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BANKING SECTOR STATISTICAL DIGEST 2011 - 2014 Section I – Banking Sector Structure Balance Sheet Profile Assets Distribution Assets Sectoral Distribution Liabilities Distribution Funding Distribution Funding Distribution Profile Loans to Funding Profile Earnings & Profitability Financial Soundness Indicators Non-Performing Loans (NPL's) Section II – Banking Sector – International Assets & Liabilities International Assets & Liabilities Cross-Border Assets & Liabilities by Region Domestic (Local/Resident) Assets & Liabilities in Foreign Currency The Cayman Islands banking sector has 'weathered' the effects of the financial crisis and down-turn in global economic growth. It has maintained its position as the 6th largest international banking centre in terms of cross-border assets of US$1.42 trillion and 5th in cross-border liabilities of US$1.44 trillion as at end December 2014. The sector remains generally stable and well capitalized with capital adequacy ratios (CAR) of 29.5% for non-retail banks licensed as subsidiaries, private & affiliates and branches and 17.6% for retail banks. Banks continue to remain profitable despite the increase in non-performing loans and low interest rate policy over the 2011-2014 period, which have impaired earnings and profitability. The sector reported a net income of US$3.2 billion at end-2014. With improved conditions in the international markets, primarily in Europe, signs of improved global economic activity, signals of interest rate increases by the US and increased loan loss provisioning in 2014, the banking sector is poised for improvements in profitability going forward. Domestically, expected increases in growth and improvements in unemployment rates bode well for improved performance for the retail sector. Section III – Category A Banks Retail Banks - Balance Sheet Profile Retail Banks - Assets Distribution Retail Banks - Funding Distribution Non-Retail Banks - Balance Sheet Profile Non-Retail Banks - Assets Distribution Non-Retail Banks - Funding Distribution Retail Banks - Earnings & Profitability Retail Banks - Financial Soundness Indicators Retail Banks - Non-Performing Loans Copyright © 2015 by the Cayman Islands Monetary Authority. All text, designs, graphics and other works in this document are the copyrighted works of the Cayman Islands Monetary Authority. All rights reserved. Any redistribution, in whole or in part, without the permission of the Cayman Islands Monetary Authority, is strictly prohibited. Banking Sector Structure The Cayman Islands Monetary Authority (CIMA), through its Banking Supervision Division (BSD), regulates and supervises all banking entities operating in and from the Cayman Islands. The Banks and Trust Companies Law (2013 Revision) allows for two categories of banking licence: Category A licence which permits banks to operate both in the domestic and international markets and provide services to residents and non-residents, and Category B licence which permits banks to conduct international banking business with non-residents and domestic banking business with other Cayman Islands licenced entities. 300 18 17 250 17 15 15 200 15 13 150 260 Category A Banks 249 100 229 219 Category B Banks 207 198 185 2012 2013 2014 50 0 2008 2009 2010 2011 Number of Banks Following the financial crisis in 2007/2008, Bank licences have steadily declined as banks terminated their licences in search of higher efficiency returns through consolidation and restructuring. Category B banks decreased annually from a high of 260 in 2008 to 185 in 2014. Category A banks decreased by 5 from 18 in 2008 to 13 in 2014, for a total of 198 banks as at December 2014. Category A & B Banks Branches 181 173 76 162 74 21 19 2008 2009 Middle East & Africa, 4%, Caribbean, Central America & Mexico 14% South America, 18% Privates & Affiliates 152 66 18 2010 Subidiaries 143 63 19 2011 139 61 18 2012 130 57 49 19 17 2013 2014 Asia & Australia, 11% North America , 28% Europe, 27% 1 Types of Banks Of the 198 category A and B licensees in 2014, 130 were branches and 49 were subsidiaries primarily from Europe, North America and South America, and 19 were banks privately owned or affiliates to another bank or a financial institution in their Group. Nationality of Banks The majority of licensed banks are branches or subsidiaries of established international financial institutions, with the largest concentrations of banks from North America, Europe and South America. Banking Sector - Balance Sheet Profile Total assets have declined since the financial crisis, from US$1.7 trillion in 2008 to US$1.449 trillion in 2014. The Cayman Islands’ banking system remains strong and resilient with unconsolidated assets and liabilities of US$1.449 trillion as at December 2014 and consolidated assets and liabilities of US$1.430 trillion at varying fiscal year-end periods for 2014. The sector shows signs of stabilization and growth, as seen by the growth of balance sheet positions of $1.449 trillion as at 2014, due mainly to increased market confidence of the continued US monetary policy of low interest rates and signs of slow, but positive, global economic growth. CATEGORY A & B BANKS - CALENDAR YEAR - (Millions U$D) ASSETS Cash Items Financial Assets at Fair Value Investments - Held-to-Maturity Investments -Available-for-Sale Other Investments Loans and Advances Less Loan Loss Provisions Net Loans Other Assets TOTAL ASSETS LIABILITIES Deposits Repurchase Agreements (REPOS) 2011 870,513 28,614 4,425 47,516 90,963 462,332 1,492 460,839 2012 682,726 26,931 2,803 52,988 66,132 526,839 1,537 525,301 2013 701,712 20,210 4,682 40,078 51,009 528,191 1,012 527,179 2014 745,829 24,646 5,392 37,733 57,368 498,990 2,700 496,290 80,628 82,763 64,120 81,999 1,583,501 1,439,648 1,408,994 1,449,260 2011 2012 2013 2014 1,466,410 1,246,084 1,236,198 1,254,628 8,901 12,911 9,591 18,399 Hybrid Debt and Subordinated Debt 10,549 11,273 13,825 18,062 Other Notes, Bonds and Commercial Paper 26,228 39,815 62,027 62,518 Other Borrowings 61,133 75,414 53,635 48,073 Creditors and Other Liabilities 21,776 45,229 35,204 43,978 1,304 1,009 737 711 1,596,304 1,431,739 1,411,238 1,446,369 Other Loss Provisions TOTAL LIABILITIES TOTAL SHAREHOLDERS EQUITY TOTAL LIABILITIES AND SHAREHOLDERS EQUITY -12,802 7,909 -2,244 2,890 1,583,501 1,439,648 1,408,994 1,449,260 Following year-to-year contractions since 2008, the banking sector balance sheets increased by US$40 billion, from US$1.409 trillion in 2013 to US$1.449 trillion in 2014. Over 2011-2014, the banking sector funding shifted from retail deposits and borrowings to the issuance of debt instruments, as investors reacted to the US low interest rate monetary policy and higher returns from capital markets. Shareholders Equity showed mixed performance. Branches reported negative shareholders equity, in most instances, from liabilities being greater than assets. Subsidiaries showed positive earnings, though slightly compressed due mainly to market volatility, higher levels of provisioning for credit losses and slow growth in the global economy, primarily in Europe and emerging markets. Footnote: Unconsolidated data at calendar year-end is presented so as to include intra-group positions which more accurately reflect the size of banks’ balance sheet. Footnote: Shareholders’ Equity can be negative or positive as it includes subsidiaries/privates/affiliates that hold capital and branches that are not required to hold capital as they are considered an account of their Parent Bank. Branches shareholders’ equity is presented as assets minus liabilities and can produce a negative value for the sector given the relative number and balance sheet size of branches in aggregate. 2 Banking Sector - Asset Distribution The balance sheet profile of the banking sector reflects a liquid and healthy composition of assets, with Cash Items (cash and bank balances) and Loans & Advances accounting for an average of 85% of total assets. Cash Items averaged 50% or US$750 billion and Loans & Advances averaged 35% or US$500 billion. This high level of cash and lower than traditional industry benchmarks for loans are indicative of a tax neutral international financial centre with no foreign exchange controls, where licensees access funding and foreign currency on the international markets to provide liquidity and credit to their Parent Groups. This distribution of cash and loans is also influenced by the business models of the banking sector where bank services include treasury functions, wealth management, investment business, retail and branch banking. 100% 90% 3.3% 5.1% 1.8% 3.9% 5.7% 1.8% 3.0% 5.6% 1.4% 3.0% 5.6% 1.7% 36.6% 37.5% 34.4% 80% 29.2% 70% 60% Investments (Securities) 5.7% 50% 4.6% Other Assets 4.0% 3.6% Financial Assets at Fair Value Loans and Advances 40% Other Investments 30% Cash Items 54.9% 20% 47.4% 49.8% 51.4% 2012 2013 2014 10% 0% 2011 The banking sectors’ distribution of loans to gross loans reflects the different business models of the retail and non-retail banks and highlights the significant exposure of retail banks to non-financial corporations and the household sector, as opposed to the significant exposure of the non-retail subsidiaries and branches to other banks, mainly Parent Bank Groups. Banking Sector - Sectoral Distribution of Loans to Gross Loans Indicator (%) Central Banks General Government Deposit Takers (Banks) Other Financial Corporations Non-Financial Corporations Other Domestic Sectors (Households) Total Retail Banks Subsidiaries Branches 2013 0.0 7.6 1.5 1.8 56.0 33.1 100 2013 0.0 0.5 60.8 4.4 14.9 19.4 100 2013 0.0 0.2 84.9 2.0 9.3 3.6 100 3 2014 0.0 7.9 0.7 1.6 57.1 32.8 100 2014 0.0 0.3 58.5 6.1 14.2 20.9 100 Sector 2013 2014 2014 0.0 0.0 0.0 0.3 0.4 0.4 82.2 83.4 80.6 3.8 2.0 3.8 9.7 10.1 10.6 4.0 4.2 4.7 100 0 100 100 Banking Sector - Asset Distribution Over the 2011-2014 period an average of 95% or US$700 billion of Cash Items was used to provide liquidity to Parent Groups, through placements of Certificates of Deposits (CD's). At end-2014, Cash Items increased by US$44 billion from US$701 to US$745 billion, of which CD's with Parent Groups’ bank and non-bank entities increased by US$53 billion from US$675 billion in 2013 to US$728 billion in 2014. Cash Items (Millions U$D) 2011 2012 831 Cash Balances & Certificates of Deposits (CD's): o/w Group Bank - Parent, Branch, Subsidiary or Affil. o/w Group non-bank entities o/w Other Banks Due from financial institutions 526 0 0 0 0 68 96 157 840,044 652,852 691,030 820,950 620,812 661,458 5,998 18,638 14,887 7,960 13,096 13,402 14,685 11,724 29,565 TOTAL 2014 1,530 74 Gold and bullion Cash items in process of collection 2013 1,412 870,514 28,389 682,721 9,056 701,712 740,632 720,948 4,514 745,829 Total loans decreased by US$30 billion, from US$528 billion in 2013 to US$498 billion in 2014, partially as a result of loan write-offs and a reduction in consumer loans. Loans to Parent Groups over the 2011-2014 period averaged 79% of total loans and advances, but decreased by US$40 billion from $440 billion in 2013 to $400 billion in 2014, as funding was used to provide liquidity to Parent Groups and to expand the credit to Other Financial Corporations (OFI's) by $8 billion at end- 2014. Loans and Advances (Millions U$D) 2011 Sovereigns & Central Banks Non Central Government Public Sector Entities (PSEs) Multilateral Development Banks (MDBs) Group Bank - Parent, Branch, Subsidiary or Affiliate Group non-bank entities Other Banks Non-Financial Corporations - Private sector Non-Financial Corporations - Commercial Mortgages Other Financial Corporations - Financial intermed's & aux. Retail Lending/Consumer Loans - Households Residential Mortgages - Households Other loans and advances TOTAL 4 2012 2013 2014 1,068 604 1,296 1,481 1,275 1,612 555 650 295 67 49 0 212,182 251,274 288,024 236,237 133,475 163,563 152,319 165,037 5,965 3,402 1,720 2,407 77,936 69,840 49,910 49,628 1,721 3,120 2,321 1,920 7,554 14,272 10,198 18,290 2,714 2,936 2,594 2,904 1,843 1,838 2,566 2,589 16,295 14,311 16,639 17,848 462,332 526,839 528,191 498,991 Banking Sector - Liabilities Distribution Over 2011-2014, core retail deposits (retail funding) averaged 91% or $1.30 trillion and external debt (wholesale funding) averaged 9% or US$130 billion, for an average of $1.43 trillion in funding. A review of this period reflects a change in funding sources evidenced by a decline in retail deposits from 92% in 2011 to 87% in 2014, offset by an increase in wholesale funding from 7.3% in 2011 to 9.6% in 2014, with a high of 10.7% in 2012. The use of external debt as a source funding is only seen in the non-retail banks and more prevalent in South American banks. 100% 0.7% 2.3% 3.4% 2% 90% 80% 70% 60% 50% 92% 87% 88% 87% 40% Creditors and other Liabilities Deposits Long Term Debt and Other Borrowings 30% 20% 10% 7.3% 10.7% 10% 9.6% 2011 2012 2013 2014 0% 5 Banking Sector - Funding Distribution A major change in deposit funding over the 2011-2014 period was seen by a reduction in deposits of US$212 billion, from US$1.466 trillion in 2011 to US$1.254 trillion in 2014, due mainly to a reduction in deposits from Parent Groups. However, this trend reversed as retail funding increased by US$22 billion from $1.232 trillion in 2013 to $1.254 trillion in 2014, due mainly to increased deposits of US$61 billion from Parent Groups. Retail Funding 2011 Deposits (Millions U$D) 2012 2013 2014 Sovereigns & Central Banks 1,936 3,078 4,959 4,997 Non Central Government Public Sector Entities (PSEs) 5,042 1,092 1,461 1,806 174 46 78 165 Group Bank - Parent, Branch, Subsidiary or Affiliate 723,578 609,068 640,822 677,071 Group non-bank entities 268,950 167,773 143,601 167,950 94,060 80,862 44,599 65,986 Non-Financial Corporations - Private sector 160,743 155,971 153,898 149,589 Other Financial Corporations - Financial intermed's & aux. 182,862 198,503 206,721 160,424 9,658 7,674 6,138 7,017 19,399 22,017 30,507 1,466,402 1,246,084 1,232,784 19,622 1,254,627 Multilateral Development Banks (MDBs) Other Banks Individuals -Households Other deposits TOTAL To offset the decrease in retail funding, banks responded by using debt instruments which is reflected in the increase in wholesale funding of US$41 billion over 2011-2014 from US$106 billion in 2011 to US$147 billion in 2014. Wholesale Funding 2011 Debt & Borrowings (Millions U$D) 2012 2013 2014 8,901 12,911 9,592 18,399 Hybrid debt/equity instruments (over 5 years) 10,549 11,273 13,842 18,062 Other Notes, Bonds & Commercial Paper 26,228 39,815 62,010 62,519 Other Borrowings TOTAL 61,133 75,414 53,636 106,811 139,413 139,080 48,072 147,052 Repurchase Agreements (Repo's) 6 Banking Sector - Funding Distribution Over 2011-2014, investors reacted to low yields from global low interest rates and shifted from retail deposits to the capital markets in search of the higher returns. Banks, in turn, reacted by the issuance of debt securities offering higher yields to investors. The shift in funding pattern is concentrated primarily among South American banks, a trend that is seen by the Bank for International Settlements (BIS) statistics, which show that . external debt securities financing increased as a source of funding for banks from Emerging Economies postglobal crisis (Changes in Funding Patterns by Latin American Banking Systems, Liliana Rojas-Suarez and Jose Maria Serena, Bank of Spain, 2015). This shift in funding patterns presents some vulnerability as its continued availability is dependent primarily on the US low interest rate monetary policy. Wholesale funding also reflected a shift from Other Borrowings to Debt Securities. Other Borrowings declined to US$48 billion in 2014 from US$61 billion in 2011 and US$75 billion in 2012, which was offset by an increase of US$10 billion in repurchase agreements, US$8 billion in hybrid/equity instruments and US$36 billion in notes, bonds & commercial paper from 2011 to 2014. Wholesale Funding Distribution Billions U$D 160 140 Total Wholesale Funding 120 Other Borrowings 100 Other Notes, Bonds & Commercial Paper 80 Hybrid debt/equity instruments (over 5 years) 60 Repurchase Agreements (Repo's) 40 20 2011 2012 2013 2014 Year 7 Banking Sector - Loans to Funding Loan-to-Deposit ratio (LTD), a measure of a banking funding profile and liquidity, for the banking sector averaged 39% over 2011-2014, with the non-retail banks LTD ratio averaging 37% and the retail banks LTD ratio averaging 60%. The stark difference in the LTD ratios for the non-retail banks in comparison to retail banks reflects the large presence of branches whose primary business function is to raise funds on the international markets to provide liquidity to Parent Groups as opposed to issuing loans. The retail banking sector average LTD ratio of 60% provides a healthy cushion of deposits from a stress in funding. Notwithstanding, the LTD ratio for this sector increased from 60.1% in 2013 to 68.5% in 2014, partly due to a reduction in resident deposit liabilities, primarily from OFIs. This decrease is seen by a shift of $733 million in resident deposits from the retail banks to the resident non-retail investment banks by the OFIs (investment and managed assets) sector. Loans to Funding 2011 2012 2013 2014 Total Gross Loans to Deposit Ratio - Non-Retail Banks 30.7% 40.3% 41.2% 38.4% Total Gross Loans to Deposit Ratio - Retail Banks 49.7% 62.9% 60.1% 68.5% Total Gross Loans to Deposit Ratio - All Banks 31.5% 42.3% 42.8% 39.8% Total Gross Loans to Retail Deposits & Wholesale Funding - All Banks 29.4% 38.0% 38.5% 35.6% With the use of wholesale funding, the banking sector loans to funding ratio averaged 35% over the 2011-2014. At end-2014, the banking sectors' loans to funding ratio increased from 29.8% in 2011 to 35.6%, whereas the sectors’ LTD ratio declined to 39.8% from 42.8% in 2013 as a result of a decrease of $30 billion in loans and an increase in retail and wholesale funding of $22 billion and $8 billion, respectively. Gross Loans to Deposits & Total Funding 80.0% 70.0% 60.0% percent 50.0% Total Gross Loans to Deposits Retail Banks 40.0% Total Gross Loans to Deposits - All Banks 30.0% Total Gross Loans to Funding - All Banks 20.0% 10.0% 0.0% 2011 2012 2013 2014 8 Banking Sector - Earnings & Profitability The years 2011-2012 were particularly challenging for European and South American banks with large trading and investment portfolios. They incurred significant trading losses due to market volatility, the sovereign debt crisis in Europe and deteriorating macroeconomic conditions as seen in the effects of lower oil prices and higher rates of unemployment. 2011 Banking Sector (Millions U$D) 2012 2013 2014 Net Interest Inc ome 3,768 4,060 2,696 Net Non-Interest Inc ome 1,578 585 1,290 1,070 -146 74 -224 -1,873 Provisions For Credit Losses /Rec overies 2,395 Other Inc ome 113 962 1,974 1,506 Trading Inc ome (Gain/Loss on Financ ial Instruments) 184 -3,168 1,343 1,529 Operating Inc ome 5,497 2,512 7,079 4,625 Net Inc ome Before Taxes & Dividends 4,331 1,388 5,920 3,374 Net 3,747 641 5,556 3,212 Inc ome Retained Earnings & Profitability (Millions U$D) 8,000 Net Interest Income 6,000 Net Non-Interest Income 4,000 Provisions For Credit Losses /Recoveries 2,000 Other Income Trading Income (Gain/Loss on Financial Instruments) - Operating Income -2,000 Net Income Before Taxes & Dividends -4,000 2011 2012 2013 2014 Net income retained decreased by 82.9% from US$3.75 billion in 2011 to a low of US$641 million in 2012 mainly due to significant trading losses by European banks. The sectors' net income improved in 2013 and 2014, from improvements in trading income and other income, to a high of US$5.56 billion in 2013. The decrease in net income to US$3.21 billion in 2014 was due mainly to large provisions for credit losses by European banks. 6,000 5,557 Millions U$D 5,000 4,000 3,747 3,217 3,000 2,000 1,000 641 - 2011 2012 2013 Year 9 2014 Net Income Retained Financial Soundness Indicators Banking Sector, 2013-2014 Outlook The Financial Soundness Indicators (FSI's) for the period under review suggest that the Cayman Islands banking sector remains stable post-global crisis with capital adequacy ratios (CARs) above regulatory requirements and that it has remained profitable despite challenging macroeconomic environments and sporadic market volatility. Improvements in some key indicators such as net interest margin and increased provisions for expected credit losses indicate that the sector is poised for improved performance in 2015. Exogenous variables such as inflation in South American markets, changes in the US low interest rate policy and global economic growth should be closely monitored for any effects on the health and soundness of the banking sector. Capital Adequacy Ratios The retail sector experienced a slight reduction in CARs from 18.3% to 17.6% in 2014, due to an increase in loan write-offs over the 2013-2014 period. Subsidiaries in the non-retail sector had a reduction in CAR from 36% to 29.5% at end-2014, due to an increase in provisions for credit losses, which also caused a decrease in Tier II capital from unaudited net losses and a slight reduction in capital to assets. Asset Quality Non-performing loans (NPLs), a measure of deteriorating asset quality, increased marginally for the sector from 0.4% in 2013 to 0.6% in 2014. The retail sector showed signs of improvement in asset quality as seen by a reduction in NPL's from 3.8% to 2.7% and a corresponding decrease in non-performing loans (net of provisions) to capital from 13.8% to 9.8% reflecting improved asset quality at end-2014. NPLs for the non-retail branches showed a marginal increase from .04% to .05%, while non-retail subsidiaries experienced a significant deterioration in asset quality from 0.5% in 2013 to 6.9% in 2014. Earnings and Profitability Over 2013-2014, earnings and profitability declined for the sector with mixed results. The retail banks maintained a stable return on assets (RoA) and equity (RoE), whereas the non-retail subsidiaries experienced a significant reduction in profitability as seen by a reduction in RoA from 6% to (5.0%) and RoE from 1.2% to (0.8%) over the 2013-2014 period. Liquidity Liquid assets to total assets, an indication of liquidity available to meet expected and unexpected demands for cash, increased for the entire banking sector from 52.3% to 53.5%. However, liquidity declined from 35.5% to 24.2% for retail banks and from 50.2% to 40.1% for subsidiaries, while branches, mainly US banks, increased marginally from 52.6% to 54.1% 10 Banking Sector - Core Financial Soundness Indicators Retail Banks Subsidiaries Branches 2013 2014 2013 2014 2013 2014 Regulatory Capital to risk-weighted assets 18.3 17.6 36.0 29.5 n/a n/a n/a n/a Regulatory Tier 1 Capital to risk-weighted assets 17.5 16.0 31.9 27.1 n/a n/a n/a n/a Regulatory Tier II Capital to risk-weighted assets 0.8 1.6 14.8 8.6 n/a n/a n/a n/a Total Regulatory Capital to total assets 9.6 10.7 29.7 23.7 n/a n/a n/a n/a 13.8 9.8 (0.92) 0.01 n/a n/a n/a n/a 3.8 2.7 0.5 6.9 0.4 0.5 0.4 0.6 n/a n/a Indicator (%) Sector 2013 2014 Capital Adequacy Asset Quality Nonperforming loans (net of provisions) to capital Nonperforming loans to gross loans Earnings and Profitability Return on equity 8.8 8.4 6.0 (5.0) n/a n/a Return on assets 0.96 0.98 1.20 (0.8) 0.4 0.1 0.4 0.1 Interest margin to gross income 69.6 71.9 21.0 31.0 34.9 48.7 34.9 47.8 Noninterest expenses to gross income 58.0 58.3 54.6 51.0 12.4 22.8 20.1 29.8 35.5 24.2 50.2 40.1 52.6 54.1 52.3 53.5 Liquidity Liquid assets (core) to total assets Banking Sector - Encouraged Financial Soundness Indicators Retail Banks Subsidiaries Branches 2013 20.0 2014 15.6 2013 n/a 2014 n/a Sector 2013 2014 17.3 14.6 102.6 444.8 401.9 495.0 397.5 461.6 372.8 6.4 (10.1) (8.9) 22.2 26.7 17.4 19.8 21.3 21.3 63.9 48.2 15.8 2.2 22.2 10.6 50.8 49.0 58.2 45.9 19.9 28.3 37.6 36.0 Residential Real Estate Loans to gross loans 28.4 27.1 6.9 6.0 3.5 3.9 3.9 4.3 Commercial Real Estate Loans to gross loans 9.6 5.1 1.3 1.3 0.3 0.3 0.5 0.4 Indicator (%) Capital to assets 2013 11.0 2014 11.8 Customer deposits to total (noninterbank) gross loans 131.1 8.5 Fees & Commissions to Gross Income Personnel expenses to noninterest expenses Trading foreign exchange gains (losses) to gross income 11 Banking Sector - Nonperforming Loans Post-global crisis, the Banking Sector experienced a significant increase in NPLs for a high of 1.2% or US$5.2 billion for 2011, 1.25% or US$5.5 billion in 2012, 0.4% or US$2.2 billion in 2013 and 0.6% or US$2.9 billion in 2014, of which Branches accounted for $4.8 billion, $5.1 billion, $1.9 billion and $2.3 billion, respectively. Of the total NPLs for the banking sector over 2011-2012, branches accounted for an average of 92% or US$4.9 billion, which decreased over the 2013-2014 period to an average of 82% or US$2.1 billion, due to improved conditions in the US economy where most of the branches operate. At end-2014, branches experienced a slight increase in NPLs which contributed to the increase for the banking sector from 0.4% in 2013 to 0.6% for 2014. NPLs for subsidiaries increased over the 2013-2014 period from 0.50% or $33 million to 6.9% or $436 million due mainly to the economic conditions and market volatility in Europe and South America where the majority of these banks operate, and the late recognition of the deterioration of the asset quality. Retail banks, on the other hand, experienced a decrease over the 2013-2014 period from 3.8% or $280 million to 2.7% or $216 million due to loan write-offs and a marginal slowdown in loan growth of $30 million in the domestic sector. NPL's, Loan Loss Provisions, Gross Loans (Millions U$D) 5,541 528,191 7,500 6,500 N P L ' s P r o v i s i o n s 5,262 540,000 520,000 528,839 2,959 5,500 500,000 498,990 4,500 3,500 2,234 462,332 2,700 2,500 L 480,000 O A 460,000 N S 440,000 1,500 1,492 1,537 1,012 500 420,000 2011 2012 2013 12 2014 NPL's Loan Loss Provisions Loans Banking Sector - International Assets and Liabilities As at end-2014, the Cayman Islands ranked 6th internationally in terms of cross-border assets of US$1.42 trillion and 5th by cross-border liabilities of US$1.44 trillion booked by the banking sector with non-residents. In addition, the banking sector also booked US$25 billion and US$50 billion of assets and liabilities in the domestic market with other Cayman Islands licensed entities for a total of US$1.44 trillion and US$1.49 trillion of international (cross-border and domestic) assets and liabilities. Total International Assets - All Currencies (Millions U$D) 1,600,000 1,400,000 1,200,000 1,000,000 Total International Assets All Currencies 800,000 600,000 o/w Domestic (Local) Assets in Foreign Currency 400,000 200,000 2011 2012 2013 Non-Bank Total Non-Bank Total Non-Bank Total Non-Bank Total - o/w External (CrossBorder) Assets in all Currencies (Dom. & For.) 2014 Total International Liabilities-All Currencies (Millions U$D) 1,800,000 1,600,000 1,400,000 1,200,000 Total International Liabilities - All Currencies 1,000,000 800,000 600,000 o/w Domestic (KY) Liabilities in Foreign Currency 400,000 200,000 2011 2012 2013 Non-Bank Total Non-Bank Total Non-Bank Total Non-Bank Total - 2014 13 o/w Cross-Border Liabilities in all Currencies (Dom. & For.) Banking Sector - Cross-Border Activity Of the banking sector's US$1.44 trillion of cross-border liabilities, 89.6%% or US$1.291 trillion was used to book positions with Developed Countries (primarily North America and Europe), with the remaining distributed mainly to Developing Latin America & Caribbean (primarily South America) and Offshore Centres. This highlights the role of the Cayman Islands' banking sector as a financial intermediary to raise funds in the international market to provide liquidity and capital to Parent Groups and credit to private sector entities and households. Cross-Border Assets and Liabilites by Region - Dec . 2014 (US$ Billions) Assets 1,291 1,212 1 Developed Countries 3 Developing Europe 39 66 Offshore Centres Liabilities 78 64 3 Developing Latin America & Caribbean 13 Developing Africa & Middle East 12 63 23 Developing Unallocated Asia & Pacific Own Issues of Securities Of the US$1.44 and US$1.49 trillion in assets and liabilities as at end-2014, 71% or US$1.017 trillion and 63% or US$912 billion are interbank assets and liabilities, respectively. Of these interbank positions, 95% or US$972 billion and 71% or US$649 billion were intrabank placements booked cross-border with onshore Parent Group Banks. Cross-Border Interbank and Intrabank Positions 1,600 1,443 1,423 1,400 US$ Billions 1,200 1,000 1,017 972 912 800 649 Total 600 Interbank 400 Intrabank 200 Cross-Border Assets Cross-Border Liabilities Dec 2014 14 Banking Sector - Domestic Activity At end-2014, the banking sector booked US$25 billion in assets and held US$50 billion in deposit liabilities as interbank and intrabank placements with other Cayman Islands licensed banks and other non-financial corporations, which are considered residents of the domestic economy. . Category A retail and non-retail banks booked $5 billion in assets and US$11 billion in liabilities, while category B banks booked US$20 billion in assets and US$39 billion in liabilities. These positions were primarily by banks from South America and Developed Countries (North America and Europe). The high level of domestic assets booked by South American banks are intrabank bookings and credit with other Cayman Islands licensed entities, operating in South America, providing credit to the South American economy. This is in contrast to the smaller amount of assets booked by banks from Developed Countries whose main activity is to provide liquidity to their non-resident Parent Groups operating in the global economy in international markets. Total Domestic Assets & Liabilities in Foreign Currency by Region 2014 (Millions U$D) 100% 307 3,685 156 978 90% 80% 70% 60% 16,434 17,277 Non-reporting developing Africa and Middle East Offshore centres 50% Latin America and Caribbean 40% Developed countries 30% 20% 10% 6,402 29,886 Assets Liabilities 0% 15 Category A - Retail Banks - Balance Sheet Profile Over the 2011-2014 period, the retail banking sector’s total assets and liabilities averaged $13.827 billion with a year-on-year increase from 2011 to 2013, but declined by US$1.865 billion to US$12.936 billion at end-year 2014, primarily as a result of a reduction in the number of retail banks. The sector’s asset distribution is indicative of banks conducting traditional retail banking services, while diversifying their exposures and concentration. At end-2014, the banks' funding was fully from core retail deposits, with no reliance on wholesale funding. Shareholders Equity showed constant positive performance, despite domestic macroeconomic challenges such as lingering high rates of unemployment and low interest rate margins. Category A Banks- Retail - Calender Year (Millions U$D) ASSETS 2011 2012 2013 2014 Cash Items 4,355 4,356 5,082 3,376 Financial Assets at Fair Value 9 0 14 12 Investments - Held-to-Maturity 123 205 200 253 Investments - Available-for-sale 924 1,033 865 1,307 Other Investments 105 101 100 89 7,689 8,072 8,209 7,588 46 57 46 62 7,642 8,014 8,152 7,526 Loans and Advances Less Loan Loss Provsions Net Loans Other Assets TOTAL ASSETS LIABILITIES Deposits 454 426 384 374 13,616 14,135 14,801 12,936 2011 2012 2013 2014 11,916 12,478 13,144 11,369 Repurchase Agreements (REPOS) 0 0 0 0 Hybrid Debt and Subordinated Debt 0 0 0 0 Other Notes, Bonds and Commercial Paper Other Borrowings Creditors and Other Liabilities Other Loss Provisions TOTAL LIABILITIES TOTAL SHAREHOLDERS EQUITY 0 0 0 0 14 6 16 0 179 104 106 34 22 18 31 35 12,131 12,606 13,299 11,440 1,485 TOTAL LIABILITIES AND SHAREHOLDERS EQUITY 16 13,616 1,529 14,135 1,501 14,801 1,496 12,936 Category A - Retail Banks - Assets Distribution At end-2014, of total loans of US$7.58 billion, 51% or US$3.86 billion and 49% or US$3.72 billion were resident and non-residents loans, respectively, reflecting a large non-resident portfolio for domestic retail banks. Lending to resident households as residential mortgages and consumer loans represented the largest exposure to the domestic private sector market at 56% or US$2.15 billion of total resident loans at end-2014, which reflected an increase of 29% or US$458 million from US$1.69 billion in 2013. The Herfindahl-Hirschman Index (HHI), used to measure concentration in private sector lending increased by 14% from 510 to 580 at end-2014, of which the household sector accounted for 10%. With the reduction in the number of retail banks, the market share of each bank's exposure to the household sector increased and ranged from 3% to 12%, but still depicts an un-concentrated market within the banks' market share and signals a healthy market environment. Asset Distribution - Retail Banks 120.0% 100.0% 3.3% 3.0% 2.6% 2.9% 56.3% 56.9% 55.3% 58.4% 80.0% Other Assets Loans and Advances 60.0% Other Investments 40.0% 20.0% Debt Securities 7.3% 7.7% 8.7% 31.9% 30.7% 34.2% 2011 2012 2013 Cash Items 12.1% 26.0% 0.0% 2014 The retail banking sector's largest exposure at end-2014 was 77% or US$2.89 billion of non-resident loans to various non-financial corporations in the South American market, a decrease from 82% or US$3.5 billion in 2013. 2013 Retail Banks (Millions U$D) 2014 NonResident Resident LOANS AND ADVANCES Resident NonResident 618 15 591 66 77 0 89 43 0 90 0 41 21 0 16 0 0 0 0 0 Non-Financial Corporations - Commercial private sector 744 3,555 799 2,891 Non-Financial Corporations - Commercial Mortgages 328 236 82 217 25 114 71 104 324 26 355 66 1,638 225 1,799 228 Sovereigns & Central Banks Non Central Government Public Sector Entities (PSEs) Group Bank - Parent, Branch, Subsidiary or Affiliate Group non-bank entities Other Banks Other Financial Corporations - Financial intermediaries Retail Lending/Consumer Loans - Households Residential Mortgages - Households Other loans and advances TOTAL 17 121 52 64 66 3,896 4,313 3,866 3,722 Category A - Retail Banks - Funding Distribution Over the 2011-2014 period, customer deposit funding for retail banks averaged 99.9%, as would be expected based on their core business. The retail banks' resident deposits consisted mainly of deposits from Households of US$1.8 billion or 30%, Non-Financial Corporations (private sector) of US$1.7 billion or 29% and Other Financial Corporations (namely investment funds) of US$1.27 billion or 21% at end-2014. In the non-resident sector, the sectors' funding was primarily from Group Banks and has increased by 10%, from 55% or US$3.119 billion in 2013 to 65% or $3.356 billion in 2014, while deposits from Non-Financial Corporations decreased by 8% from 28% or US$1.574 billion in 2013 to 20% or US$1.025 billion in 2014. Funding - Retail Banks 120.00% 100.00% 80.00% Deposits 60.00% Other Borrowings (loans, overdrafts, etc.) 40.00% 20.00% 0.00% 2011 2012 2013 2014 Overall, funding declined by US$1.7 billion from US$13.14 billion in 2013 to US$11.37 billion at end-2014, due mainly to a reduction in the number of retail banks, which was offset by a reduction in placements of CDs of $1.6 billion within the Parent Groups sector, while the banking book was sold to another retail bank. 2013 Retail Banks (Millions U$D) 2014 Resident NonResident Resident NonResident Sovereign 565 20 553 32 Non-Central Government Public Sector Entities (PSEs) 124 15 156 15 DEPOSITS Multilateral Development Banks (MDBs) 0 0 0 0 Group Bank - Parent, Branch, Subsidiary or Affiliate 39 3,119 28 3,356 Group non-bank entities 98 0 56 0 Other Banks 150 1 243 2 Non-Financial Corporations - Commercial private sector 2,115 1,574 1,789 1,025 Other Financial Corporations - Financial intermediaries 2,368 212 1,271 155 Individuals - Households 1,781 410 1,870 537 194 360 210 70 7,434 5,711 6,176 5,192 Other deposits TOTAL 18 Category A - Non-Retail Banks - Balance Sheet Profile .The category A non-retail banking sector assets and liabilities averaged $8.663 billion with a year-on-year decline from 2011 to 2013, due primarily to a reduction in deposits from European banks licensed in this category, and the transition of a category A non-retail bank to a category B licence. Like the overall banking sector, the non-retail sector is showing gradual improvements, with an increase in total assets of $843 million from $7.705 billion in 2013 to $8.548 billion at end-2014. In contrast to the retail banking sector, the category A non-retail banks' balance sheet profile depicts an average of 70% in Cash Items and 25% in Loans which is indicative of the banks' business function of investment banking services and providing liquidity to their Parent Groups. Category A Banks- Retail - Calender Year (Millions U$D) ASSETS 2011 2012 2013 2014 Cash Items 7,153 6,535 5,105 5,282 0 0 18 38 Investments - Held-to-Maturity 55 0 159 135 Investments -Available-for-sale 53 68 21 50 5 5 16 4 1,884 1,901 2,087 2,673 Financial Assets at Fair Value Other Investments Loans and Advances Less Loan Loss Provsions 0 0 1 0 1,884 1,901 2,086 2,673 382 36 299 366 9,532 8,870 7,705 8,548 LIABILITIES 2011 2012 2013 2014 Deposits 7,778 7,163 5,933 6,666 Repurchase Agreements (REPOS) 0 0 0 0 Hybrid Debt and Subordinated Debt 0 0 0 0 Other Notes, Bonds and Commercial Paper 0 0 0 0 Other Borrowings 252 201 288 321 Creditors and Other Liabilities 499 503 463 538 0 0 0 2 8,529 7,867 6,684 7,527 Net Loans Other Assets TOTAL ASSETS Other Loss Provisions TOTAL LIABILITIES TOTAL SHAREHOLDERS EQUITY 1,003 TOTAL LIABILITIES AND SHAREHOLDERS EQUITY 19 9,532 1,003 8,870 1,021 7,705 1,021 8,548 Category A Banks - Non-Retail Banks - Asset Distribution As at end-2014, assets of US$8.5 billion were held by the non-retail banking sector, of which Cash Items accounted for 62% or US$5.28 billion and Loans accounted for 31% or US$2.67 billion. 93% or US$4.9 billion of the US$5.28 billion in Cash Items was placed with non-resident Parent Groups and 82% or $2.2 billion of the US$2.67 billion in loans was with non-residents. Of the $2.2 billion in non-resident loans, 53% or US$1.16 billion was booked with households as Retail and Consumer Loans in the US market and 43% or US$952 million was booked with non-resident non-financial corporations in a number of South American and Caribbean countries, highlighting the role of these banks in the international financial markets. Asset Distribution -Non Retail Banks 8,000 7,000 6,000 Millions U$D 5,000 Cash Items 4,000 Debt Securities Other Investments 3,000 Loans and Advances Other Assets 2,000 1,000 0 2011 2012 2013 2014 Year 2013 Non-Retail Banks (Millions U$D) 2014 Resident NonResident Resident NonResident Cash 0 0 0 0 Gold and bullion 0 0 0 0 Cash items in process of collection 0 0 0 0 56 5,049 18 5,264 38 4,716 6 4,899 0 0 0 0 18 333 12 363 CASH ITEMS Balances & CD's : o/w Group Bank - Parent, Branch, Subsidiary or Affiliate o/w Group non-bank entities o/w Other Banks Due from financial institutions TOTAL 0 0 0 2 56 5,049 18 5,264 2013 Non-Retail Banks (Millions U$D) 2014 Sovereigns & Central Banks 0 NonResident 0 0 NonResident 0 Non Central Government Public Sector Entities (PSEs) 0 0 0 0 Multilateral Development Banks (MDBs) 0 0 0 0 Group Bank - Parent, Branch, Subsidiary or Affiliate 0 0 0 0 154 4 146 0 0 0 0 0 29 586 13 952 Resident LOANS AND ADVANCES Group non-bank entities Other Banks Non-Financial Corporations - Commercial private sector Resident 0 0 0 0 160 27 277 54 Retail Lending/Consumer Loans - Households 0 1,083 0 1,175 Residential Mortgages - Households 4 1 24 4 Other loans and advances 0 40 1 28 347 1,741 461 2,213 Non-Financial Corporations - Commercial Mortgages Other Financial Corporations - Financial intermediaries TOTAL 20 Category A - Non-Retail Banks - Funding Distribution Over the 2011-2014 period, an average of 96% of the funding for the non-retail banking sector was from core retail deposits, while 4% was from other borrowings. Resident OFIs provided 93% or US$4.234 billion of the $4.54 billion in deposits, while non-resident OFIs provided 48% or US$1.03 billion of the US$2.12 billion, which is indicative of the role the banks in this sector play in the domestic and international investment business sector. Funding from non-resident OFIs decreased by 17% from US$1.205 billion in 2013 to US$1.035 billion in 2014, while funding from Non-Financial Corporations showed a 116% increase from US$341 million to US$742 million in 2014. Funding - Non-Retail Banks Deposits Other Borrowings (loans, overdrafts, etc.) 97.27% 96.87% 3.13% 2011 95.41% 95.37% 4.63% 2.73% 2012 4.59% 2013 2014 Overall, of the US$6.6 billion in deposits at end-2014, Other Financial Corporations (investment fund business) account for US$4.2 billion from resident entities and US$1.03 billion from non-resident entities, accounting for 80% of the total non-retail banks deposit funding. This reflected a high rate of interconnectedness to the resident investment fund business sector. 2013 Non-Retail Banks (Millions U$D) 2014 NonResident Resident 0 0 DEPOSITS Sovereign NonResident 0 0 Resident Non-Central Government Public Sector Entities (PSEs) 0 0 0 0 Multilateral Development Banks (MDBs) 0 0 0 0 Group Bank - Parent, Branch, Subsidiary or Affiliate 0 0 14 1 Group non-bank entities 2 2 0 0 Other Banks 2 0 3 13 Non-Financial Corporations - Commercial private sector Other Financial Corporations - Financial intermediaries Individuals - Households Other deposits TOTAL 21 180 341 258 742 3,908 1,205 4,234 1,035 28 232 31 301 0 33 0 32 4,120 1,813 4,540 2,124 Retail Banking Sector - Earnings & Profitability Over the period under review, the retail banks remained profitable with an average of US$122 million in net income retained in spite of the large sectoral exposure to the household sector in residential mortgages and consumer loans, which are impacted by higher than normal unemployment rates and a slowdown in economic activity. Net income earned peaked to US$145 million in 2012 from US$113 million dollars in 2011 due to a reduction in operating expenses. The net income in the retail banking sector has experienced marginal year-onyear decreases from 2012 to 2014 due to increased impairment in the loan quality leading to a higher rate of loan write-offs, and a reduction in the number of banks from 7 to 6 banks. Retail Banks Income (Millions U$D) Net Interest Income Net Non-Interest Income Provisions For Credit Losses /Recoveries Other Income Trading Income (Gain/Loss on Financial Instruments) Operating Income Income Before Taxes & Dividends Net Income Retained 2011 2012 2013 2014 268 89 13 7 38 390 173 113 271 81 28 0 34 359 152 145 277 84 31 2 34 367 136 120 274 81 29 1 24 351 130 112 Earnings & Profitability (millions U$D) 450 Net Interest Income 400 350 Net Non-Interest Income 300 Provisions For Credit Losses /Recoveries 250 Other Income 200 Trading Income (Gain/Loss on Financial Instruments) 150 Operating Income 100 Income Before Taxes & Dividends 50 Net Income Retained 0 2011 2012 2013 2014 22 Financial Soundness Indicators - Retail Banking Sector Capital Adequacy Ratios (CAR) The capital adequacy ratio for the six retail banks remains above the 8% threshold prescribed by the Basel Capital Requirements, the 10% requirement of the Banks and Trust Companies Law (2013 Revision), and the regulatory requirements of 12% for subsidiaries and 15% for privates and affiliates. Asset Quality Over the 2011-2014 period, the banks experienced deterioration in asset quality, primarily in the household sector, due to a slowdown in the economy and increased unemployment, which resulted in increased loan write-offs and a reduction in CAR to 17.6% at end-2014. NPLs declined from 3.8% in 2013 to 2.7% at end-2014, reflecting improved asset quality as seen by the reduction in provisioning for NPL's from 13.8% in 2013 to 9.8% at end-2014, due in part to loan write-offs and slower asset growth in loans. Earnings and Profitability Banks continue to remain profitable with stable operating income levels and marginal reductions in net income retained since 2012, as seen by a reduction in RoE from 9.3% in 2012 to 8.4% at end-2014. Liquidity The sectors' level of liquidity remains high by industry norms though decreasing to 24.2% for liquid assets to total assets and 45.2% for liquid assets to short-term liabilities as at end-2014, respectively, caused mainly by a decrease in resident deposit funding from the OFIs sector and the effects of a reduction in the number of banks in this sector. 23 Domestic Retail Banks - Core Financial Soundness Indicators Indicator (%) Capital Adequacy Regulatory Capital to risk-weighted assets Regulatory Tier 1 Capital to risk-weighted assets Regulatory Tier II Capital to risk-weighted assets Total Regulatory Capital to -Total assets Nonperforming loans (net of provisions) to capital 2011 2012 2013 2014 22.2 21.0 1.2 7.8 13.3 19.8 18.7 1.1 10.3 12.7 18.3 17.5 0.8 9.6 13.8 17.6 16.0 1.6 10.7 9.8 3.0 3.4 3.8 2.7 Earnings and Profitability Return on equity Return on assets Interest margin to gross income Noninterest expenses to gross income 9.0 0.8 70.4 57.1 9.3 1.10 70.1 53.6 8.6 0.96 69.6 58.0 8.3 0.98 71.6 58.3 Liquidity Liquid assets (core) to total assets **** Liquid assets (core) to short-term liabilities *** 24.9 34.7 33.0 59.1 35.5 76.5 24.2 45.2 Indicator (%) 2011 2012 Capital to assets Trading income to gross income Personnel expenses to noninterest expenses Customer deposits to total (noninterbank) Gross Loans 8.8 8.5 50.3 174.9 27 6.0 11.3 8.7 31.8 125.6 26.1 6.3 2013 11.0 8.5 50.8 141.7 2014 11.8 6.4 49.0 102.6 28.4 9.6 27 5.1 Asset Quality Nonperforming loans to total Gross Loans ***Liquid assets (core) are defined as Cash Items and Short-Term Liabilities are Deposits up to 90 days Domestic Retail Banks - Encouraged Financial Soundness Indicators Residential real estate loans to Total Loans Commercial real estate loans to Total Loans Retail Banks - Nonperforming Loans 24 Over the 2011-2014 period, NPLs ranged from 3.0% in 2011, with a record high of 3.8% in 2013 to 2.7% at end2014, which though above the pre-crisis range of 1.9% in 2008 is still relatively low when compared regionally and internationally. The increase in NPLs post-global financial crisis was due mainly to an increase in unemployment, at 10.5% in 2012, 9.4% in 2013 and 7.9% at end-2014 (for Caymanians, the majority of the market) and a slowdown in economic activity with gross domestic product (GDP) slow growth rate of 1.2% to 1.4% for 2012 and 2013, respectively. The decrease in NPLs at end-2014 is due to a number of factors, namely, the improvement in asset quality by loan-write-offs over this period, a decrease in the unemployment rate, an increase in economic activity as seen by a 2.1% increase in GDP for 2014 and the reduction in the number of retail banks in the market. A review of the decomposition of NPLs show that the majority of the NPL's were concentrated in the domestic Household Sector in residential mortgages and retail/consumer loans and the Non-Financial Sector - Commercial Private Sector, as expected, as these are two main sectors of loan concentration for the retail banks. NPL by Counterparty Sector for Retail Banks 2011-2014 (%) 100% Other loans and Advances 90% 80% Residential Mortgageshouseholds 70% Retail Lending /Consumer LoansHouseholds 60% 50% Other Financial CorporationsSecurities Firms 40% 30% Other Financial CorporationsFinancial Intermediaries & Auxiliaries Non-Financial Corporations Commercial Mortgages 20% 10% 2011 2012 2013 Loss Doubtful Substandard Loss Doubtful Substandard Loss Doubtful Substandard Loss Doubtful Substandard 0% Non-Financial Corporations Industrial & commercial private sector Other banks 2014 Domestic Retail Banks - Sectoral Distribution of Loans by Resident Loans to Total Resident Gross Loans (percentages of total) Indicator (%) Central Banks -Resident to Total Resident Loans General Government - Resident to Total Resident Loans 2013 0.0 2014 0.0 15.4 15.1 Deposit Takers (Banks) -Resident to Total Resident Loans 0.6 0.3 Other Financial Corporations -Resident to Total Resident Loans 0.5 0.5 24.1 25.4 Non-Financial Corporations -Resident to Total Resident Loans of which: Non-Financial Corporations - Commercial Mortgages - Resident Other Domestic Sectors (Households) - Resident to Total Resident Loans of which: Households - Consumer Loans - Resident of which: Households - Residential Mortgages - Resident Total 13.1 4.2 59.4 58.7 9.0 10.1 50.4 48.6 100 25 100