Many borrowers continue to struggle to make loan repayments, according to the latest figures on the banking sector published by financial regulator the Bermuda Monetary Authority (BMA).

Non-performing loans (NPLs) — defined as loans in which borrowers are 31 days or more late in making repayments — made up 12 percent of total loans on the books of the Island’s banks in the first quarter, unchanged from the fourth quarter of 2013.

The BMA’s Quarterly Banking Digest also showed that provisions set aside by the bank for soured loans rose for a sixth successive quarter to 25.8 percent of total NPLs, up from 25 percent in the final quarter of last year.

“Large exposures to the real estate market remain a challenge, as evidenced by the unchanged non-performing loans (NPLs) to total loans ratio,” the BMA commented. “The level of provisions for future asset impairments continues to climb (up 1.6 percent) and grew for the sixth consecutive quarter, increasing modestly from 25 percent in Q4-2013 to 25.8 percent relative to NPLs.”

Real estate-related loans make up 64.8 percent of all loans and advances.

The statistics also showed that the value of NPLs equates to 43.8 percent of the banking sector’s capital. Though this figure is high, it fell for a third successive quarter from its peak of 45.4 percent in the second quarter of 2013.

The figures will be closely watched by financial services industry professionals, particularly in the light of rating agency Standard & Poor’s (S&P) downgrade of the Bermuda banking sector last month, made partly on the basis of the deteriorating quality of the banks’ loan books in a weak economy.

S&P projected that bad loan losses through the cycle that has followed the global financial crisis (2009-2016) would total between $1 billion and $1.2 billion — and that banks were only half way through these losses.

Butterfield Bank argued that S&P had got it wrong, in that the $600 million of aggregate industry losses since 2009 had included several large write-offs related to hotel developments, and that the scale of such losses was unlikely to be matched over the next two years.

“The industry has largely addressed legacy non-performing hospitality loans and there is no evidence of potential material, near-future losses from this sector,” Butterfield argued, adding that it believed Bermuda had shown economic resilience through a period of transition and that there was potential for economic growth.

The BMA’s figures shows that total loans continue to shrink. The report stated: “Lending activity (down 2.4 percent) remained low as domestic credit supply continued to decline.”

Banks have been criticised by some in the community — including Finance Minister Bob Richards — for a lack of appetite to lend at a time when the economy needs credit the most.

In February this year, Mr Richards accused the banks of “debilitating ultra-cautious lending during economic weakness” that did not serve the Island’s interests.

HSBC Bermuda CEO Richard Moseley responded to those comments in an interview with this newspaper by saying that lending standards had normalised compared to the pre-crisis days and that the banks were ready and keen to lend to qualified borrowers.

The BMA report also found that the banks’ capital levels improved during the first quarter, along with profitability.

“Sector profits improved during the quarter as lower reported net charge-offs (down 51.4 percent), lower operating expenses (down 8.4 percent) and higher non-banking income (up 34.3 percent) helped increase quarterly earnings,” the report stated.

“Consequently, annualised return on equity and return on assets rose from 1.2 percent and 0.1 percent in Q4-2013 to 9.7 percent and 0.9 percent, respectively.”