SINT MAARTEN/CURACAO - The banking sector of Curaçao and Sint Maarten proved to be resilient and able to withstand shocks, despite the challenging macro-economic conditions caused by the pandemic.
The impact of the pandemic was unevenly distributed across the different segments of the economy, which was visible in the asset quality of the banks. Although the solvency position of the banks remained stable, the Centrale Bank van Curaçao and Sint Maarten (CBCS) is concerned about latent credit risk and will remain vigilant.
The Financial Stability Report, published by the CBCS, describes the main vulnerabilities associated with the local banking sector. The solvency of the banks remained stable, partially due to the dividend payout restrictions implemented by the CBCS in 2020. At year-end 2021, the capital-to-risk-weighted assets ratio stood at 19.3% on a monetary level, which is above the minimum supervisory requirement of 10.5%.
However, credit risk continues to be a concern given the consistently high volume of nonperforming loans and latent credit risk. In addition, Covid- 19-related moratoria on distressed loans have created a problem of forbearance in some institutions. Significant uncertainty persists regarding the size of Covid-19-related losses that banks will ultimately realize, as these will depend on the speed of economic recovery.
The CBCS closely monitors the development in the asset quality and will mandate the banks to maintain adequate reserves levels to mitigate deferred credit risks. Overall profitability of the sector remains under pressure, driven mainly by declining lending rates, high operating expenses, loan loss provisioning, and increased competition.
The average lending rate has declined steadily since 2010, with the local banking sector facing increased competition from institutional investors, especially in the corporate sector. The liquidity in the banking sector has been increasing steadily and an excess liquidity of more than NAf.2 billion was observed at the end of 2021.
Despite the excess liquidity, allocation of resources has been insufficient throughout the years. This is particularly visible in the extension of credit, as the credit growth in the monetary union has been weak for several years.
The outlook for the banking sector remains on the cautious side. Accessibility and affordability of the housing market may deteriorate for households due to the steep rise in prices in the construction sector, which could potentially shrink the mortgage market.
Despite the excess liquidity in the banking industry, effective allocation of resources is not expected to improve in the short-term. A lack of qualitative investment opportunities in the local markets remains a great concern.
Increasing competition from large non-banking financial institutions on the lending market may further reduce available investment opportunities. Credit guarantee schemes could help attract more large investment projects and mobilize excess liquidity in an effective way.
The CBCS continues to encourage banks to examine their business models to counter lagging profits, and closely monitors developments impacting the banking sector. If necessary, the CBCS will implement macroprudential measures to mitigate forthcoming risks.
The complete text of the Financial Stability Report is available on the CBCS-website at www.centralbank.cw/publications