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S&P: Jamaica highly risky for banks

Published:Wednesday | November 23, 2011 | 12:00 AM

Jamaica ranks among the riskiest jurisdictions for banks to make money, according to new analysis by Standard & Poor's (S&P).

The Banking Industry Country Risk Assessments (BICRA) report places Jamaica as the 7th worst of 86 countries reviewed by the S&P.

Canadian, Swiss and Australian banks topped the list operating with the lowest industry and economic risk.

Banks operating in Jamaica earn double-digit returns on average equity, which arguably reflects the premium placed on the riskiness of operating in the island.

Jamaica bettered only Vietnam, Greece, Belarus, Venezuela, Ukraine and Paraguay in the BICRA rankings published this month.

"In Jamaica, for example, a fluid economic and political situation threatens industry stability," states the report, which alludes to the country's near 130 per cent debt to gross domestic product - one of the highest in the world.

The Jamaica Bankers Association had not responded to requests for comment up to press time.

Impact of a double grade

Earlier this month, S&P revised the outlook for Jamaica's sovereign debt from stable to negative. A downgrade would make it more costly for institutions to secure capital on the international markets.

In the BICRA, Jamaica scored 9 out of 10 in terms of challenges among the 86 countries. The sub-ranking included a perfect score of 10 for economic risk and 7 for industry risk.

Additional descriptions included scoring 'very high' for economic imbalances, credit risk in the economy and systemic funding.

"Toward the lower end of the scale in group '9' are systems like Jamaica, Paraguay and Venezuela, which we consider to have more vulnerable economies and relatively poor risk management," stated the assessment.

Two of Jamaica's largest banks earned double-digit returns on average equity: 23.7 per cent for National Commercial Bank ofJamaica (NCB) at its September yearend; and Scotia Group Jamaica earned 18.2 per cent for nine months ending July 2011.

NCB, the first to post annual results, earned J$13 billion in net profit at yearend September 2011, up 17.7 per cent.

Though criticised for transaction charges and high interest rate spreads, the banks are reluctant to make concessions on fees, which represent billions in revenue annually.

The top two banks, NCB and Scotiabank, grossed a combined J$12.6 billion in fees and commissions in 2010. The bankers argue that the fees are important as offsets to high operating costs.

In August, Jamaica's bankers announced that they drafted their own code of conduct as a self-policing tool that was sent to the central bank for review late last year.

It coincided with the intervention of Government, which conducted a bank survey in 2010.

Globally, S&P stated that many banks were faced with mounting pressure arising from the financial crisis in the United States and Europe.

"Banking sectors across the globe still face trying times in the aftermath of the financial crisis," it stated. "We believe the risk of downward changes to our BICRAs presently outweighs the possibilities for upward revisions. This is true for both mature and emerging economies. Key contributing factors include widespread concern about European sovereign debt, as well as the increased risk of a double-dip recession in Europe. Troubled funding markets and the future exit strategies of central banks and governments may also have an impact on banking sectors. Added to this is the potential for rising economic imbalances in emerging markets."

The S&P assessment also singled out Jamaica as one of a few countries with spiralling real estate prices.

"Nevertheless, we classify eight systems as 'intermediate risk' or 'high risk' because of residential real estate price acceleration - in systems like Guatemala, Paraguay, Venezuela, and Jamaica - or commercial real estate exposure, in countries like Panama and Trinidad and Tobago," the report stated.