For Canadian banks, tourism hot spots turn cold

With its palm fronds and white sandy beaches, the West Indies has a reputation for being laid back. But the region’s economy may be just a bit too laid back these days for the Canadian banks that operate in markets such as Jamaica and the Bahamas.

The global recession, particularly the decimated United States economy, has caused the once-reliable flow of free-spending vacationers to dwindle this year, leaving resorts and local residents who depend on tourism dollars to struggle with their own finances.

Delinquent loans are on the rise, including those held by the corporate and commercial clients who are traditionally the most lucrative clients for Canadian lenders operating in the West Indies, including Bank of Nova Scotia, Canadian Imperial Bank of Commerce and Royal Bank of Canada.

Meanwhile, hotel expansion, which for decades has been a steady and profitable revenue stream for the banks, is now slowing. After a boom in resort expansion over the past few years, islands like Jamaica are now flush with hotel rooms and battling declining occupancy rates, making them unlikely to borrow for expansion.

“We have issues with the Caribbean at this particular point in time,” Bank of Nova Scotia’s head of international banking, Rob Pitfield, told analysts last week. Among Scotiabank’s international operations, “the Caribbean was the hardest hit by the downturn, and its recovery is more dependent on U.S. performance,” Mr. Pitfield said. “We expect growth to be more tempered in this region.”

Though tiny compared with its Canadian operations, Scotiabank’s 200 branches in the region have long been a backbone of its international division. Along with RBC, Scotiabank’s roots in the region are more than a century old, dating back to its first branch in Jamaica in 1889.

Since then, the bank has seen its share of economic cycles. However, the stubborn economic malaise in the U.S., which accounts for 63 per cent of Jamaica’s tourism dollars, has clobbered the region’s chances for a swift comeback.

Profit at Scotiabank’s international operations increased 2 per cent in the third quarter, as its branches in Mexico, Chile and Asia helped offset the West Indies slump. The bank expects the region to bounce back, although it may take some time.

“Because these economies are smaller, there is a lag effect and it takes them just a little bit longer to come out of it,” Scotiabank chief executive officer Rick Waugh said in an interview. “Resorts get themselves into trouble [but] we’ve had virtually no losses – or very few losses – in resorts.”

The surge in hotel expansion that has put a damper on expansion is most evident in Jamaica. After adding just 255 hotel rooms in 2007, the island built 1,000 more rooms in 2008 and more than 1,500 in 2009, an annual increase of 6.3 per cent and 9.3 per cent, respectively. But there weren’t enough new tourists to occupy them. Jamaican hotels filled just 59 per cent of their rooms in 2009, down from 63.2 per cent in 2007.

“A number of properties opened, they were large properties, several hundred rooms per resort,” said Antoinette Lyn, manager of research and market intelligence for the Jamaica Tourist Board. “There’s still plans for other resorts to open, but because of what was happening globally, there was a slowdown.”

Nassau beach— Hisham F. Ibrahim

The drop in tourists is mostly a result of the recession, but an increase in crime and an ongoing drug war on the island led to several countries issuing travel warnings for Jamaica in the past year, which also had an impact on travel to the island.

CIBC has also experienced turbulence in these markets. The bank, which recently expanded in the region with a $150-million (U.S.) purchase of a stake in Bermuda-based Bank of N.T. Butterfield & Son Ltd., told analysts it may see “pressure” on impaired loans at its FirstCaribbean operations.

However, the true extent of the problem is tough to decipher, since the rules for recording impaired loans in the region make the picture look worse than it probably is. Similar to Canada, mortgages are declared impaired after 90 days of non-payment. However, in several jurisdictions, for loans to return to good standing the borrower must keep up with payments for a consecutive 12 months before they are cleared, which is stricter than Canadian rules.

The result, CIBC’s chief risk officer Tom Woods said, is that more loans in the Caribbean end up as part of the bank’s provisions for credit losses (the amount of money it sets aside to cover bad loans) than would happen in Canada.

Still, the numbers are also small compared with CIBC’s overall operations. FirstCaribbean generally sees about $20-million of loan loss provisions in a quarter, compared with $297-million across CIBC in the third quarter.

The seasonal nature of the Caribbean economy, with tourism dropping off in the summer, also contributes to the struggles people there have in keeping up with their payments. “There’s a fair bit of seasonality in the Caribbean. We’re in the summer, we do tend to see an uptick in delinquencies,” Mr. Woods said.