National Bank Ltd, a Jamaican commercial bank with an island-wide branch network, had assets of Six hundred million United States dollars (US$600,000,000) as at September 30, 2020, the end of its financial year. Seventy per cent (70%) of this amount was invested in credit products comprising variable interest rate real estate mortgage loans with tenures of up to 25 years, demand loans with variable interest rates and tenures ranging from one month to seven years, add-on loans with tenures of one month to three years, overdrafts and credit cards loans.

About twenty per cent (20%) of NBC’s credit portfolio is invested in credit cards held by employees in the private and public sectors and ten per cent (10%) is invested in loans to private sector public passenger vehicles operators, including tour companies. Another twenty per cent (20%) of the debt portfolio is taken by loans made to the accommodation/recreation sector comprising hotels, restaurants, night clubs, bars and movie theatres. Twenty per cent (20%) of the credit portfolio comprise residential home owners’ mortgage loans with about a quarter of these mortgage loans held as second properties, mainly apartments that are normally rented short-term through the Airbnb, Incorporated network.  The income derived from these second homes is used to service the related loans. The balance of the loan portfolio is made up of loans (including overdrafts) to medium and large businesses comprising manufacturing, retailing/distribution, services, telecommunications and agriculture.

The very infectious coronavirus, Covid19, pandemic that has hit the world, including Jamaica, has as at June 30, 2021 seen this country recorded over fifty thousand cases of infections with over one thousand deaths.

 Since March 2020, the date of the first infection in the island, the government has instituted several measures to stem the spread of the virus. These include island-wide curfews starting in the early evenings and finishing at 6am the following day for most of 2020. For 2021, after an escalation in the spread of the virus, the curfew hours were 8pm until 5 am the following day up to June 30, 2021. Beginning July 2021, the curfew hours were adjusted to 11pm to 5 am the following day.

Although the measures intended to curb the spread of the virus were relaxed somewhat, the government has also requested that workers who can work from home should be allowed to continue doing so.  However, many businesses, including the entertainment sector that were mandated to curtailed their hours of operations have been allowed to open now, subject to the curfew hours. So bars and many quick service restaurants that had either closed or drastically scaled back their operations for either lack of customers or out of fear for their employees contracting or spreading the virus are now adjusting their opening hours to times as accommodated by the curfew hours. Public passenger vehicles are instructed to still maintain their reduced passenger load per trip, while some larger businesses from all sectors have maintained their reduced production time with accompanying staff lay-offs. Educational institutions at all levels have since ceased face to face teaching, except for primary and high schools which have been allowed face to face classes only for students with imminent examinations. A large portion of the population is still staying home either through the government mandated lockdowns, work from home, temporary joblessness, or out of general fear of contracting the virus.

Based on the above, the bank’s projection for their financial year 2020/2021 is for an annual decline of ten per cent (10%) per annum in net interest revenue (interest revenue after accounting for interest paid to depositors) with the greater part of this decline expected to take place evenly in the last six months of its financial year. The decline targets for the first six months ended March 31, 2021 were not met as the bank saw a greater decline than projected. The original projected decline was based on the bank believing that a vaccine would be found and that this would be readily available to the Jamaica population. While vaccines were found, Jamaica has been unable to secure sufficient quantities to vaccinate a large enough percentage of the population to allow the country to return to pre-Covid19 normal.

Projections by the bank’s Board of Directors since early April 2021 is that this pandemic and general business malaise is expected to continue until at least December 31, 2021. Some scientists are also predicting that the island could also be hit by another wave of escalation in the virus as the present relaxed measures will be abused by many people and in addition there is a more contagious strain of the virus, the Delta variant, which is now spreading in several countries and likely to affect Jamaica in the near future.

 

1. As a Senior Credit Analyst at the bank’s credit underwriting centre, you have been requested to submit a short analysis of the problems that you foresee facing the bank as it relates to its credit portfolio. You are expected to surface at least four problems and show why you expect these problems to occur.  Your analysis should be based on your treating any assumptions in the case as accepted.       

 

2. Based on your analysis above, what remedies will you propose and what effects do you expect these to have on the bank’s loan portfolio? At least four supported remedies are expected to be proposed.