The territory’s banking industry continued to contract in 2016 in terms of the number of banks and the amount of assets and liabilities held by those institutions, according to the Cayman Islands Monetary Authority’s 2016 Banking Digest.
However, the domestic retail banking sector grew in 2016, increasing its assets and liabilities, and expanding credit. CIMA attributed the expansion to a healthy local economy.
According to CIMA, banks’ assets and liabilities both contracted to about US$1.04 trillion from US$1.17 trillion and US$1.22 trillion, respectively, in 2015. Cross-border assets and liabilities declined to about US$1.02 trillion and US$985 billion, respectively, which CIMA attributed to a stagnation in international lending during the second half of 2016.
“This contraction resulted in the decline in ranking of the Cayman Islands international banking position to 8th and 7th in terms of cross-border assets and liabilities,” CIMA stated in its report.
Of the total assets and liabilities held by Cayman-registered banks in 2016, US$529 billion were held by European banks, US$370 billion by banks from developed non-European countries (primarily the U.S., Canada, Japan, and Australia), and US$113 billion by banks from Latin America and the Caribbean (primarily Brazil and Mexico).
CIMA attributed some of the decrease in total assets and liabilities to the exit of a “Class A” bank from Cayman. The number of “Class B” banks – which are restricted to conducting business offshore with non-residents – also fell from 172 in 2015 to 148 in 2016. The decline in the number of banks has been attributed to “de-risking,” a trend where Cayman-registered banks have had increasing difficulty in finding correspondent banking services in other jurisdictions.
The banking industry also saw its profitability fall in 2016 with return on equity decreasing from 8.3 percent in 2015 to 4.9 percent a year later, and return on assets falling from 1.4 percent in 2015 to 0.9 percent. Banks reported negative net income before taxes and dividends of roughly US$1.7 billion, and negative net income retained of nearly US$2 billion – marking the first year of negative net income in more than six years.
“The reduction in net income retained was due to the increase in provisions for credit losses by South American banks, losses incurred in other income by European banks from Investments in non-resident related companies and losses in trading income from bouts of market volatility in Europe and South America,” CIMA stated in its report.
Cayman’s domestic banking sector fared better than its international counterpart, seeing its return on equity increase from 11.2 percent in 2015 to 13.3 percent in 2016, and its return on assets increase from 1.3 percent to 1.5 percent. Income before taxes and dividends increased from US$175 million to US$216 million, and net income retained increased from US$125 million to US$171 million, according to CIMA.
“The increase in earnings reflects the increase in earnings from the interest rates increases and spreads in 2016,” states the CIMA report.
Assets and liabilities for retail banks expanded by US$355 million to a total of US$14.39 billion by the end of 2016, and deposits increased by US$222 million.
“The increase in core retail deposits was due to an increase in resident deposits reflecting improvements in the domestic macro-economic environment,” CIMA stated.
In turn, credit to the domestic market increased by US$39 million to a total of US$3.88 billion at the end of 2016. Loans to households and businesses expanded by US$66 million and US$20 million, respectively. The expansion of local credit in the private sector came at the same time as there was a decrease in loans to government by US$38 million, CIMA stated.
While credit expanded, so did the territory’s mortgage foreclosure rate, reaching 2.37 percent in 2016. The increased foreclosure rate contributed to a decline in the number of non-performing loans – loans that have been delinquent for at least 90 days – which decreased as a proportion of total assets from 2.5 percent in 2015 to 2.1 percent.
CIMA stated that the decrease in non-performing loans was due to more foreclosures, as well as a decrease in the unemployment rate and a growing economy.