While Bermuda’s banks remain in good shape financially, they have sharply increased provisions for bad debt as a result of Bermuda’s “poor economic fundamentals”, the Bermuda Monetary Authority said yesterday.The Authority’s Banking Digest for the second quarter of 2012 said collectively, Bermuda’s retail banks have significant exposure on real estate-related loans and advances — 62.8 percent in the second quarter, down from 65 percent a year earlier.The percentage of non-performing loans, loans that are not being paid back or significantly delayed, declined from 8.3 percent of the banks’ total loans to 8.1 percent, the Digest said.But the banks’ large exposure to the real estate sector has led to a rise in “specific provisioning and charge-offs, which has affected the banks’ earnings capacity”.The banks racked up a loss charge for bad debt totalling $73.9 million in second quarter, which is more than quadruple the amount compared to the previous quarter ($12.8 million) and prior year ($16.6 million).“The impact of a deteriorating lending book continues to be affected by poor economic fundamentals,” the report stated, adding that during the quarter, net charge-off to total loans rose sharply from 0.6 percent in the first quarter of 2012 to 3.2 percent in the second.The increased provisions are also expected to affect profitability. The BMA said annualised return on equity declined from 8.9 percent in the first quarter of 2012 to 1.2 percent in the second quarter, and the annualised return on equity fell from one percent to 0.1 percent.Even though the Island’s retail banks face an uphill battle to collect on loan payments, they have $0.1 billion in cash, which is the same level during the same period in 2011 .“The solvency for the sector remains high as capitalisation improved slightly (up 0.6 percent) during the last quarter,” reported the BMA, adding that system-wide leveraging declined during the quarter. The banks also saw a decline in risk-weighted assets (down 0.7 percent).Risk-weighted assets are assets weighted by factors representing their riskiness and potential for default.The report also found that the Bermuda dollar funding gap widened further. The BD$ loan-to-deposit ratio increased to 154 percent (up from 151 percent in Q1 2012 and 142 percent a year earlier) as BD$-denominated customer deposits declined (down 1.3 percent). However, the large foreign-denominated deposits, which declined by 5.1 percent during the quarter, continue to supplement the BD$ funding gap.Total assets in the second quarter were down 4.2 percent, to 23.7 billion from 24.3 billion.Total deposits were down 4.5 percent quarter over quarter and now sit at 20.2 billion. The quarterly decline is attributed mainly to lower USD customer deposits (down 5.4 percent), of which 47.4 percent were total customer deposits.Depositor interest has shifted towards demand deposits, as the deposit balance rose from 40.3 percent to 44.5 percent in the second quarter of this year, while savings declined from 28.8 percent to 25.3 percent.