America’s Cup seen easing risks for banks
Risks to Bermuda's banking sector have stabilised thanks to a gradually strengthening economy helped by the island's hosting of the America's Cup.
That is the view of analysts from Standard & Poor's Rating Services, who believe Bermuda is in the latter stages of a decade-long “correction phase” of economic imbalances in the form of real-estate valuations that soared in the pre-recession boom years.
The report, authored by Nikola Swann, primary credit analyst, leaves Bermuda with an unchanged rating of 5 under S&P's Banking Industry Country Risk Assessment methodology, on a scale in which 1 represents the least risk and 10 the most.
The report found that soured-loan write-offs had been less severe than the ratings agency had expected and it expects total credit losses at Bermudian banks during the 2008-2018 period to total between $600 million and $800 million.
S&P estimates that island banks have already charged off more than $500 million in credit losses, net of recoveries. It expects additional credit losses of between $100 million and $300 million in the 2016 to 2018 period, some of which may result from some “overreaching” America's Cup-related investments.
“The Bermudian banking sector remains in a correction phase, in our view, following the real-estate and stock-market boom in the last decade that peaked in 2007 to 2008,” the report states.
“Although spread over several years, the magnitude of this peak-to-trough correction has been severe.”
House prices fell by 26 per cent between 2008 and 2015, S&P estimated, while gross domestic product slumped by 18 per cent during the same period.
“In our opinion, the valuation boom was spurred by the large and extended (over more than a decade) growth of high-value-added, internationally focused insurance and reinsurance companies, accompanied by a large influx of non-Bermudian staff,” S&P stated.
“We believe financial market dislocations since 2008, particularly in the US, flowed through to Bermudian profits, salaries, and employment, with extended knock-on effects on Bermudian valuations.
“The severity of Bermuda's correction highlights the risks to its extremely concentrated economic model, in our opinion.”
The analysts added that Bermuda's economy is experiencing a “substantial, multiyear boost” from hosting the America's Cup. “Taking into account the race's positive influence on borrowers' corporate, employment, and rental income, we expect the event will prove a substantial mitigant to the bank credit losses we had previously expected in the 2015 to 2018 period,” the report added.
“On the other hand, we are not sure that the event will significantly benefit the island's economy beyond 2017.”
S&P expects continued job losses from consolidation in the insurance industry, possibly mitigated by the competitive advantage the sector enjoys from the European Union's granting of equivalence with its Solvency II regulatory regime.
The analysts believe that upside potential for the banking sector outweighs downside risk, mainly because of the One Bermuda Alliance government's rule changes to encourage inward investment, the likelihood of an outsize boost for investment flows from the America's Cup main event next year and the economy's return to growth in 2015.