POLITICS

Bank CEOs say their Caribbean operations stand to benefit from cheaper oil

01/18/2015 10:00 EST | Updated 03/20/2015 05:59 EDT
TORONTO - A combination of lower oil prices and cost-cutting is poised to help improve the Caribbean operations of some of Canada's biggest banks, a region where they have struggled for years.

While they brace for loan losses and lower revenues in Western Canada due the plunge in oil, the big banks say the Caribbean is set to benefit from the decline.

"They're one of the biggest beneficiaries of cheaper oil, so there are some positives finally starting to creep in to the economic outlook of the region from that perspective," Royal Bank of Canada chief executive David McKay said during a banking conference last week.

The Caribbean economy has been in a slump since the global financial crisis caused a slowdown in the region's vital tourism industry. That has hurt the profits of several Canadian banks that have operations in the region.

The Royal Bank (TSX:RY) announced last year it is exiting its Caribbean wealth management business, after selling its Jamaican operations at a loss.

Meanwhile, CIBC (TSX:CM) took a $420-million charge on its Caribbean operations in the second quarter of last year, plus an additional $123 million in loan losses.

The Bank of Nova Scotia (TSX:BNS) has been operating in the Caribbean for more than a century and, of the three lenders, has the largest customer base in the region. The lender plans to close some of the roughly 370 branches it operates in the Caribbean — "to be congruent with the economic reality," chief executive Brian Porter told the banking conference.

Last year Scotiabank took $83 million in loan loss provisions related to its Caribbean hospitality portfolio. But with oil prices declining, Porter says Scotiabank's Caribbean operations are about to turn a corner.

The region is a net importer of oil, so cheaper prices will allow it to save on energy costs. Meanwhile, a stronger U.S. economy could boost travel to the region, especially if cheaper oil trickles down to consumers via lower air fares.

All of that, combined with the banks' efforts at tightening expenses, should make the Caribbean less of a sore spot for the Canadian lenders in 2015.

"We're operating in a very challenging economy but, with that cost takeout, we feel strongly that we will have a strong rebound in the Caribbean performance in fiscal 2015," said McKay, who noted that RBC has trimmed its staff in the region from more than 6,500 to under 5,000 in the past two years.

"We've done the hard work necessary to turn that franchise around and I am confident that in 2015 you'll see the fruits of all that work."

However, Ian Nakamoto, director of research at investment firm MacDougall, MacDougall & MacTier, said "it could take some time" before lower oil prices translate to cheaper flights for travellers. And even then, Caribbean destinations have been losing market share to other tourism hot spots.

"If (the banks) had to start from square one, I really wonder if they'd go in (to the Caribbean) as much as they have," Nakamoto said. "There are different areas around the world that are probably more dynamic than the Caribbean ... maybe the banks' capital is better placed somewhere else."

Gareth Watson, vice-president of investment management and research at Richardson GMP, said performance in the Caribbean is unlikely to change how investors look at Canadian bank stocks.

"The Caribbean operations are so small in the context of the larger bank, that it's not really something that I think would influence an investor to buy or not to buy a particular bank stock," Watson said.

"The retail platforms in Canada are the biggest generators of revenue and income for the Canadian banks, and if you have a couple of branches down in Barbados do better than you thought they might ... it's not really going to change the bottom line to a large extent."

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