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Friday, February 6, 2009

Will other banks follow? Watch and see!

Last week CIB/CLICO out of Trinidad, collapsed, prompting the Trinidadian Government via the Central Bank, to nationalize it and then, hand it over to a competitor to be administrated--First Citizens Bank. Of course, CIB/CLICO's license to operate was revoked.

The Central Bank report states that CIB had three major problems, resulting in their downfall;

Excessive related-party transactions which carry significant contagion risks. I should note that the high level of concentration is not specifically prohibited by the present legislation.

An aggressive high interest rate resource mobilization strategy to finance an equally high risk investments, much of which are in illiquid assets (including real estate both in Trinidad and Tobago and abroad).

A very high leveraging of the Group’s assets, which constrains the potential amount of cash that could be raised from the asset sales.


This has to be a recipe for disaster. CIB has yet to put out their end of year reports, but most likely the report would have been as dismal as the 07 and 100% more dismal than the 06 reports'. More importantly, share value, the most reasonable monitor of buoyancy within a corporation, feel by nearly half in 2006 and half of 2006 in 2007, as stated by their end of year financials for both years.

Without a doubt, CIB/CLICO was slip-sliding for a while now. Questions remain, now, why did not the government and share-holder's take control of the situation? This could have been avoided, with an intervention by mid-2008. With a range of packages, least of which a share buy back and then a new PO (Public Offering) as well as a capital injection from the Central Bank, would have staved off this catastrophe--while, albeit, ground for CIB would have still been shaky.

However, the time for that is past and now, Central Banker's and Finance Ministers, have to ask themselves the questions; what other bank's were connected to CIB through investment's and secondary lending and also, which other bank's followed the CIB business model in the Caribbean?

If any of the Caribbean bank's fit the answer, then action must be taken now.

So far, no one else has put out a cry for help in the region. However, there has been a move made by the First Caribbean International Bank (FCIB), in regards to showing some signs of being strapped for cash. While they are not investment focused, they do do allot of capital market and other related investment's and such--like a true investment bank does.

FCIB put out a memo to all customers, stating that they will be charging depositors--yes, you heard me "charging depositors"-- who have less than $500 dollars on their savings account.

FCIB must be begging for a bank run!

With the market the way it is and people strapped for cash as well as people losing their job's, any and all deposits, must be secured and depositors, must be given proper treatment. In addition, by FCIB reducing their "down market" customer base, pushes them further into the deep with their commercial and "up scale" customers, where the problems are more systemic and is where the financial crisis is most volatile. They have apparently thrown away diversification, for the sake of raising a few buck's off of the back's of one half of their customer base.

Here's what's personally funny as well-- I just went to the FCIB and asked about how to set up an account, before the news of the memo hit my country. You can bet that they can scratch this customer from off of their list. Not that I can't maintain a balance of over $500, but, first, I would have to think twice about dealing with a bank that would change procedural taxation on their customers at time like this and second, why would that be an enticing option for me, to join a bank, who is about to tax their customer's as an apparent cash raising exercise, if I am someone who has money to deposit worth more than the taxed minimum?

But, the former point is neither here nor there. The latter is that it appears to be a fact that they are scrambling --and possibly strapped-- for cash.

To be fair, I thought the FCIB would have been the first bank to ask for help or to go under in the Caribbean, amidst the global financial pressure. However, they lasted past CIB. But, for how long will they survive, when the tell tale signs that they are scrambling for cash are upon us?

While they have exposure to real estate as most bank's do, most notably, their commercial real estate exposure is in question-- through their strong corporate focus.

With companies facing drastic issues in this global economic down turn, how has this affected their bottom line--where, it appears, companies are losing profit and people are losing jobs, over night, because of it. Just a note in addition with this, taxation recoverables were down, by nearly 80% in 2007 from 2006.

Also, they have increased their derivatives trading in 2007, by almost double. The derivatives market is where the trouble in the USA started in regards to sub prime exposure. However, the exposure is minimal and they did not dip in too deeply, enough to change the dynamics of their cash flows in 2007.

Investment securities are up 35% from 06 to 07. But, at a volatile time in the corporate market as well as Caribbean government's, facing a time in retaining tax revenue, default on these debt's are a major concern.

With that, deposits grew by close to $140 million in the same period, however, will they be pulling that money out this year due to their recent tax on deposits? This would show up in 09, but disaster can strike right now.

The statements for 2008 aren't out yet. However, from the conservatism seen in the 2007 financial, there was more than enough fluff for FCIB to manage and not for customers, to be too alarmed--at least just yet. But, they are facing a considerable challenge.

While eye's are now open to the way banks in the Caribbean operate, one cannot judge, from a hindsight, how the bank's in the Caribbean are performing.

One issue is, is that there is so much secrecy within the banking network. And, two, high finance and the importance of financing dynamics, to the average consumer in the Caribbean, is not as astute as some may experience in the EU or the USofA.

However, more eye's are watching now. At least we hope.
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