October 6, 2020
According to new central bank data unserviced bank and mortgage loans, also called non-performing loans (NPLs), grew by one-third to $27.9 billion over the span of a year ending June. It’s the highest percentage rise in eight years and, as a dollar value, grew by $7.5 billion from $20.4 billion a year earlier. This reflects the increased economic challenges faced by borrowers amid job losses and lay-offs linked to the coronavirus.
The data did not indicate whether personal or commercial loans were hardest hit. The growth in NPLs across commercial banks alone was 32.8%, to $24 billion. Building societies, which distribute mortgage loans, saw their NPLs spike by 67.3% to $3.9 billion. The January-March 2020 period was the first quarter that witnessed a double-digit rise in NPLs in years, and the deterioration continued into the June quarter.
Jamaica’s economy has been contracting since the coronavirus was detected on the island in March. The June quarter was especially bad, having contracted 18.4% as reported last week by the Statistical Institute of Jamaica, STATIN – a historically dire performance. It affirmed the preliminary estimates of an 18% second-quarter contraction by the Planning Institute of Jamaica.
Much of the decline resulted from the total lockdown of the tourism sector, which lasted over two months to mid-June. Amid the deteriorating economy, a number of banks and lending institutions have offered moratoriums on loans which would have helped to keep NPLs at bay. The increased uncertainty and write-downs on loans, by banks in particular, resulted in the financial sector’s profit margin dropping from 23% last year to 8.7% for the June quarter, the Bank of Jamaica, BOJ, indicated.
Total loans grew 14% across the financial sector to $957 billion as of June. That puts NPLs at 2.8% of total loans, up from 2.4% but still well within the 5.0% threshold set by regulators. Comparatively, in 2012, NPLs were over 8% of total loans; and in the 1990s, they at times represented half of the total loan portfolio.
BOJ, in its Quarterly Monetary Policy Report for the June 2020 quarter, said demand for personal loans has waned slightly as many persons had lost jobs due to the COVID-19 pandemic and were unable or less inclined to access loans. The central bank stated that “In the context of the adverse impact of the novel coronavirus, Bank of Jamaica projects that labour market conditions will worsen over the next eight quarters,” explaining that the unemployment rate is projected to rise from 7.5% in 2019 to 10% in June 2020, and to 12% in March 2022.
STATIN, which does a quarterly jobs survey, has put those reports on hold since the pandemic. The statistical agency last reported on jobs in January, pre-COVID, when the unemployment rate was estimated at 7.3%.
Lenders had reported to the central bank in its credit survey that on average, they would have reduced interest rates on new local currency loans, making it cheaper to borrow. The reduced rates were expected to be applied to loans for microbusinesses, but there was no word in relation to personal loans. BOJ data for July indicated that commercial banks were issuing personal loans at an average of 20.96%, down from 21.79% a year earlier; mortgages, at 7.47%, are down from 7.88%; while commercial loans, at 9.52%, were one point lower than the 10.52% rate that existed a year earlier. Overall, the weighted average loan rate for July was 12%, down from 13%.
Analyst Certification –The views expressed in this research report accurately reflect the personal views of Mayberry Investments Limited Research Department about those issuer (s) or securities as at the date of this report. Each research analyst (s) also certify that no part of their compensation was, is, or will be, directly or indirectly, related to the specific recommendation (s) or view (s) expressed by that research analyst in this research report.
Company Disclosure –The information contained herein has been obtained from sources believed to be reliable, however its accuracy and completeness cannot be guaranteed. You are hereby notified that any disclosure, copying, distribution or taking any action in reliance on the contents of this information is strictly prohibited and may be unlawful. Mayberry may effect transactions or have positions in securities mentioned herein. In addition, employees of Mayberry may have positions and effect transactions in the securities mentioned herein.