‘Game change’

The sale of CIBC FirstCaribbean International Bank to the Colombia-based Gilinski Group could give the bank the room to end the practice of terminating correspondent banking relationships –  finance and banking expert Jeremy Stephen has predicted.

Stephen, a University of the West Indies lecturer in banking and finance, told Barbados TODAY he expected that the practice, known as de-risking, could present an opportunity for the bank to take on greater risk in attracting accounts that the once Canadian-owned bank would have shunned.

Derisking refers to the practice of financial institutions terminating or restricting business relationships with clients or categories of clients through US dollar banks abroad to avoid, rather than manage the risk of possible money laundering or terrorism financing by adhering to stringent laws passed in the US and other industrialised nations.

On Friday, the Toronto-based Canadian Imperial Bank of Commerce (CIBC) announced that it has agreed to sell the majority of its shares in the Barbados-headquartered CIBC FirstCaribbean to GNB Financial Group Ltd, which is wholly owned by the Europe-based Starmites Corporation S.ar.L, the financial holding company of the Gilinski Group.

The deal is said to be worth approximately $1.594 billion (US$797 million).

CIBC is expected to receive about $400 million (US$200 million) in cash and provide secured financing for the rest. The transaction should close some time in 2020.

Sharing his analysis on the development on Friday, Stephen told Barbados TODAY the acquisition came as no surprise since it was known for some time that CIBC wanted to reduce its exposure to the region, especially following the recession a decade ago.

He said he expected a “range” of developments “depending on how the new beneficial owners are or who is going to be in senior management”.

He said: “They may handle this as a practical manner or be aggressive and mash some corns locally and internationally with respect to correspondent banks. Or they may continue to play it safe and FirstCaribbean continues to be in the same position it has been in over the last ten years in particular with high non-performing loans and the same threat of de-risking hanging over its head.”

The prominent economist also pointed to CIBC’s failed attempt last year to raise some $480 million (US$240 million) in an initial public offering of about 9.6 million shares in the US for the FirstCaribbean subsidiary due to what the bank said at the time was “market conditions”.

Stephen said following some level of research into the Gilinski Group, one could expect some “radicalisation” of sorts.

He explained: “Radicalise is a strong word, but they seem like they are very forward-thinking when it comes to banking in a high-risk region.

“So on that front alone… it just remains to be seen what the intent is for this particular acquisition.”

The finance lecturer also speculated that the Gilinski Group could “build up the bank and possibly look for a sale because the company doesn’t have a track record for holding on to assets significantly over the long-term”.

He added: “You could probably expect a sale of that exposure, if I go by what they have done historically, within a decade, but they have had a lot of success stories in Colombia for sure.”

Stephen pointed out that the group was taking on a lot of the risk with the over 66 per cent share purchase.

Giving a further analysis of the development, which comes at a time when Canadian banks have a high level of compliance burden, Stephen said this might no longer be necessary with the takeover.

Depending on which of the subsidiaries of the Gilinski Group that FirstCaribbean International Bank operates under then the regulatory standards and compliance would shift from Canada to the jurisdiction in which the entity is registered, he suggested.

Stephen said: “Wherever the head office is, in Colombia or Europe, wouldn’t have the same burden in terms of reporting standards and risk measures that the Canadian would have to take on.

“So maybe the bank would be willing to take on a bit more risk.”

He also contemplated that the bank could become “a bit more aggressive in terms of cost-cutting because that seems to be the history of those guys as well, to make the bank very lean and get rid of underperforming assets and provide a lot of value to customers”.

CIBC FirstCaribbean is one of the largest regionally listed financial services institutions in the English and Dutch-speaking Caribbean, operating in 16 countries and employing more than 2,700 people.

The financial institution, which also has a representative office in Hong Kong providing business development, relationship management and fund administration, has US$11.5 billion in assets and market capitalization of US$2.1 billion, as at July 31, 2019.

Making it clear that he did not study the Gilinski Group long enough, the trained business and financial consultant outlined to Barbados TODAY how he saw the deal resulting in a drive to create a leaner bank.

Stephen said: “There may be an efficiency exercise.

“You may see more expertise brought in at middle management level, there may be less need for tellers and more use of technology coming into the market because that drops costs over time.

“But of course then, that is going to become a labour relations issue given that in the Caribbean we pretty much believe that labour intensity is something that is supposed to be protected.”

On the other hand, the economist said it would be interesting if a decision was taken to “strategically shift” a lot of the headquarters resources regarding its risk management resources back to the Caribbean.

“That would allow them to take a lot more risk,” he said.

With this development, Stephen suggested, he would expect the issue of de-risking to be thrust back into the spotlight.

He said: “There is obviously the issue of de-risking because… the bank will still require a huge amount of resources from American correspondent banks.

“So it may very well temper the risk that these guys are going to take going forward.

“You may see in the medium-term some of the issue of de-risking starting to rear its head considering the change in beneficial ownership.

“But I definitely think they will take a lot more risk than the Canadians would.”
marlonmadden@barbadostoday.bb