant bank and two building societies. These institutions hold $2.3 trillion in assets, inclusive of loans totalling $1.2 trillion.

“For the review period, deposit-taking institutions’ capitalisation remained comfortably above the relevant prudential benchmarks, liquidity remained adequate, while profitability continued to improve,” said the BOJ.

Deposit-taking institutions or DTIs are banking operations.


The central bank added that global tensions could reduce global demand for goods and services, which in turn, would negatively impact the local economy. It listed protracted inflation, continued tightening of financial conditions, both externally and domestically, and geopolitical tensions in eastern Europe as factors.

“The assessment, however, indicates that the financial sector remains largely resilient to these shocks,” it said.

The banking sector’s capital adequacy ratio or CAR remained stable at 14.1 per cent as of August, and well above the 10 per cent benchmark, while for securities dealers, capital adequacy was estimated at 22 per cent.

Among general insurance companies, of which there are about a dozen, the minimum capital test ratio was estimated at 269 per cent as of June, exceeding the 250 per cent regulatory minimum while the life insurance sector, comprising six licensees, recorded a minimum continuing capital surplus requirement of 233 per cent, far outpacing the regulatory benchmark of 150 per cent.

During 2020, the BOJ requested financial institutions to hold off on issuing dividends, for a limited period, as a means of preserving capital. The BOJ also instructed banks to conduct preliminary stress tests and risk assessments, incorporating COVID-19-related scenarios to determine the adequacy of capital and liquidity under those stress scenarios.

Financial institutions resumed paying dividends, but some caution is creeping back into the system. Recently, VM Investments This month, Proven Group, and JMMB Group indicated they would hold off on distributions, joining NCB Financial Group, which had adopted that stance since early 2021.

Dividends are paid to shareholders from accumulated profits in Jamaica but from cash in other jurisdictions. This reduces the capital of an entity, which in turn, affects its CAR.

“Given the uncertainty surrounding the future path of the domestic and the external economy, two scenarios, moderate and severe, relating to further increases in GOJ bond yields and a mild recession in the US, which leads to increases in non-performing loans or NPLs for selected sectors, were contemplated,” said the BOJ regarding the stress tests.

The results of the interest rate risk assessment show that the balance sheets of financial institutions (DTIs and securities dealers) are generally resilient to the contemplated increases in GOJ bond yields. This resilience is largely due to the size of the sector’s buffer capital and strong levels of regulatory capital.

Over the course of a year, the Bank of Jamaica increased its benchmark rate from 0.5 per cent to 7.0 per cent in a series of rate decisions. Non-performing loans, that is, borrowings that are unserviced for 90 days, amounted to 2.5 per cent of loan portfolios, down from 3.0 per cent in September 2021, according to BOJ Prudential Indicators. It is back to pre-pandemic levels when NPLs were at 2.4 per cent.

Areas of concern include banking sector assets growing faster than equity. In June 2020, total assets to equity stood at some 680 per cent of equity but is now at 780 per cent of equity. Also, household debt to GDP has risen to 37 per cent at June 2022 compared to 31 per cent in June 2020. That equates to the highest levels in at least a decade.

That said, the banking sector’s exposure to real estate showed only modest growth at 12.2 per cent of total assets in June, from 11 per cent in June 2020.

Banking institutions ranked by size of assets:

NCB $846b

Scotiabank $494b

JN Bank $224b

Sagicor Bank $193b

VM Building Society $167b

JMMB Bank $167b

FirstCaribbean $146b

First Global $80b

Citibank Ja $30b

Scotia Building Society $23b

Cornerstone T&M Bank $8b

Source: BOJ industry data, September 2022