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Inside Canadian banks’ billion-dollar Caribbean struggle

Inside Canadian banks’ billion-dollar Caribbean struggle

Posted by Shanelle Weir on February 26, 2015

They arrived in droves starting at 5:30 a.m., desperate to secure a steady pay cheque. By midmorning, the anxious mob totalled 5,000 people.

Sandals, a Caribbean hotel chain, was hosting a job fair in Barbados to hire staff for a brand new resort. Because thousands of people showed up for 600 jobs on the October morning last year, scores of applicants were forced to wait outside under the blistering sun. Things went from testy to unruly as the temperature neared 32 degrees; Sandals had no choice but to call the cops.

The chaos is one face of the ugly downturn sweeping through the Caribbean. Though the global financial crisis technically ended a few years ago, its punishing aftershocks are still being felt—and they’re amplified on island states that depend on tourist dollars for support. Countries like the Bahamas and Barbados are marketed as idyllic vacation spots with white sand beaches, but their local economies are anything but serene.

In the Bahamas, the unemployment rate was 15.7% at the start of February—higher than in Portugal, one of Europe’s worst-hit economies, and well over double Canada’s rate. The situation is even worse in Barbados—and arguably even more surprising, since the loyalty of British tourists to “Little England” had seemed to be bred in the bone.

The colonial tie meant little during the financial crisis, and the resulting downturn drove Barbados’s debt load to nearly 100% of its gross domestic product. Struggling to pay the bills, the government fired 3,000 public servants last year. It’s also gone cap in hand to hotel developers, offering major tax concessions to spur investment—hence the scene at Sandals.

 

Financial institutions are, of course, at the epicentre of this storm. Take the case of Sagicor Financial Corp., a leading regional life insurer, based in Barbados. Because the country’s sovereign debt has been downgraded several times, Sagicor’s corporate debt rating has also suffered. In January, the company abruptly announced it was relocating its head office outside of Barbados, shocking the island’s 290,000 citizens.

Canadian lenders have it even worse. Our banks are often praised for sidestepping the U.S. mortgage crisis and for avoiding the ugly economic woes that still wreak havoc in Europe, but the truth is, they’ve hit trouble in paradise. Royal Bank of Canada, Bank of Nova Scotia and Canadian Imperial Bank of Commerce are by far the Caribbean’s three largest lenders, dominating both personal and commercial banking. Combined, they’ve written off more than $1 billion in the region since the Great Recession.

To stanch the bleeding, the banks have been restructuring their regional operations by shrinking their footprints and by leaning on specific countries, such as energy-rich Trinidad and Tobago, to drive growth. At first it seemed like a smart plan, but then energy prices plummeted. Some 45% of Trinidad’s GDP comes from the energy industry, as do 80% of its exports.

Shareholders barely noticed when Canada’s banks started suffering from this tropical malaise five years ago. Because the Big Six lenders were on a tear, many of their mistakes were glossed over. Bank CEOs, however, have warned that the bull run is waning. Spooked by spiralling writeoffs, investors repeatedly asked bank chiefs about the region at a major industry conference in January. More than anything, they simply want to know what the hell is happening in the backyard of Canadian banking.

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