Credit Growth To Tick Up In The Near Term
BMI View: We believe that Trinidad & Tobago (T&T) 's banking sector will continue to see an uptick in credit growth this year, driven by low interest rates and an increase in business and consumer confidence. Moreover , with new financial sector regulations and a healthy loan-to-deposit ratio, we expect T&T's banking sector to remain among the most stable in the region going forward .
After a contract ion in loans in 2010, and subdued credit growth for much of 2011 and 2012, lending by Trinidadian commercial banks has seen an uptick in Q113 , with total loans up 5.1 % year-on-year (y-o-y) . We expect this trend will be sustained through 2013 and early 2014 for several reasons . First, we expect record low interest rates will continue to feed through the financial system, leading to increased lending. Indeed, after a round of cuts to the repo rate through 2012, we believe that the Central Bank of Trinidad & Tobago (CBTT) will maintain the benchmark policy rate at 2.75% through the end of 2013 given relatively low inflationary pressures ( see 'Accommodative Stance Will Continue In The Near Term,' May 28) .
|Signs Of A Recovery|
|T&T - Commercial Banking System Credit (LHS) & Loans, % chg y-o-y (RHS)|
Second, we believe that a return to growth for the energy sector, which we forecast will drive real GDP growth of 2.5% in 2013 and 3.0% in 2014, from 1.2% in 2012, will improve confidence among businesses and consumers, driving demand for credit. Moreover, the growing deposit base that commercial banks have seen in recent quarters on the back of stronger revenues from T&T's energy sector will support an organic increase in lending as the economy picks up steam. Indeed, total deposits at commercial banks have averaged 11.0% y-o-y growth over the past 12 months, reaching TTD92,972.4mn in March.
|Growing Deposit Base Will Support Rise In Lending|
|T&T - Deposits (LHS) & Loan-to-Deposits Ratio (RHS)|
That said, by mid-2014 w e see loan and asset growth beginning to slow. W e believe that stronger growth and supply-side inflationary pressures will see the CBTT begin to tighten its monetary policy in early 2014, raising the repo rate by 50 basis points to 3.25% and limiting the expansion of credit. In addition, the interest rate on savings accounts has trended down over the past several years, reaching 0.3% in January from a recent high of 2.1% at the end of 2008, which we expect could lead to a gradual slowdown in deposit growth next year, reducing commercial banks' source of capital.
Banking Sector To Remain Stable
More broadly, we believe that T&T's banking sector will remain on stable footing in the coming years. Indeed, as we have previously noted, new oversight powers have enhanced the ability of the country's Securities and Exchange Commission to more efficiently regulate markets and oversee systemic risk in the financial sector, increasing productivity ( see 'Energy Sector Rebound To Drive Stronger Growth,' May 2). Moreover, while we expect loans-to-deposits, which dropped to 54.7% in March, from 59.1% the year prior, to rise as banks increase their lending in 2013, we expect it to remain below 100%, suggesting little risk that the bank will be forced to rely on less stable sources of financing to support loan growth. Finally, the percentage of deposits held in foreign currency has remained at a modest 25.0% since 2011, and with foreign investment continuing to bolster T&T's capital and financial accounts, we perceive the risk of capital flight destabilising the banking sector to be minimal.