Question

explain why Canadian banks overseas engaged in sovereign loans faced problem and how to deal with them

Answer 1

Canadian Banks were in profitable operation in Carribean Islands - Scotiabank planted roots in the British West Indies, RBC began its Caribbean,  CIBC set up shop in Barbados and Jamaica

Each of these investments seemed promising at the time in the 20th century. With tourism booming and energy prices soaring, economic growth was robust - The region’s profit margins were also fat, particularly in lending.

By 2008, the three Canadian banks had $42 billion in assets across the English Caribbean—2.5% of their combined total assets, but more than four times those held by the 40-odd locally owned banks. With such a dominant footprint, RBC, Scotiabank and CIBC didnt spend to build brand awareness.

Then the financial crisis of 2007 - 2008 hit.

2010, Jamaica became the first to turn to the International Monetary Fund for assistance. in 2014 Barbados did the same when its central bank nearly ran out of its precious foreign exchange reserves..

Scotiabank was the first financial institution to acknowledge the pain. the bank suffered a $75-million hit on its $200-million loan in 2010. and in 2011, CIBC wrote down its investment in FirstCaribbean by $203 million.In January 2014 RBC announced to sell its Jamaican operations incurring a $100-million loss. Then came $420-million writedown of FirstCaribbean’s goodwill; the closing of RBC’s Caribbean wealth management business; and scores of loan-loss provisions from all three lenders.

Today, more than half of CIBC’s total gross impaired loans—or loans that show any signs of trouble—originate in the Caribbean. At Scotiabank, the equivalent share is 35%. As for RBC, 11% of its Caribbean lending portfolio is impaired, versus just 0.33% of its equivalent Canadian business.

The reason why Caribbean loan margins were so fat is that the outsized returns reflected higher risk. The soverign loan faced a problem beacuse of :-

1. The credit adjudication of Canadian Banks left a lot to be desired - not reviewing credit profiles of customers before lending
2. Some mistakes we made around leadership and the business model, When RBC bought RBTT, it had dreams of creating a pan-Caribbean bank, a strategy that entailed eliminating individual country heads in favour of a central command. It took five years before management realized they had lost the pulse of each island, and then reinstalled local leaders, starting in 2013.
3. FirstCaribbean Bank was happy to lend during a property boom. There was a belief in Barbados that real estate prices would go up by 10% a year -once the bubble popped, CIBC was left holding bad loans tied to houses and land.
4. The cost of operation is v high - there is a need to lower costs. Since revenues aren’t growing, savings have to come from slashing expenses by Negotiating layoffs and centralizing back-office functions.
   1. The Caribbean is an inefficient market with poor infrasturcture. In Trinidad, people joke about waiting years to receive a tax refund. Roads are so bad that getting around a capital like Port of Spain takes a major chunk out of the workday.
   2. Mobile banking barely exists in the Caribbean. West Indians would rather wait in line than pay electronically. The effect on costs is brutal. A recent study of Trinidadian banks found that total operating costs averaged about 6% of total assets; the figure in the European Union was just 2%.
5. The Canadian way of doing business is also at odds with Caribbean culture.
   1. too many people think, “we don’t need to make any effort, we don’t need to plan, to harness our resources, to work hard.”
   2. West Indians also have incredible national pride. Canadians may view the Caribbean as one coherent region, but each island likes to take digs at the other, and in many cases they really don’t trust one another.

The solution for the future:-

1. For tourism, the Canadian, U.S. and U.K. economies finally look promising. the Caribbean is one of the most expensive sun destinations to visit, and a recent IMF study found the region’s share of global tourism is falling.the islands mostly offer the same thing, so they simply take tourists from one another. Each country must develop a unique strategy inorder for the economy to bounce back.
2. On the regulatory front, a recent crackdown on tax evasion, particularly by U.S. lawmakers, has forced banks to abide by new rules. In 2010, the Foreign Account Tax Compliance Act became law, holding financial institutions to much tougher reporting standards for offshore assets. Barbados and the Cayman Islands had been well known as tax havens, giving Westerners good reason to do business and to own properties there. Globally, regulators are also getting tougher on money laundering—which is done, among other channels, through offshore accounts in the Caribbean—and that’s made banks think twice.
3. The banks can also focus on their cost-cutting. Scotiabank is closing branches across the Caribbean; - RBC recently installed a Common Caribbean Operating Model to increase efficiency, instituting charges such as a small teller fee to wean customers off in-person banking. Under these initiatives, head counts are falling at all the banks.
4. There is a chance that lenders will cut and run altogether. the chances of a major sale are slim because buyers are hard to come by. Global banks such as HSBC and Citibank are shrinking their footprints. speculation that one of the Canadian banks could pull the plug—especially when all three have new CEOs. CIBC is considered to have the highest flight risk.