Passing it on
DTIS continue to hike rates as the cost of money rises
WITH central banks continuing to hike their policy rates to address inflation, more deposit-taking institutions (DTIS) have decided to increase their borrowing rates on existing products or variable rate instruments.
Apart from fees generally associated with transactions, DTIS make their money from earning interest income by lending money and pay an interest expense which is related to their cost of funding, which tends to be deposits. The rise in the policy rate has seen an associated increase in the cost of funding for DTIS. As a result, nearly every DTI has increased the interest rates on their variable rate loans in the last six months. Firstcaribbean International Bank (Jamaica) was the latest DTI to increase the interest rate on variable rate loans for its small business loans and mortgages, along with personal and small and medium-sized enterprise (SME) clients, by 50 basis points on November 1.
“In response to the rising interest rate environment, both locally and globally, variable rate loans would naturally increase based on increases in benchmarks — whether it be local Treasury Bill rates or secured overnight financing rate. As Citi Jamaica operates under a corporate banking model, any changes to our variable rate loans would not be specific to a defined segment of our customer base per se, but would be relevant generally speaking across our corporate client base,” said Citibank NA
– Jamaica country officer and corporate banking head Eva Lewis in response to the Jamaica Observer.
Apart from the associated increase in borrowing from DTIS, companies seeking financing in the capital markets have had to offer higher rates to incentivise investors to subscribe to their offers. One such example was the Productive Business Solutions Limited Perpetual Cumulative Redeemable which was oversubscribed with the Jamaican-dollar offer at 10.50 per cent and the United States-dollar offer at 9.25 per cent. Even Dolla’s secured corporate notes have a floor of 10.50 and 11.75 per cent for their respective tranches. A chief financial officer noted that refinancing debt is quite expensive now, regardless of any company’s financial standing.
“Given the inflationary environment globally, and particularly in the US — Jamaica’s major trading partner — increases in the policy rate by the Bank of Jamaica are an expected and rational response to ensure monetary conditions continue to reflect positive real interest rates,” Lewis added on the rising policy rate in Jamaica.
She noted that Citibank Ja has not increased other banking fees for its customers this year. This comes as the United States Federal Reserve hiked its feds rate by a third-consecutive 75 basis points on Wednesday to 3-3.25 per cent. The Bank of Jamaica’s (BOJ) policy rate decision is to be announced next week Thursday. The BOJ’S policy rate currently stands at 6.00 per cent compared to the 0.50 per cent a year ago.
Citibank Jamaica’s total assets stood at $25.47 billion, including $4.27 billion in loans and advances. Total liabilities stood at $21.39 billion with $18.28 billion in deposits. Citibank Jamaica earned $323.59 million in net profit last year when it had a total asset base of $28.96 billion and $4 billion in loans.
“Jamaica, compared to many of its regional partners, has demonstrated resilience in its response to the pandemic and continues to demonstrate strong fiscal discipline with respect to its return to debt-to-gdp targets temporarily interrupted by the pandemic. Tourism has shown a healthy rebound, the BPO sector continues to grow, and remittances remain strong as does FDI [foreign direct investment].
With comparably minimal refinancing risk, access to low-cost multilateral debt coupled with strong revenue performance, economic diversification, and comprehensive risk-mitigation strategies, the expectation is that Jamaica will be in a strong position to achieve its growth and deleveraging strategies over the medium term,” Lewis closed.