QUARTERLY Banking Digest Q3-214 BERMUDA MONETARY AUTHORITY PERFORMANCE HIGHLIGHTS The capital position of the banking sector rose in Q3, albeit driven by a contraction in the total asset base. The capital adequacy level rose during the period, rising to its highest level in three years. The aggregate risk asset ratio (RAR) remained strong increasing from 22.3% to 23.4% and well above all applicable capital requirements. Tier 1 capital (core equity capital) as a percentage of risk-weighted assets (RWAs) also rose, increasing from 2.6% to 21.6%, while the regulatory leverage ratio (equity to total assets) continued to improve, rising from 9.2% to 1.%. Asset quality indicators improved as non-performing loans (NPLs) and bank provisioning declined during the quarter. The level of provisions set aside by banks declined by 42.3% over the prior quarter, falling to its lowest level since the first quarter 212. The loan provisions to total loans ratio declined from 3.9% to 2.4% in Q3-214. In addition the coverage ratio of provisions to NPLs also fell decreasing from 27.2% to 19.4% and ending seven consecutive quarters of unfavourable growth. This quarter s results reflected some asset disposition activity that is not likely to be repeated in the near term. Net charge-offs fall to its second lowest level within a year. Loan losses posted by banks decreased during the quarter as net charge-offs (down 3.2%) declined to its second lowest quarterly total over the past five quarters. The annualised net charge-offs to total loans decreased from 1.3% to 1.% during the quarter. The sector s aggregate balance sheet declined to its lowest level in nearly four years. The balance sheet position contracted by 8.9%, resulting from a planned divestiture transaction and several large anticipated deposit withdrawals. Declines in total assets were led by: interbank deposits (down 31.%) which were used to cover a large portion of the deposit outflow; lending (down 4.1%) resumed its negative decline, and investments (down 1.5%) fell to its lowest level for the year. Sector profitability continued to be positive, despite lower reported earnings during the quarter. Income from banking sources (down 8.%) and non-banking income (down 3.1%) combined with higher operating expenses (up 9.%) reduced sector profits, resulting in lower Q3 earnings. As a result, annualised RoE decreased to 2.9% (Q2-214: 8.3%), while RoA declined to.3% (Q2-214:.8%) for the quarter. SUMMARY INDICATORS Table I below is a summary of selected indicators, including capital, earnings and asset quality. Table I: Selected Indicators (Ratios in %) Capital Position t Risk Asset Ratio (RAR) 23.4 22.3 22.7 21.9 21.8 Tier 1 to risk-weighted assets (RWAs) Assets to regulatory capital (multiple) Regulatory leverage ratio (equity to total assets) Liquidity Cash/cash equivalents to total deposits liabilities 21.6 2.6 21. 19.9 19.8 1. 11. 1.9 11.2 1.4 1. 9.2 9.1 8.6 9.4 21.5 27.2 25. 29.1 29.7 Loan-to-deposit ratio 41.6 38. 37.9 37.4 42.4 Funding gap* -49.7-54.9-54.9-55.6-5.5 Profitability Interest margin to interest income 91.4 91.2 91. 9.5 91.5 Return on assets.3.8.9.1.8 Return on equity 2.9 8.3 9.7 1.2 7.1 Loan Book Provisions to nonperforming loans (NPLs) 19.4 27.2 25.8 25. 23.3 NPLs to total loans 1.8 11.5 12. 12. 11.7 NPLs to capital 38.5 42.7 43.8 44.6 44.9 Other Change in BD$ money supply.5-3.5 1.7-1.8.5 Change in assets -8.9. -3.3 8.1.1 Change in RWAs -4.8.7-3.8 -.5 -.3 Change in customer deposits * loans less deposits divided by total assets -12.4.1-3.8 9.6.4 1
BALANCE SHEET Aggregate Balance Sheet Summary of Balance Sheet Ratios Table II below provides a summary of key balance sheet trends in the sector. Table II: Aggregate Balance Sheet Change (BD$ blns) QoQ YoY Assets Cash.1.1.1.1.1-9. -12.3 Deposits 4. 5.8 5.3 6.4 6. -31. -33.3 Loans & advances 7.8 8.2 8.1 8.3 8.6-4.1-9.1 Investments 9.2 9.4 9.9 9.4 7.7-1.5 18.8 Other assets 1..9.8.8.8 13.1 27.8 Total assets 22.1 24.3 24.3 25.1 23.2-8.9-4.7 Liabilities Savings deposits 5.5 5.8 5.9 5.9 5.4-5.5.8 Demand deposits 9. 1.6 1.5 1.2 8.8-14.9 2.2 Time deposits 4.3 5.1 5.1 6.2 6.1-14.9-28.9 Total deposits 18.8 21.5 21.5 22.3 2.3-12.4-7.4 Other liabilities 1..4.5.4.5 129. 99.4 Total liabilities 19.8 21.9 21.9 22.7 2.8-9.7-5. Equity and subordinated debt Total liabilities and equity Totals may not add due to rounding. 2.3 2.4 2.3 2.4 2.4-1.4-2.4 22.1 24.3 24.3 25.1 23.2-8.9-4.7 Table III provides a summary of balance sheet ratios measuring asset quality and capital. Table III: Summary of Balance Sheet Ratios ( unless indicated otherwise) Asset allocation Investments 41.7 38.5 41. 37.6 33.4 Loans 35.5 33.7 33.6 33.3 37.2 Deposits 18. 23.8 21.8 25.4 25.7 Deposits allocation Savings 29.1 27. 27.5 26.4 26.7 Demand 48. 49.4 48.8 45.7 43.5 Time 22.9 23.6 23.7 27.9 29.9 Capital position Risk Asset Ratio (RAR) 23.4 22.3 22.7 21.9 21.8 Equity to total assets 1. 9.2 9.1 8.6 9.4 Assets to regulatory capital (multiple) Loan book 1. 11. 1.9 11.2 1.4 NPLs to total loans 1.8 11.5 12. 12. 11.7 Provisions to NPLs 19.4 27.2 25.8 25. 23.3 Provisions to total loans Totals may not add due to rounding. 2.4 3.9 3.8* 3.6 3.2 *restated numbers Total assets declined by 8.9% (or $2.2 billion) during the quarter and 4.7% (or $1.1 billion) year-on-year. This quarterly decline was driven primarily by a planned divestiture transaction and several large loan payoffs. The sector s overall assets fell to their lowest level in nearly four years, with the most notable movements occurring in interbank deposits (down 31.% or $1.8 billion), followed by lending (down 4.1% or $332.8 million) and investments (down 1.5% or $142.2 million). Total deposit liabilities fell during the quarter by 12.4% (or $2.7 billion) and 7.4% (or $1.5 billion) year-on-year. The asset funding sources were mostly impacted by the outflow of demand deposits (down 14.9% or $1.6 billion) and time deposits (down 14.9% or $758.9 million). US$-denominated demand deposits (down 15.1%) contributed mainly to the overall decline in demand deposits, while the decrease in time deposits was driven by the decline in FX$-denominated time deposits (down 18.%), inclusive of US$denominated time deposits (down 14.%). The sector s capital position improved in Q3-214 as the overall RAR increased from 22.3% to 23.4%. Tier 1 capital (core equity capital) as a percentage of risk-weighted assets (RWAs) also rose during the quarter, rising from 2.6% to 21.6%. The capital adequacy continued to improve, as the regulatory leverage ratio (equity to total assets) increased to 1.% from 9.2%. NPLs as a percentage of total loans continued to decline for the third consecutive quarter, falling from 11.5% to 1.8% in Q3-214. NPLs, net of provisions, declined at a faster rate (down 1.% or $93.7 million), when compared to the decline in total loans (down 4.1% or $332.7 million). During the quarter the sector s coverage ratio of provisions to NPLs fell from 27.2% to 19.4%, ending the steady rise observed over the last seven quarters. 2
Capital Adequacy Chart I below shows the movement in the risk asset ratio (RAR) and the leverage ratio over the last two years. Chart I: Risk Asset Ratio and Leverage Chart I: Risk Asset Ratio and Leverage Risk Asset Ratio 26 24 22 2 18 16 14 12 1 Dec-12 Mar-13 Jun-13 Risk asset ratio - scaled to left Chart II below reflects the movement in total assets and the change in risk-weighted assets (RWAs) over the last two years. Chart II: Total Assets and Change in RWAs Chart II: Total Assets and Change in RWAs Total Assets Blns 26 25 24 23 22 21 2 Dec-12 Mar-13 Jun-13 Total Assets - scaled to left Leverage ratio - scaled to right Change in Risk-weighted Assets - scaled to right The sector s capital adequacy level rose during the period, rising to its highest level in three years. The aggregate RAR increased from 22.3% to 23.4%. Net capital levels remained unchanged, while RWAs declined by 4.8% (or $472.4 million) due to lower credit risk exposures. The sector s leveraging position has steadily improved as the leverage ratio (equity to total assets) rose for the third consecutive quarter, increasing from 9.2% to 1.% in Q3-214. 14 12 1 8 6 6 4 2-2 -4-6 Leverage Ratio Change in RWA (in %) Loan impairments improved as banks reported $188.2 million in provisions for loan losses during the quarter; a 42.3% decline over the prior quarter and the lowest quarterly provision total since the first quarter 212. The sharp decline in loan provisions is mostly due to a larger reduction in the loan balance attributable to the disposition of several large loans. Subsequently, the level of provisions reserved by banks relative to total loans declined to 2.4% (Q2-214: 3.9%). NPLs as a percentage of total loans fell from 11.5% to 1.8% in Q3-214, while NPLs to total capital fell for the fifth consecutive quarter, declining to 38.5% (Q2-214: 42.7%). Table IV: Quality of the Loan Book Loans and advances quarter-over-quarter growth rate Residential mortgages to total loans Loan impairments -4.1.4-2.4-3.3-1.8 53.9 54.7 55.1 54.6 53. NPLs to total loans 1.8 11.5 12. 12. 11.7 NPLs to capital 38.5 42.7 43.8 44.6 44.9 Net charge-offs to loans (annualised) Loan provisioning 1. 1.3.9 1.9 1.5 Provisions to NPLs 19.4 27.2 25.8 25. 23.3 Provisions to total loans *restated numbers 2.4 3.9 3.8* 3.6 3.2 Sectoral Distribution of Loans Charts III and IV reflect the sectoral distribution of loans during the quarter and the variation of lending to the different sectors over the last five quarters. Chart III: Sectoral Distribution of Loans and Advances Chart III: Sectoal Distribution of Loans and Advances Other Financial Institutions, 6.3% Other Personal Loans, 1.1% Others, 1.% Asset Quality Loan Book Table IV is a summary of ratios measuring the composition and quality of the loan book for the last five quarters. Other Business and Sevices, 8.8% Real Estate-related, 64.8% Loans to the real estate-related sector continued to dominate overall lending; representing 64.8% (Q2-214: 65.4%) of all loans and advances. Loans classified as Other personal loans increased from 9.3% to 1.1%, while loans to Other financial institutions declined from 6.9% to 6.3% over the same period. 3
Chart IV: Sectoral Distribution of Loans and Advances Chart IV: Sectoral Distribution of Loans and Advances 19. 8.7 6.1 66.3 Investment Book 18.6 9. 7.1 65.3 2. 8.8 6.4 64.8 Chart V below shows the structure of the aggregate investment book during the quarter. Chart V: Sectoral Structure of the Investment Book* * includes Other Investments and Subsidiaries and Associated Companies 19. 8.7 6.9 65.4 2.1 8.8 6.3 64.8 Real Estate-related Other Financial Institutions Other Business and Services Other ("other loans" and "other personal loans") Chart V: Sectoral Structure of the Investment Book 3.1 29.5 4.4 26.1 23.2 5.7 26. 19.7 54.3 Sovereigns Investments held with Banks Other Investments* * includes "Other Investments" and "Subsidiaries and Associated Companies" 27.7 21.4 5.8 3.2 18.4 51.4 1 8 6 4 2 1 8 6 4 2 Liquidity Table V shows the liquidity condition of the banking sector over the last five quarters. Table V: Liquidity Indicators Cash and deposits to total assets Cash and cash equivalents to total deposit liabilities 18.3 24.1 22.1 25.9 26. 21.5 27.2 25. 29.1 29.7 Loan-to-deposit ratio 41.6 38. 37.9 37.4 42.4 Loans to total assets 35.5 33.7 33.6 33.3 37.2 Funding gap -49.7-54.9-54.9-55.6-5.5 All institutions met the regulatory minimum liquidity standards. Structural funding declined in Q3-214, as loans decreased at a slower rate (down 4.1%) compared to the decline in deposits (down 12.4%). Consequently, the loan-to-deposit ratio rose for the fourth consecutive quarter, increasing from 38.% to 41.6% in Q3-214 causing a narrowing in the funding gap. Chart VI below shows the change in total loans, customer deposits, and the consolidated loan-to-deposit ratio (for both BD$ and FX) over the last five quarters. The investment book remained structurally conservative, as banks continued to adjust their investment holdings in favour of highlyliquid securities. Sovereign investments increased during the quarter, rising from 5.8% to 51.4% of the investment book, while Other investments grew for the third successive quarter, increasing from 27.7% to 3.2% in Q3-214. Chart VI: Total Loans and Deposits Amouints in blns (BD$) 25 2 15 1 5 5 46 42 38 34 3 Total Loans Customer Deposits Loan-to-deposit ratio - scaled to right 4
PROFIT AND LOSS Table VI below is a summary of profitability ratios for the sector for the last five quarters. Table VI: Summary of Profitability Ratios Net interest margin to total income Annualised net interest margin to (average) earning assets* Annualised interest income to (average) earning assets* Banking income to total income Non-interest income to total income Non-interest expenses to total income Personnel expenses to non-interest expenses Return on assets (RoA)** Return on equity (RoE)** 64.2 58.7 62. 67.5 6.4 2.2 2.1 2.2 2.2 2.3 2.4 2.3 2.4 2.4 2.5 81.8 82.1 82.3 88.4 79. 18.2 17.9 17.7 11.6 21. 87.4 78.6 73.8 96.2 79.4 42.4 43.1 45.9 38.1 43.7.3.8.9.1.8 2.9 8.3 9.7 1.2 7.1 * Earning assets are averaged over the last four quarters. ** Shareholders equity is averaged over the last four quarters. Margin Analysis Sector earnings declined during the quarter, driven by lower net profits. Net interest income experienced a marginal increase (up 1.%), while income sources from banking income (down 8.%) and non-banking income (down 3.1%) coupled with higher operating expenses (up 9.%) largely contributed to the quarterly decline in profits. The sector s cost efficiency deteriorated in Q3-214, as non-interest expenses as a percentage of total income rose from 78.6% to 87.4%, driven by higher operating and non-operating expenses (up 8.%) relative to lower total income (down 7.7%). It should be noted that a substantial amount of non-interest expense reported in Q3-214 was related to a planned divestiture and not indicative of a normalised level for this category. Chart VIII reflects the distribution of income sources as of end- September 214. Chart VIII: Distribution of Income Sources Other Banking Income, 17.7% Non-banking Income, 17.6% Chart VII below shows the change in income and expense elements of the aggregate profit and loss statement of the sector over the last five quarters. Other Non-banking Income,.6% Net Interest Income, 64.2% Chart VII Income and Expenses Income and Expenses ( of average assets) 1. Chart IX shows the trend in RoE and RoA over the last five quarters. Chart IX: Annualised Return on Assets and Return on Equity.5 2. 12. -.5 1.5 1..5 1 8 6 4 2 in % -1.. -2 Net Interest Income Other banking income (net) Non-banking income and other income Operating expenses -.5-4 Net charge offs/credit to bad debt (provisions) Net income(loss) ROE - scaled to right ROA - scaled to left 5
Profitability indicators showed that annualised RoE and RoA declined for the third consecutive quarter, resulting from lower reported earnings. RoE decreased from 8.3% to 2.9%, while RoA declined from.8% to.3% during the quarter. Both profitability ratios are below levels reported in the same period last year. The FX-denominated deposits to total deposits ratio declined from 85.% to 82.8%, as FX-denominated deposits (down 14.6%) fell at a faster rate relative to total overall deposits (down 12.4%). FX-denominated assets to total assets also declined from 79.5% to 77.2% in Q3-214. Charge-offs for Loan Losses and Loan Impairments Loan losses declined in Q3-214, as net charge-offs fell to its second lowest quarterly total over the past five quarters. Annualised net charge-offs to total loans decreased from 1.3% in Q2-214 to 1.%; falling below levels reported in the same period last year (1.5%). Overall charges declined to $19.2 million (down 3.2%) during the period and $12.4 million (down 39.4%) year-on-year. Chart X shows the actual net charge-offs and the annualised change relative to total loans over the last five quarters. Chart X: Net Charge-off Amount and Proportion of Annualised Charge-offs to Loans 4. 3. 2. 1.. Net Charge-off (quarter) - scaled to right Foreign Currency (FX) Balance Sheet Table VII below shows the aggregate FX balance sheet of the sector over the last five quarters. Table VII: Foreign Currency Balance Sheet Net Charge-off to Loans (annualised) - scaled to left 8 7 6 5 4 3 2 1 Change Amounts in Mlns (BD$) Table VIII below shows the foreign currency position for the sector for the last five quarters. Table VIII: Foreign Currency Positions FX-denominated assets to total assets FX-denominated loans to total loans FX-denominated deposits to total deposits Table IX is a summary of ratios measuring the liquidity of the FX-denominated bank balance sheet for the last five quarters. Table IX: Liquidity Indicators (FX Positions) 77.2 79.5 79.3 79.5 78. 46.1 47.5 46.7 47.1 48. 82.8 85. 84.4 85.3 83.6 Changes in FX assets -11.5.3-3.6 1.2 1.6 Changes in FX loans and advances Changes in FX customer deposits* -6.9 2.1-3.1-5.2 2. -14.6.8-4.7 11.8.4 * Percentage change based on absolute numbers. Cash and deposits to total assets Cash and cash equivalents to total deposit liabilities 23.3 29.9 27.5 32. 32.9 25.5 31.6 29.2 33.5 35.1 Loan-to-deposit ratio 23.2 21.3 21. 2.7 24.4 Loans to total assets 21.2 2.1 19.8 19.7 22.9 Funding gap -7.2-74.6-74.5-75.6-71.1 (In BD$ blns) QoQ YoY Loans and advances 3.6 3.9 3.8 3.9 4.1-6.9-12.7 Total assets 17.1 19.3 19.2 19.9 18.1-11.5-5.7 Deposit liabilities 15.6 18.3 18.1 19. 17. -14.6-8.3 The total FX$-denominated balance sheet declined during the quarter, as the asset funding source from FX$-denominated deposits declined by 14.6%. The combination of FX$-denominated demand deposits (down 14.9% or $1.6 billion) and time deposits (down 14.9% or $758.9 million) contributed to the overall decline in FX$-denominated deposits. 6
Chart XI shows the movement in FX-denominated loans and deposits, and the ratio of FX-denominated loans to customer deposits, for the last five quarters. Chart XI: FX Loans and Customer Deposits Amounts in blns (BD$) 2 15 1 5 FX Loans FX Deposits FX Loan-to-Deposit Ratio (scaled to right) 28 26 24 22 2 in % Table XI is a summary of ratios measuring the liquidity of the BD$-denominated balance sheet over the last five quarters. Table XI: Liquidity Indicators (BD$ Positions) Cash and deposits to total assets Cash and cash equivalents to total deposit liabilities 1.4 1.4 1.5 2.1 1.5 2.2 2.1 2.3 3.3 2.3 Loan-to-deposit ratio 13.4 133.1 129.8 134.4 133.9 Loans to total assets 83.9 86.4 86.3 86. 87.7 Funding gap to total BD$ Assets 19.6 21.5 19.8 22. 22.2 The FX loan-to-deposit ratio rose sharply in Q3, rising to 23.2% (Q2-214: 21.3%), as total FX-denominated deposit liabilities (down 14.6%) exceeded FX-denominated loans (down 6.9%). Bermuda Dollar Balance Sheet Chart XII shows the movement in BD$-denominated loans and deposits, along with the ratio of BD$-denominated loans to deposits, for the last five quarters. Chart XII: Bermuda Dollar Loans and Customer Deposits Table X below shows the aggregate Bermuda dollar balance sheet of the sector over the last five quarters. BD$-denominated balance sheet amounts were fairly even in Q3 and have remained stable over the last five quarters. Amounts in blns (BD$) 6 5 4 3 2 1 16 15 14 13 Table X: Bermuda Dollar Balance Sheet 12 Change (In BD$ blns) QoQ YoY Loans and advances 4.2 4.3 4.3 4.4 4.5-1.5-5.7 Total assets 5. 5. 5. 5.1 5.1 1.4-1.4 Deposit liabilities 3.2 3.2 3.3 3.3 3.3.5-3.2 Note: The BD$-denominated balance sheet of the sector aggregates data submitted on legal entity reporting basis, which is different from the presentation of the banking statistics in the Regulatory Update, which shows the consolidated sector balance sheet. BD Total Loans BD Customer Deposits Loan-to-deposit ratio (scaled to right) The BD$ liquidity indicators showed that the loan-to-deposit ratio dipped during the quarter to 13.4% (Q2-214: 133.1%) as BD$ lending (down 1.5%) outpaced stable BD$ deposits. The impact resulted in a narrowing in the funding gap from 21.5% to 19.6% in Q3-214. BD$ loans as a percentage of BD$ total assets declined from 86.4% to 83.9%, easing some of liquidity pressures on the BD$ balance sheet. The quarterly movement was attributed to lower BD$ loans (down 1.5%) compared to the increase in total BD$ assets (up 1.4%). 7
Monetary Aggregates Table XII shows the trend in the domestic money supply over the last five quarters. Table XII: Bermuda Money Supply (Unconsolidated) (In BD$ mln) Notes and coins in circulation 112 117 111 145 127 Deposit liabilities 3,294 3,275 3,4 3,343 3,44 Banks and deposit companies less: cash at banks and deposit companies Bermuda dollar money supply % Growth on previous period 3,46 3,392 3,512 3,488 3,532 32 34 31 66 46 3,374 3,358 3,48 3,422 3,486.5-3.5 1.7-1.8.5 % Growth y-o-y -3.2-3.2-5.1 -.4.2 The table includes the supply of Bermuda dollars only. The sector s overall money supply remained fairly stable during the quarter but decreased 3.2% year-on-year. Notes and coins in circulation fell during the quarter by 4.5% (or $5.2 million) and were lower (down 12.3% or $15.7 million) than levels reported in the same period last year. 8
SELECTED INTERNATIONAL DEVELOPMENTS This section lists important publications issued during the last quarter by international organisations and national supervisory authorities. This section does not reflect the views of the BMA. Bank for International Settlements (BIS) In September, the BIS issued its Quarterly Review report, which covers international banking and financial market developments. The report looks at areas such as; shifting macro risks in advanced economies, international statistical highlights, cross-border bank lending and global residential property prices. http://www.bis.org/publ/qtrpdf/r_qt149.pdf The Basel Committee on Banking Supervision (BCBS) published its Basel III Monitoring Report, as of 31st December 213. The report assesses the impact of the Basel III framework on banks, by looking at the risk-based capital requirements, the leverage ratio, liquidity coverage ratio (LCR), and the net stable funding ratio (NSFR). http://www.bis.org/publ/bcbs289.pdf The Financial Stability Institute (FSI) In July, the FSI published its survey FSI Survey - Basel II, 2.5 and III Implementation, reporting on the results of its 214 survey by disclosing the information received from 9 non-bcbs/non-eu jurisdictions. The results cover responses in relation to Basel II implementation, information relating to the implementation of Basel 2.5, and responses in regard to Basel III. http://www.bis.org/fsi/fsiop214.pdf The ECB published its third quarterly report detailing the progress in the operational implementation of the Single Supervisory Mechanism (SSM) Regulation during the three months between May and August 214. http://www.ecb.europa.eu/pub/pdf/other/ssmqr2143en.pdf The European Banking Authority (EBA) In September, the EBA published its final guidelines, Guidelines on Test, Reviews or Exercises that may Lead to Support Measures covering the recovery and resolution in the banking sector as part of the Bank Recovery and Resolution Directive (BRRD). http://www.eba.europa.eu/documents/118/821335/eba-gl- 214-9+%28Guidelines+on+Public+Support+Measures%29. pdf/264e69b-135a-443e-8d2a-1e66f545ba9 In July, the EBA published two final draft Regulatory Technical Standards (RTS), specifying information to be included in a recovery plan, which consists of; the summary of the recovery plan, information on governance, a strategic analysis, a communication plan, and a description of preparatory measures. http://www.eba.europa.eu/-/eba-publishes-final-draft-technicalstandards-and-guidelines-on-recovery-plans The International Monetary Fund (IMF) In September, the IMF published its paper Supervisory Roles in Loan Loss Provisioning in Countries Implementing IFRS which discusses the different accounting and regulatory approaches in loan loss provisioning and the challenges supervisors face when there are different perspectives and lack of guidance from IFRS. http://www.imf.org/external/pubs/ft/wp/214/wp1417.pdf The Prudential Regulation Authority (PRA) In July, the PRA issued its paper, Implementing the Bank Recovery and Resolution Directive which sets out proposed changes to the PRA Rulebook to implement the European Union Bank Recovery and Resolution Directive and amendments to a supervisory statement to reflect the PRA s expectations. http://www.bankofengland.co.uk/pra/documents/publications/ cp/214/cp1314.pdf The European Central Bank (ECB) In August, the ECB published its manual, Comprehensive Assessment Stress Test Manual detailing how the European Banking Authority (EBA) will incorporate findings from its asset quality review (AQR) into stress test projections. It also describes the stress test quality assurance process, which is vital to ensuring that the exercise is robust and credible. http://www.ecb.europa.eu/pub/pdf/other/castmanual2148en.pdf 9
GLOSSARY Adjusted return on assets is the return on assets computed using net income excluding extraordinary items. Adjusted return on equity is the return on equity computed using net income excluding extraordinary items. Annualised is expressing (a quantity such as an interest rate, profit, expenditure etc.) as if it applied or were measured over one year. Coverage Ratio (Provisions to NPLs) is the ratio that shows the extent to which non-performing loans are already covered by provisions. Earning assets includes deposits with other financial institutions, loans, advances and leases, and investments. Equity refers to the shareholder equity. Fees and commissions consist of net income from banking fees, charges and commissions, investment management fees, trust and company administration fees, trustee and custodian fees, and fund management fees. Foreign currency is any currency other than the Bermuda dollar. Funding gap is defined by the difference between total loans and total deposits divided by total assets. General provisions are provisions not attributed to specific assets but to the amount of losses that experience suggests may be in a portfolio of loans. Interest expenses to customer deposits is computed by dividing the annualised interest paid and payable by the average total customer deposit liabilities. Interest income to earning assets is computed by dividing the annualised interest received and receivable by the average total earning assets. Interest income includes interest received and receivable, and consists of interest from deposits with financial institutions, government securities, loans and other interest earning assets. Interest margin is calculated as interest received or receivable less interest paid or payable. Leverage is calculated as shareholder equity divided by total assets. Mortgages refer to financing for land and buildings for purchasing real estate estate/residential property. Mortgages on residential property to total loans refer to mortgages secured by residential properties consisting of homes, apartments, townhouses, and condominiums as a percentage of total loans. Net charge-offs for loan losses and impaired loans is the sum of general and specific profit and loss charge for doubtful debts and transfers made to suspended interest account (net of recoveries). Net income is derived by netting off provision for taxation from gross profit, and takes into account extraordinary items. Non-interest income includes all other income received by the bank. Included are fees and commissions from provision of services, gains and losses on financial instruments, and other income. Non-interest expenses cover all expenses other than interest expenses, including fees and commissions. Non-performing loans (NPLs) consist of those loans classified as substandard, doubtful and loss as per the BMA guidance on the completion of the prudential information return for banks. A loan is classified as substandard when the delay in repayment is between 31 and 9 days, as doubtful when the delay is between 91 and 18 days, and as loss when the delay exceeds 18 days. Other income consists of changes in the book value of investments, other non-banking services income, profit or loss on fixed assets and any other income that cannot be classified into any other specific income line item. Other operating expenses consist of services by external service providers and other operating expenses. Provisions include both specific and general provisions. Real estate is used to refer to lending to real estate operators, and owners and lessors of real property, as well as buyers, sellers, developers, agents and brokers. Regulatory capital as provided by the banks in their quarterly prudential information returns is the sum of Tier 1 and Tier 2 capital net of applicable total capital deductions. 1
Regulatory capital to total assets is derived by dividing the regulatory capital by the total assets as provided in the prudential information returns. potential for default. Specific provisions are the outstanding amount of provisions made against the value of individual loans, collectively assessed groups of loans and loans to other deposit takers. Return on assets (RoA) is calculated by dividing the net income by the average value of total assets over the same period. The average assets are obtained by averaging the total assets at the beginning and at the end of the quarter. Tier 1 capital consists of ordinary shares, perpetual non-cumulative preference shares, reserves verified by the auditors, current year s losses and minority interest (in Tier 1) adjusted for goodwill and other intangibles, and securitisation but before capital deductions. Return on equity (RoE) is calculated by dividing net income by the average value of shareholder equity over the same period. The average shareholder equity is obtained by averaging the shareholder equity at the beginning and at the end of the quarter. Total income is the sum of net interest income and non-interest income. Total loans include loans, advances, bills and finance leases. Risk Asset Ratio (RAR) is calculated as total (net) regulatory capital divided by total risk-weighted assets. Risk-weighted assets (RWAs) refer to a concept developed by the Basel Committee on Banking Supervision (BCBS) for the capital adequacy ratio. Assets are weighted by factors representing their riskiness and Total risk-weighted assets (TRWA) is the sum of total credit riskweighted assets, total operational risk-adjusted RWA and the total market risk-adjusted RWA. Note: Please refer to the Guidance on Completion of the Prudential Information Return for Banks for a detailed description of the individual components of specific line items. A copy of the Guidance is available for download on the Authority s website: www.bma.bm. BERMUDA MONETARY AUTHORITY BMA House 43 Victoria Street Hamilton HM 12 Bermuda P.O. Box HM 2447 Hamilton HM JX Bermuda tel: (441) 295 5278 fax: (441) 292 7471 email: enquiries@bma.bm website: www.bma.bm 11