A government debt default in Barbados has put Canadian banks at risk of writeoffs, with Canadian Imperial Bank of Commerce particularly exposed to the Caribbean country’s troubled finances through loans and securities worth a half-billion U.S. dollars.
Three Canadian banks – CIBC, Royal Bank of Canada and Bank of Nova Scotia – are by far the largest lenders in the Caribbean, and each has wrestled with a weak regional economy since the 2008 global financial crisis.
The banks’ woes started to dissipate in the past three years, owing to a mild economic recovery and intense cost-cutting campaigns, but they re-emerged this week after Barbados missed an interest payment on external debt. The government has also requested assistance from the International Monetary Fund.
The default not only portends a weak economy for years to come, limiting bank revenue growth, but also directly affects the lenders’ balance sheets. As Barbados’s finances suffered over the past few years, the country required banks to hold more of their reserves in government-issued securities, to fund the deficit. As of January, the requirement is 20 per cent.
CIBC’s regional arm, FirstCaribbean, is based in Barbados, and earlier this year the bank disclosed that FirstCaribbean had US$506-million worth of exposure to the government of Barbados through securities and loans. The figures for RBC and Scotiabank have not been disclosed, however, their regional operations are based in other countries: RBC in Trinidad and Scotiabank in Jamaica.
For the moment, the newly elected government in Barbados has only suspended payments on external debt, which might protect the Canadian banks because they are domestic lenders there. But rating agency Standard & Poor’s wrote in a note Wednesday that this should not give creditors much comfort.
“Our ratings on Barbados reflect its selective default on its external debt obligations and our view that a default on its local currency debt obligations is a virtual certainty,” the agency wrote.
For CIBC, the default extends a string of challenges in the Caribbean. The problems bubbled to the surface in 2014, when the bank incurred a $420-million writedown on the division. At the end of that fiscal year, 58 per cent of the bank’s gross impaired loans emanated from the Caribbean.
Shortly after, CIBC deployed Gary Brown to Barbados. Mr. Brown was well-regarded internally for unloading some of the bank’s U.S. capital markets businesses to Oppenheimer Holdings Inc. in 2007, and the expectation was that he would clean up the division some more and then try to unload it.
After exploring a sale, according to people familiar with the matter, CIBC ultimately tried to take FirstCaribbean public in the United States this spring. The bank pulled the deal not long after, owing to limited investor interest.
A month and a half later, it is contending with the fallout from the debt default.
CIBC and Scotiabank declined to comment, while RBC said the situation is evolving and the bank remains committed to Barbados.
Although CIBC disclosed US$506-million worth of exposure to Barbados government debt, the bank may not face any losses. One plausible scenario is that maturities on existing domestic debt are simply extended. It is also possible that any losses will be contained by writing off only a portion of the government’s debt.
While RBC’s and Scotiabank’s exposures are less clear, they have already struggled with other problems in the Caribbean.
In 2014, RBC shocked its peers with plans to sell its Jamaican operations to Sagicor Group Jamaica Ltd., incurring a $100-million loss in the process. The bank has also shut down its Caribbean wealth management division.
Scotiabank, which planted roots in the British West Indies, as they were then known, with a branch in Jamaica in 1889, has closed branches across the Caribbean and centralized bank office functions to slash costs.
Tim Kiladze
James Bradshaw