THE Bank of Jamaica (BOJ) this week published its annual report for the year 2021, a review which shows that local deposit-takers found US dollar denominated securities and assets increasingly attractive. Holdings of USD securities increased by double digits during the year.

Licensees, the central bank outlined, bolstered holdings in foreign government and GOJ security holdings while storing excess liquidity in low-risk assets.

The securities holdings of deposit0taking institutions (DTIs) expanded sharply by 16.8 per cent ($79.0 billion) for 2021, relative to growth of 10.7 per cent ($45.3 billion) for 2020.

The BOJ outlined that the increase in investments reflected a larger take-up of foreign government securities ($37.5 billion) and GOJ securities ($31.8 billion) as licensees stored excess liquidity from deposit inflows in low-risk assets.

The central bank noted, “This strategy reflected the ongoing negative impact of the pandemic as well as the absence of higher yielding non-government issued foreign currency securities for investment within their respective risk appetites.”

Some licensees also expanded their reach into overseas markets. Consequently, loans to overseas residents increased by 36.7 per cent ($30.1 billion) for 2021 as banks provided funding to non-resident individuals, businesses and financial institutions.

Meanwhile, securities acquired under reverse repurchase agreements increased during the period ($5.4 billion) as licensees sought to bolster profits by extending excess funding to other financial institutions.

Large cash holdings as loans demand shrunk

The BOJ noted that, during 2021, licensees continued to record large holdings of cash and bank balances, as some institutions experienced continued declines in corporate loan demand.

DTIs also maintained higher liquid balances to meet future deposit withdrawals and adjusted their business models to better manage emerging credit risk exposures.

During 2020, total gross loans for the DTI sector increased by 10.9 per cent ($101.1 billion) compared with growth of 17.3 per cent ($137.4 billion) at end 2019.

In 2021 cash and bank balances increased by 19.8 per cent ($73.7 billion) compared with growth of 23.5 per cent ($70.7 billion) in 2020.

The BOJ notes that the growth in 2021 reflected higher current account and cash reserve balances at BOJ ($38.2 billion) and increased placements with other banks ($24.1 billion).

The central bank said that this occurred as DTIs stored excess flows from customer deposits in interest-bearing accounts eligible as liquid assets and increased cash reserves held against the higher levels of prescribed deposit liabilities.

Cash and bank balances as a share of total assets grew to 19.4 per cent at end 2021 from 18.4 per cent at end 2020.

Credit supply cut

The BOJ said loan growth was constrained by a reduction in credit supply and lower demand for business credit.

For 2021, loans and advances net of provisions for International Financial Reporting Standards (IFRS) losses grew by 10.2 per cent ($102.5 billion), compared to the previous year’s growth of 9.5 per cent ($87.4 billion).

The faster growth in net loans was attributable to a reduction in IFRS provisions, as the gross stock of loans grew by 9.6 per cent ($99.3 billion) for the year, representing the second-consecutive year of a slowdown owing to the impact of the pandemic.

Reduced provisions

The BOJ stated that the reduction in provisions occurred as some licensees wrote back a portion of their IFRS provisions to profits following a more optimistic outlook with regard to the impact of the pandemic on the local economy.

The overall slowdown in gross loans reflected a reduction in credit supply by some lenders as a precautionary measure against the potential impact of the heightened credit risk environment on DTIs’ balance sheets.

As a result, the BOJ stated, growth in corporate loans slowed markedly to 4.5 per cent ($17.6 billion) from 12.8 per cent ($44.8 billion) in 2020. In comparison, growth in personal loans improved to 9.9 per cent ($52.2 billion) from 8.6 per cent ($41.9 billion) in 2020.3

Corporate reduction

The reduction in loan disbursements to key corporate sectors during 2021 followed increased lending during the preceding year as some businesses (mainly in the tourism, professional services, utilities, and distribution sectors) obtained financing.