Contrasting strategies in Cayman’s banking sector

Though the world knows of the Cayman Islands’ leadership in the global offshore banking industry, retail banks, which cater to the business and personal needs of Cayman residents, play an increasingly important role in the islands’ economic development.  

As the worldwide recession began to recede in 2014, big changes came to this key business segment. Here are some details from inside the boardroom about four principal retail banks. 

 

Butterfield Bank, benefiting from acquisitions  

A major business move Butterfield made in 2014 was to buy parts of competitor HSBC’s corporate and retail banking business in the Cayman Islands. The gross assets of the local bank following the first quarter of 2014 were about $800 million; its total assets were around US$1.4 billion. HSBC ceased developing new business in July, when Butterfield announced its intent to purchase. 

Butterfield Bank (Cayman) Ltd., a wholly owned subsidiary of Bermuda’s The Bank of N.T. Butterfield & Son Ltd., had more than $2.3 billion in assets and provided more than 270 jobs in Cayman at the beginning of 2014. 

According to Brendan McDonagh, Butterfield’s chairman and chief executive officer, the acquisition of HSBC will strengthen Butterfield’s core business and market position in Cayman and will drive long-term growth. 

In its most recent quarterly report, for the quarter ended Sept. 30, 2014, Butterfield reported net income of $22.8 million compared to 21.6 million in the same quarter a year before. Core earnings for the period exceeded the year earlier figures by 10.6 percent. McDonagh attributed part of the improved 2014 performance to Butterfield’s acquisition of the Legis Group’s trust and fiduciary services business in Guernsey during the year. 

“The impact of these kinds of acquisitions, along with the gradual strengthening of quality in our commercial loan book,” McDonagh said, “is providing incremental improvements in quarterly core earnings, even against a backdrop of low economic growth and low interest rates in our major markets.” 

Total assets of Butterfield Cayman were $2.2 billion, a small decrease from year-end 2013, and customer deposits ended third quarter slightly below their levels a year earlier. 

McDonagh predicted further improvements in 2015 as the bank comes to realize its greater retail and commercial banking capacity as a result of the HSBC acquisition. 

One of the highlights for Butterfield was its award in November as Bank of the Year, a designation bestowed by The Banker, a Financial Times trade publication.  

Butterfield considers its mission to be to provide strong and consistent returns to shareholders, offer security and opportunities to employees, and contribute to the local communities in which it operates.  

 

ScotiaBank, restructuring retail banking  

The Toronto-based bank that has been in business in Cayman since 1968 will restructure its retail banking business in the Caribbean in 2015. “A limited number of branches in the Caribbean will be closed and combined with other branches to align with market opportunity and minimize overlap,” the bank said, but it is still too early to detail the implications of the review of the bank’s operating model and international distribution network for Cayman. 

Inside the boardroom, directors have mulled over their decision based on, among other things, that “a protracted economic slowdown throughout much of the Caribbean and Central America” during 2014 resulted in increased provisions for credit losses.  

ScotiaBank, which calls itself “the most international” of Canada’s banking institutions, saw financial headwinds across much of the Western Hemisphere, not including North America. The signs included moderated economic growth in Peru, Mexico and Chile, and lower interest rates in those nations as well. 

Focusing on longer-term shareholder value in 2014, the bank increased this measure by 13 percent for the year, less than its peer groups’ average of 16 percent. Scotia’s long-term goal is to outperform its peer group average, as it has done over recent 5-year and 10-year periods in the past. 

Part of that strategy resulted in the bank’s withdrawal from some markets in the Caribbean, where the bank has operated for more than 125 years, and Latin America. Yet the 2014 annual report indicates that ScotiaBank foresees long-term potential in at least some parts of the region.  

The future of South America’s Pacific nations, bank directors say, is promising, “with strong macroeconomic fundamentals and attractive demographics” that could provide business for the bank over the longer term.  

ScotiaBank’s outlook for other parts of the world would seem to depend on conditions: “We expect that developed market economies will experience uneven growth, led by continued growth in the U.S. and negligible growth in Europe,” directors say. 

ScotiaBank’s medium-term financial objectives include a 15 percent to 18 percent return on equity, earnings per share growth of 5 percent to 10 percent. 

 

Royal Bank of Canada, limiting its role in Cayman  

A slower performer during the transitional 2014 year, Royal Bank of Canada will limit some of its banking operations in the Cayman Islands starting in 2015 as it closes its wealth management division. 

RBC has regional wealth management offices in Cayman, Barbados and the Bahamas. It plans more focused wealth management business in the future, serving high-net-worth and ultra-high-net-worth clients from the bank’s key operational hubs in Canada, the U.S., the British Isles and Asia. “Those areas have been elected because they offer the best opportunities and allow the bank to build on the strengths of RBC’s other businesses,” the bank says. 

RBC believes private wealth management in the Caribbean is becoming less profitable as regulation increases in the region, tied to increased reporting obligations in the U.S.  

The net effect is that despite having built substantial wealth management business in the Caribbean, RBC is going to withdraw from an enterprise whose returns may decline in the near future. 

Despite the fact that 2014 was a record year for the bank as a whole, which built business in some global markets, it also recorded a total loss on disposal of $100 million (including a $60 million loss in the first quarter) in selling its RBC Royal Bank Jamaica Ltd. and RBTT Securities Jamaica. 

Dave McKay, president and CEO, said, “Six years after the financial crisis, it feels like the global economy has begun to turn a corner.” Sometimes such shifts require a business to shed underperforming enterprises, and the costs can be great. 

For the year, total revenues were up to more than $34 billion from $30.7 billion in 2013. Net income grew 7.9 percent in the same period, while dividends ratcheted up sharply in the decade from 2004’s $1.01 (CanD) to $2.84 in 2014, and shareholder returns exceeded the global peer average over the last one year, three years, five years and 10 years. 

The banking company’s overall performance was solid enough for Euromoney Magazine to declare that Royal Canadian had the “best private banking services in Canada, the Caribbean, Cayman islands and Jersey in 2014.”  

 

Cayman National has big expectations  

Cayman National stands by its intention to become a leading internationally accepted financial services institution for its customers, locally and internationally. With an emphasis on community service, the bank also promises to provide a rewarding workplace for its employees. 

In the first three quarters of 2014, Cayman National’s total assets grew from about $1.1 billion to more than $1.2 billion, and total shareholders’ equity grew from $82.7 million to almost $84.5 million. Total income for the bank increased from about $37 million in 2013 to more than $39.3 million in the following year. 

Net income for the company rose 71 percent from second quarter 2013 to the same time a year later. The bank’s directors attributed the boost to ongoing cost savings measures and improvements in revenue.  

Since U.S. account reporting rules were installed, adding an extra-layer of administrative and financial burden, Cayman National, like all banks in Cayman, had to focus on cutting costs. 

In 2015, community service will remain a first-agenda issue for the bank, which operates in Cayman and the Bahamas. 

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