The Liming House

Good to see you again. Glad you enjoy the Limes.

T&T’s FCB won a country award at The Banker’s 2009 ceremony (link).

First Citizens Bank

Last year, Trinidad and Tobago was significantly affected by the meltdown of the largest conglomerate in the Caribbean, the CL Financial Group. This affected the whole of the local financial system and economy, and had a knock-on effect on First Citizens Bank’s loan book. Further, the government-owned bank had to assist with the restructuring of loan facilities, raising new capital and allocating management time to addressing the various issues arising from the crisis.

First Citizens Bank’s solutions not only helped the local economy, they also provided growth for the bank itself. The acquisition of some troubled institutions were turned to the bank’s advantage and confirmed its counterparty credit rating (BBB+/A2) by Standard & Poor’s, the highest among local banks.

“First Citizens, as a bank owned by the government, was called upon to assist with the management of the crisis,” says chief executive Larry Howai. “The end result has been the maintenance of stability within the local financial system. In addition, the bank was able to acquire a solid base of new customers from the [troubled] CL Financial Group and also acquired [Caribbean Money Market Brokers], one of the premier brokerage houses in the Caribbean. This has resulted in increased profitability, a 70% increase in the bank’s asset base and a presence in several Caribbean islands.”

Last year’s results have encouraged the bank to aim even higher for the future and to look at acquisition targets in the region.

“Our main focus in the coming year will be on risk management, close monitoring and management of our loan and investment portfolios and strategic expansion in key markets,” says Mr Howai. “This latter will include potential acquisition opportunities both locally and in the Caribbean region.”

From credit rating agency Standard & Poor’s on Tuesday (emphasis and in-line explanations mine):

NEW YORK, Feb. 3, 2009–Standard & Poor’s Ratings Services said today that it placed its ‘A/A-1′ foreign-currency and ‘A+/A-1′ local-currency sovereign credit ratings on the Republic of Trinidad and Tobago on CreditWatch with negative implications.

[Credit watch with negative implications means the ratings agency is considering downgrading T&T's existing credit rating; any subsequent rating action is normally taken within three months. A sovereign's credit rating is important because it determines (among other things) how much that country will pay to borrow in the international debt markets. Essentially, a credit rating is an assessment of a country's creditworthiness; it is an indicator of that country's willingness and ability to repay its debts. As a benchmark, S&P rates the United States as triple-A - the highest possible rating - while Jamaica is currently rated B]

“The CreditWatch placement follows the government’s announcement on Jan. 30, 2009, that it will assume control of or provide support to several key subsidiaries of the CL Financial Group (CLFG), a large Trinidadian financial conglomerate,” explained Standard & Poor’s credit analyst Roberto Sifon-Arevalo. According to the central bank, CLFG’s financial condition has deteriorated because of related-party transactions, high-risk investments, and high leveraging of the group’s assets. The central bank has announced that it will take control of CLFG’s flagship bank, Clico Investment Bank (CIB), transfer its assets and deposits liabilities to wholly government-owned First Citizens Bank, and revoke CIB’s banking license. CLFG has also disclosed that its insurance companies–CLICO Insurance Co. Ltd. and British American Insurance Co. Ltd.–have sizeable statutory fund deficits. The government has announced that CLFG will divest assets, including its 55% share in Republic Bank Ltd. and share in Methanol Holdings Trinidad Ltd., to First Citizens Bank and the government to make up the statutory fund shortfall, with the government backstopping any deficiency.

“We will resolve the CreditWatch status of the ratings once we can estimate the potential fiscal cost to the government, the broader damage to its financial system, and any impairment to the island’s medium-term growth prospects,” Mr. Sifon-Arevalo added. Trinidad and Tobago enters this CLFG intervention with general government assets exceeding debt by 4.5% of GDP in 2008, a substantial improvement from a net debt position of 20% in 2003. The country’s external position has also strengthened, with net external liabilities of 6% of current account receipts in 2008, down from 134% in 2003. The government’s saving of part of its gas windfall in its Heritage and Stabilization Fund during this period accounts for its fiscal buffer and the country’s improved international investment position.

Further reading:
Sovereign ratings in the Caribbean – An S&P report from May 2007

From a note issued by analysts at JP Morgan, emphasis mine:

The Central Bank late on Friday announced that it would bail out a number of financial services companies—Clico Investment Bank (CIB), Clico Insurance Company (CLICO), British American Insurance Company (BAICO) and Caribbean Money Market Brokers (CMMB)—within the CL Financial Group, which have recently been facing liquidity pressures. The government will take control of CIB and transfer third party assets and liabilities of both CIB and CMMB to First Citizens Bank (100% owned by the government and the second largest local bank with over US$2.4 billion in assets). The problems at CL Financial Group apparently stemmed in part from the sharp drop in methanol and real estate prices, but also from risky practices that included excessive related-party transactions. As part of the bailout plan, CL Financial will sell, liquidate or collateralize its assets and use the proceeds to meet funding requirements for both CLICO and BAICO and the government will provide full funding support to meet any remaining deficits; the fiscal cost of such support is still undetermined. The central bank governor emphasized that excluding CIB, T&T’s banking system is well capitalized (the average capital adequacy ratio stands at 18%) and is not facing undue liquidity challenges. While the situation is still fluid, at this juncture, we believe that Friday’s decision was a pre-emptive move to contain any contagion from the possible collapse of the CIB and do not believe that the troubles at CL Financial Group are symptomatic of a broader systemic problem. Separately, the central bank on Friday left the repo rate unchanged at 8.75% after its monthly policy meeting on the heels of December inflation data, which showed the CPI increasing 0.1%mom taking 2008 annual inflation to 14.5%yoy.

(via VG)

PRESS RELEASE
Verbatim, statement issued Jan 30

CMMB Assures Clients Their Investments are Safe

In light of the announcement today by the Central Bank regarding the CL Financial Group, CMMB wishes to reassure its clients that their investments with us are safe. CMMB continues to operate as an independent entity separately from Clico and Clico Investment Bank. We are the largest full service securities company in the Caribbean and have been in operation for over eight years. During this time CMMB has operated as a profitable company continuing to offer
safe and profitable investments to clients.

CMMB has met all commitments to our clients and will continue to do so. We will provide further details regarding the arrangement with First Citizens Bank butclients should be assured by the First Citizens’ proposed acquisition of CMMB.
First Citizens is wholly owned by the Government of Trinidad & Tobago and has the strongest rating of any financial institution in Trinidad & Tobago. Further assurance should be taken from the Governor of the Central Bank comments
that the objective of the Central Bank and the Government of Trinidad and Tobago is to ensure that all investors are protected.

For further information please contact:

Mr. Ram Ramesh – Managing Director & CEO, CMMB Limited
Tel: 623-7815 ext 2000 Email: ram.ramesh@mycmmb.com

Mr. Ramcharan Kalicharan – Chief Operating Officer, CMMB Limited
Tel: 623-7815 ext 2094 Email: ramcharan.kalicharan@mycmmb.com

Presented verbatim, here is the full text of the statement made by Central Bank Governor Ewart Williams at the press conference on Friday:

Some of you may know that CIB has been facing liquidity challenges over the past few weeks. These challenges came to a head in the last few days when the bank began to face an unusually high level of withdrawal requests which put a strain on their available liquid resources. Clico has also been facing liquidity problems, though nowhere near the levels of CIB. Of course, given the close integration of these two financial institutions within the CL Financial Group. It is just a matter of time before Clico also begin to come under severe liquidity pressures. The Inspector of Financial Institutions and the Governor of the Central Bank met with the Chairman and Chief Financial Officer of CL Financial on January 7 2009. In a second meeting on January 13, 2009, Clico’s Chairman formally raised the issue of possible financial assistance from the Central Bank.

There is no doubt that the increase in CIB withdrawals and the nervousness seen at Clico have something to do with the depositors’ concerns about the impact of the sharp decline in methanol and real estate prices on CL Financial’s overall financial situation. In the Bank’s view however, the current financial difficulties being faced by CIB and Clico have more to do with four things:

*Excessive related-party transactions which carry significant contagion risks. I should note that the high level of concentration is not specifically prohibited by the present legislation.

*An aggressive high interest rate resource mobilization strategy to finance an equally high risk investments, much of which are in illiquid assets (including real estate both in Trinidad and Tobago and abroad).

*A very high leveraging of the Group’s assets, which constrains the potential amount of cash that could be raised from the asset sales. In our regular monitoring of CIB and of Clico since 2004 (when insurance supervision was transferred from the Ministry of Finance), the Central bank has consistently focused on these deficiencies but have been stymied by the inevitable challenge of change and by inadequacies in the legislative framework which do not give the Bank the authority to demand these changes. The Central bank is very conscious of the contagion risks that financial difficulties in an institution as vast as the CL Financial Group could have on the entire financial system of Trinidad and Tobago and indeed in the entire Caribbean region. For the record, ladies and gentlemen, the CL Financial Group has an imposing presence with potentially systemic consequences for the financial sector and the economy of Trinidad and Tobago and the entire region. For example:

1 The Group controls over ($100) billion of assets in at least 28 companies located throughout the Region and the world.

2 The Group’s financial interests cover several industry sectors including banking and financial services, energy, real estate and manufacturing and distribution. The four largest financial institutions in the Group manage assets of over $38 billion, over 25 percent of the country’s GDP.

3 In addition to Clico, among the Group’s holdings is the British American Insurance Company Limited, which is one of the main insurance companies in the Eastern Caribbean.

After intense discussions over the past week the Central Bank, the Ministry of Finance and representatives of the CL Financial Group have reached agreement on a strategy to deal with the liquidity challenges of CIB and Clico and to address the underlying problems that have given rise to the current financial stress.

The principal objectives of the strategy are to ensure that resources are available to meet withdrawals of third-party CIB depositors and Clico policy holders; to protect the funds of the depositors and policy holders and in so doing maintain confidence in Clico and reinforce confidence in the financial sector as a whole. The main elements of the strategy are as follows:

*The Central Bank will take control of CIB under section 44D of the Central Bank Act.

*Early next week all the third-party assets and liabilities on the books of CIB and CMMB will be transferred to First Citizens Bank. These liabilities will be matched by resources from the sale of CIB’s holdings of certain high quality assets. The Central Bank will provide short term liquidity as needed to ensure that these liabilities are serviced.

*Following the execution of these transactions, CIB’s banking license will be revoked.

*Clico has a sizeable Statutory Fund deficit. CL Financial has agreed to divest additional assets to help fund this deficit. The Government has committed to provide any additional funding that is needed by Clico.

*Government funding will be provided in exchange for collateral and an equity interest in Clico. It will also act as a catalyst for implementing a change in the current business model and corporate governance structure of Clico. The intention will be to return Clico to its original moorings.

I would like to emphasize that these considerable steps being taken – by the CL Financial Group, the Government and the Central Bank are specifically designed to tell CIB’s depositors that your funds are safe and to maintain confidence in Clico which for decades has been the strength of the insurance sector in Trinidad and Tobago and in the region. Clico’s policy holders can also be assured that the long term future of Clico will be guaranteed by the adoption of a more robust and less risky model. Because any stress in one corner of the financial system tends to raise concerns throughout the sector.

I would also take the opportunity to remind the national community of the tremendous strength of our financial system, which indeed is the envy of the region. Excluding CIB, the banking system now boast of an average capital adequacy level of 18 per cent, compared with a recommended minimum of 8 per cent; in contrast to the illiquidity of CIB, the rest of the banking system is plagued by excess liquidity; the overall level of non-performing loans is an impressively low 2 per cent and the banks have more than adequate level of provisions against bad loans.

Let me support the point raised by Minister Tesheira on the need to accelerate some aspects of the new Insurance Act on which we have been working for some time in collaboration with industry stakeholders. We absolutely need updated insurance legislation to regulate the insurance industry in normal times as well as in times of financial stress.

The ‘fast track’ amendments to the 1980 Insurance Act that are being proposed will provide us with the authority to conduct on-site supervision; will give us the legal basis to share information with other regulators (I should note that CLICO and its affiliate British American have vast regional operations) and will allow the Central Bank to take prompt corrective action to protect depositors, if and when necessary. Before ending I would like to acknowledge the high level of cooperation that we have received from Mr. Duprey in our efforts to address what must be a very difficult period for the CL Financial Group.

I should also recognize the role of First Citizens Bank in doing its part to help stabilize the banking system. Resolving the problems of Clico will call for continued collaboration between CL Financial, Government and the Central Bank, but moreso on the collaboration of the entire financial community led by ATTIC and BATT. While it is currently a CL Financial problem, only the concerted and vigorous action of the entire financial sector would stave off financial contagion. This is not the time for companies to take advantage of CIB/Clico’s problems to expand their balance sheet; this is the time to let competition take a back seat and to support the Government and the Central Bank to keep Clico as a functioning entity and to ensure the continued stability of our financial system.

The actions that we will be taking over the next several weeks and months will only work if they have the support of the community of depositors and policyholders as well as the entire financial sector. We are confident that the proposed strategy will lead to a financial sector that is more resilient to deal with the adverse currents now buffeting the global economy.