Resilience and Growth in the Small States of the Pacific
Chapter

Chapter 18. Interest Rates, Bank Profitability, and Capital Adequacy in the South Pacific

Author(s):
Hoe Khor, Roger Kronenberg, and Patrizia Tumbarello
Published Date:
August 2016
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Author(s)
Matt Davies, John Vaught and Ezequiel Cabezon 

The structure of the banking sector in the South Pacific remained relatively stable over the last decade. The banking sector in most countries in the region is limited to about three to five commercial banks (Table 18.1), dominated by two large Australian-owned banks (ANZ and Westpac), either in the form of branches or wholly owned subsidiaries. Local banks generally hold low market shares. In recent years, however, a new regional player has emerged—Bank of the South Pacific, a Papua New Guinea bank, which has operations in three Pacific island countries. In July 2015 Westpac sold its banking operations in the Cook Islands, Samoa, the Solomon Islands, Tonga, and Vanuatu to the Bank of South Pacific. In addition, in 2012 BRED Bank, a French-owned bank with a previous presence in French Pacific jurisdictions, started operations in Fiji and Vanuatu.1

Table 18.1Structure of the Banking Sector in the South Pacific, 2001–14
2001200520092014
Number of Commercial BanksBroad Money as Percent of GDPNumber of Commercial BanksBroad Money as Percent of GDPNumber of Commercial BanksBroad Money as Percent of GDPNumber of Commercial BanksBroad Money as Percent of GDP
Fiji545560570680
Papua New Guinea632434453447
Samoa333436443444
Solomon Islands321329338443
Tonga337345343448
Vanuatu495399492473
Sources: IMF, International Financial Statistics database; and IMF staff estimates.
Sources: IMF, International Financial Statistics database; and IMF staff estimates.

This chapter provides comparative information on interest rate levels, profitability indicators, and capital adequacy among banks in the South Pacific. It was motivated by inquiries from central bank governors and ministers of finance at the Forum Economic Ministers’ Meeting in 2009 and the South Pacific Central Bank Governors’ Meetings in 2009 and 2011 on the cost of financial services to the public in the Pacific. Our analysis focuses on the six South Pacific countries with central banks—Fiji, Papua New Guinea, Samoa, the Solomon Islands, Tonga, and Vanuatu—and uses data they provided to compare their financial sectors to those of other countries and regions following Davies and Vaught (2009). Data availability and reliability are major constraints in cross-country analysis of this type. To ensure comparability, the analysis works wherever possible from disaggregated prudential data so that ratios can be derived on a similar basis.

The analysis draws regional conclusions where possible. However, banking experiences in the six countries have ranged broadly over the last decade, despite the similarity in their banking systems. Regional averages can obscure as much as inform, and so results for individual countries are the main focus of discussion.

The chapter begins with a brief review of the key determinants of interest rates in the Pacific, and a survey of interest rates across the region, which allows a broad cross-country analysis (though these rates are difficult to compare on a like-for-like basis). We then compare interest rates in the South Pacific and other regions using data derived from disaggregated prudential sources. The following sections examine bank profitability in the Pacific, the contribution of noninterest operations to bank profitability, and capital adequacy in the region. We close with a discussion on policy implications, regulatory responses, and the scope for regional coordination to support financial sector deepening.

Interest Rate Determinants

As is the case elsewhere, interest rates in the South Pacific reflect a wide range of factors. Interest rates are the centerpiece of commercial banks’ core business of financial intermediation; they are the key price in the financial sector, the foremost transmission mechanism of monetary policy, the main vehicle for matching supply and demand of funds and, normally, the key determinant of profitability.

Interest rate levels reflect banks’ perceptions of risk (country and creditor), market liquidity conditions, and the depth of financial markets, which affect the ability of banks to spread their risk, the cost of doing business, and the level of competition in the financial sector.

Economic risk is quite high in the Pacific. This is the case for many small, open economies. South Pacific economies have relatively low and volatile growth and are vulnerable to shocks on both the growth and inflation fronts. Inflation is a particularly important risk to the financial sector, and exchange rate risks are also significant. Although most countries in the South Pacific have fixed exchange rate regimes, their vulnerability to external shocks is high, which can rapidly impact market liquidity. Periodic devaluations are a risk to overseas investors, as happened in Fiji in 2009 and the Solomon Islands in 1997. There is also vulnerability to movements in cross-rates, such as abrupt movements of the Australian and U.S. dollars. Capital and exchange controls also add to economic risk.

Broader country risk is also perceived to be elevated in the Pacific. This can come from a number of sources, including political instability, the potential for social unrest and violence, and vulnerability to natural disasters. South Pacific countries are perceived to be vulnerable to all of these to a greater or lesser degree, which affects the way in which international banks price products in the region. As an illustration, Table 18.2 provides comparisons from one risk index to other countries.2 It shows that internationally the Pacific is perceived to have considerably higher country risk than emerging market countries, but somewhat lower risk than the countries listed in Table 18.2 in south Asia, the Caribbean, and Africa.

Table 18.2Perception of Country Risk
Export Transactions
Political RiskDirect Investments
Short TermMedium TermSpecial TransactionsCommercial Risk1War RiskTransfer Risk
Fiji555C44
Papua New Guinea353C34
Samoa264C26
Solomon Islands354B45
Tonga354C35
Vanuatu343B44
Australia111B11
New Zealand111B11
Brazil232C23
Indonesia232C23
Kazakhstan253B35
Malaysia121A22
Mexico132B23
Philippines132B33
Uruguay333A11
Pakistan575C66
Bangladesh363B54
Sri Lanka364B35
Grenada565C26
Guyana465C36
Barbados343B14
Jamaica275C26
The Bahamas333B13
Dominica465B26
St. Kitts and Nevis465C16
Seychelles576B27
Rwanda475C56
Tanzania364C35
Source: ONDD Belgian Export Credit Agency, 2013.Note: Values are on a seven-point scale, with 1 being the lowest risk.

A = lowest risk.

Source: ONDD Belgian Export Credit Agency, 2013.Note: Values are on a seven-point scale, with 1 being the lowest risk.

A = lowest risk.

The depth of financial markets and the cost of complying with prudential regulations also affect interest rate levels. The more financial products available, the easier it is for banks to diversify their risk. However, in the markets of the South Pacific, where products such as foreign exchange futures, corporate bonds, leasing, and collateralized interbank lending are not widely available, banks’ assets tend to be concentrated in lending products. The lack of high-quality, readily marketable instruments (that is, government and corporate bonds) also means that liquid assets are often placed in non- or low-earning deposit accounts or even held in cash, thereby requiring higher lending rates or spreads and increasing the costs of banking services. There are few opportunities for diversification.

Credit risk is a key determinant of interest rate levels. When setting interest rates, banks need to take into account the likelihood of interest and principal payments being received, and the ability to access and liquidate collateral in a timely manner when loans go bad. A number of factors that can moderate credit risk are not present in many South Pacific economies. Among them are secured transactions laws, collateral registries, rapid and reliable contract enforcement through the legal system, credit reporting bureaus, and bankruptcy laws. Moreover, there are inadequate markets in many jurisdictions to liquidate collateral in a timely manner or without significant loss.

Structure of the Banking Sector in the South Pacific, 2001–14

Interest Rates Compared With Other Regions

Headline Rates

The IMF’s International Financial Statistics database allows for broad international comparison. All IMF members report headline interest rates to the IMF on a regular basis, at varying levels of disaggregation. This allows comparisons between the Pacific and a broad range of other countries. However, the data are vulnerable to mistakes in reporting, and reported interest rates are not always directly comparable. The illustrative results that follow select relevant countries with available comparable data between 2003 and 2014.

Lending rates in the Pacific vary widely both in level and trend. Figure 18.1 shows interest rates in the Pacific as reported to the IMF, and the rates are, wherever possible, weighted average lending rates. The range is wide, with the Solomon Islands consistently having the highest rates, at above 12 percent, and Fiji the lowest, averaging 8 percent. Other countries consistently lie between these two extremes, with some declines in the lending rates since 2009 (for example, Fiji, Samoa, and the Solomon Islands).

Figure 18.1Lending Rates in the Pacific

(Percent)

Source: IMF, International Financial Statistics database.

On average, lending rates in the Pacific appear in line with comparator economies. Figure 18.2 shows that while rates are higher than those in Australia, they lie, on average, below countries in Africa and South Asia and are broadly in line with the Caribbean. African lending rates were broadly at the level of the Solomon Islands until 2011, while south Asian rates have climbed from broadly comparable with Samoa, Tonga, and Vanuatu at the start of the period covered in Table 18.2 (2003) to levels similar to those in the Solomon Islands in recent years. Lending rates in the Caribbean—in many ways the most pertinent comparison—are on average below the rates in the Solomon Islands, but in line with other Pacific island countries.

Figure 18.2Lending Rates for Selected Regions

(Percent)

Source: IMF, International Financial Statistics database.

Note: Africa shows data for Rwanda, Seychelles, and Tanzania; south Asia, data for Bangladesh, Pakistan, and Sri Lanka; Caribbean, data for The Bahamas, Barbados, Dominica, Grenada, Guyana, Jamaica, and St. Kitts and Nevis.

Spreads follow a similar pattern. Figures 18.3 and 18.4 show that average spreads—weighted average lending rates minus the standard savings deposit rate—in the South Pacific are in the mid-range of the Caribbean countries and somewhat higher than average spreads in south Asia. Interest rate spreads should be considered in the context of investment options. Limited investment options in the South Pacific require higher interest spreads to compensate for higher nonearning asset levels. In the South Pacific’s small financial sectors, large institutions, such as publicly owned provident funds that hold large lumpy deposits, can introduce distortions into the level of deposit rates.

Figure 18.3Interest Rate Spreads in the Caribbean and the Pacific

(Percent)

Source: IMF, International Financial Statistics database.

Figure 18.4Interest Rate Spreads in South Asia and the Pacific

(Percent)

Source: IMF, International Financial Statistics database.

Analysis from Prudential Data

Prudential data allow a more rigorous comparison of interest rates. The data used in the previous section allow for a broad international comparison, but distortions in deposit rates, as noted earlier, and reporting issues may hamper comparisons. They also do not provide a full picture of implicit interest rates and other operations, including actual flows of interest income and expenses. This section therefore uses prudential data provided by South Pacific central banks to build up a more complete picture of income and expense.

The comparative analysis uses Australia as the main reference point. Many of the large banks in the region are branches or subsidiaries of Australian banks so there is a clear relevance in this comparison. New Zealand is also used for comparison. But because market conditions are very different in Australia and New Zealand than in the South Pacific, comparisons are also drawn from the IMF’s Financial Soundness Indicators.3 This database has a far more restricted coverage than the International Financial Statistics database—it focuses on advanced and emerging markets—but allows comparison on a broader set of analytical ratios derived from commercial banks’ balance sheets. This chapter uses emerging market countries from Latin America (Brazil, Colombia, Mexico, Uruguay), Asia (Indonesia, Malaysia, Philippines, Sri Lanka) and central Asia (Georgia, Kazakhstan).

Prudential data are broadly in line with interest rate data provided to the IMF (Figure 18.5, Annex Tables 18.1.1 and 18.1.9). Loan yields in the region are highest in the smaller countries, with the Solomon Islands consistently having the highest yield (averaging around 15 percent, although falling recently) and Fiji and Papua New Guinea the lowest.4 Australian loan yields are broadly in line with those in Fiji and Papua New Guinea but consistently below other South Pacific countries. Despite inflation volatility, loan yields have remained quite stable over the past decade in many South Pacific economies, particularly the smaller ones. The cost of deposits, broadly equivalent to the weighted average deposit rate, is generally very low, particularly in Fiji and Papua New Guinea. They are on average below Australian levels in nominal terms, and much lower in real terms given the lower inflation in Australia. As a result, spreads—the difference between yield and cost of deposits—are two to three times the levels in Australia.

Figure 18.5Loan Yields and Cost of Deposits

(Percent, 2000–13)

Sources: Country authorities; and IMF staff estimates.

Net interest income is a conventional indicator of the contribution of core bank services to profitability. The simple spreads just discussed are analogous to the public understanding of interest rates, but do not reflect the profits that banks derive from their core lending operations. Net interest income takes into account the fact that banks cannot hold all of their assets in loans, which are typically the highest-yielding asset category. Regulatory and prudential operating requirements mean that banks must also hold lower or nonearning assets such as statutory reserve deposits, deposits with other banks, and cash in addition to fixed assets. Using this measure, South Pacific spreads in 2013 range between 3 percent in Papua New Guinea and about 6 percent in Samoa (Table 18.3 and Annex Table 18.1.2).

Table 18.3Net Interest Income(Percent of average assets, 2013)
Samoa5.5
Solomon Islands4.4
Tonga4.5
Vanuatu4.1
Average selected small islands4.6
Fiji3.4
Papua New Guinea13.5
Australia1.7
New Zealand2.0
Average selected emerging markets3.4
Brazil5.3
Colombia2.8
Georgia1.5
Indonesia5.4
Kazakhstan2.2
Malaysia1.3
Mexico5.2
Philippines1.6
Sri Lanka3.0
Uruguay5.1
Sources: Country authorities’ central banks; IMF, Financial Soundness Indicators; and World Bank (2013).

Latest available 2012.

Sources: Country authorities’ central banks; IMF, Financial Soundness Indicators; and World Bank (2013).

Latest available 2012.

Net interest income in the South Pacific is, as expected, generally higher than in emerging markets. Australia, New Zealand, and some emerging markets, with net interest income between 1 and 3 percent, are considerably below the South Pacific average. Although it is hard to quantify exactly, these differentials are broadly in line with what one might expect given the country risks discussed earlier and the greater size of these risks, sophistication, and depth of financial markets in these emerging economies.

Noninterest Operations

Interest rates are not the only source of bank profitability, however, even in the relatively shallow markets of the South Pacific. Fees, charges, and foreign exchange activities are significant contributors to bank income and profitability. The high level of income from foreign exchange activities is not surprising given the highly open nature of the Pacific island economies, leading to a large volume of international trade transactions supplemented by tourism payments and remittances. A number of central banks in the South Pacific have become increasingly focused on these issues, in part because of the cost of sending remittances in the Pacific, which is extremely high by international standards.

Noninterest income in the Pacific is higher than in most other regions. As a proportion of total assets, it was on average around four times more than in Australia in 2013 and well above emerging market comparators (Table 18.4). There is a reasonably wide range, however, with Tonga being the highest at about 4⅓ percent and Papua New Guinea the lowest at about 2 percent—though still significantly higher than Australia’s 1 percent (Annex Tables 18.1.6, 18.1.7, and 18.1.8).

Table 18.4Noninterest Operations(Percent of average assets, 2013)
Noninterest IncomeGross Noninterest ExpensesNet Noninterest Income
Samoa3.65.6−2.0
Solomon Islands4.14.7−0.6
Tonga4.35.4−1.1
Vanuatu3.04.0−1.0
Average selected small island states3.84.9−1.2
Fiji2.73.7−0.9
Papua New Guinea12.02.5−0.5
Australia0.91.3−0.4
New Zealand0.71.2−0.5
Average selected emerging markets1.72.6−0.9
Brazil1.73.9−2.2
Colombia1.92.2−0.3
Georgia0.81.2−0.4
Indonesia2.43.8−1.4
Kazakhstan1.61.40.3
Malaysia1.11.2−0.1
Mexico2.33.8−1.5
Philippines1.71.9−0.2
Sri Lanka1.31.6−0.3
Uruguay1.85.1−3.3
Sources: Country authorities’ central bank data; IMF, Financial Soundness Indicators; and IMF staff estimates.

Latest available 2012.

Sources: Country authorities’ central bank data; IMF, Financial Soundness Indicators; and IMF staff estimates.

Latest available 2012.

Foreign exchange operations are the largest source of noninterest income in the South Pacific, accounting for roughly two-thirds of noninterest income in many jurisdictions. For jurisdictions that allow for the disaggregation of this income source, profits from foreign exchange activities are, on average, equally split between revaluation profits and losses and service charges and fees on foreign exchange transactions. Using data provided on these spreads by central banks, which are subject to the quality of reporting by commercial banks, the average spread in the Pacific is about 8 percent.

Data constraints hamper further analysis of noninterest income. It is possible, however, that fees and charges on loans, such as commitment and transaction fees, could make up much of the remaining noninterest income. This has certainly been a concern in a number of countries. Work in Tonga has suggested that when fees and charges are consolidated into an effective interest rate, the rate increases by large amounts, particularly for small loans.

Noninterest expenses are also high in the Pacific island countries. It is not clear why this is the case, as labor and building costs, although high, are still lower than in Australia and other emerging market economies. In this regard, it is notable that “other” noninterest expenses—expenses other than salary and depreciation—reported by banks are, on average, more than half of total noninterest expenses. More disaggregated data are required to better understand the operating expenses of South Pacific banks.

Bank Profitability

At first glance, overall bank profitability in the South Pacific appears very high. Return on assets (ROA)—total pretax profit as a proportion of average assets—is a standard measure for comparing not only individual bank profitability, but also bank profitability across countries. ROA in the South Pacific ranged between 2¼ and 4 percent in 2013 (Table 18.5), and averaged around 3¼ percent, which is high by international standards.5 Advanced banking systems generally yield ROAs of about 1–2 percent, as seen in Australia. ROAs in the Pacific island countries generally exceed averages in other regions and in some cases—Samoa and the Solomon Islands in particular—are well in excess of levels observed in other regions. Returns remained broadly at these levels over the last decade, but have been on a declining trend in most countries (see Annex Table 18.1.4).

Table 18.5Profitability Indicators of the Banking System(Percent, 2013)
Return on Assets1Return on Equity2Provision Expenses3Leverage4
Samoa4.021.1−0.619.0
Solomon Islands3.823.70.215.8
Tonga3.214.00.422.5
Vanuatu2.617.90.814.4
Average selected small island states3.419.20.218.0
Fiji2.223.60.39.4
Papua New Guinea52.719.33.513.8
Australia1.220.90.35.7
New Zealand1.519.60.17.4
Average selected emerging markets2.118.12.911.5
Brazil1.413.14.710.6
Colombia3.121.74.014.5
Georgia2.514.41.817.3
Indonesia3.124.50.612.5
Kazakhstan1.514.810.810.3
Malaysia1.415.50.79.3
Mexico2.119.33.810.8
Philippines2.522.31.511.4
Sri Lanka1.619.40.68.4
Uruguay1.616.00.79.8
Sources: Country authorities’ central bank data; IMF, Financial Soundness Indicators database; and IMF staff estimates.

Net income before taxes as proportion of average assets.

Net income before taxes as proportion of average equity.

As proportion of average total loans.

Equity-to-average-assets ratio.

Latest available 2012.

Sources: Country authorities’ central bank data; IMF, Financial Soundness Indicators database; and IMF staff estimates.

Net income before taxes as proportion of average assets.

Net income before taxes as proportion of average equity.

As proportion of average total loans.

Equity-to-average-assets ratio.

Latest available 2012.

However, profits from interest operations are broadly in line with international norms. To analyze the contribution of interest operations to overall profitability, Table 18.6 illustrates the ROA of South Pacific banking systems, excluding the contribution of the very high foreign exchange earnings already identified. The table clearly shows that foreign exchange activities contribute significantly to the income and profits of commercial banks, and that without them, ROA would be more in line with international comparators. However, it is not possible from current data sources to identify whether foreign exchange income is a significant element in profitability regions other than those identified in Table 18.6.

Table 18.6Return on Average Assets(Percent)
2007200820092010201120122013
South PacificMedian4.64.13.23.13.13.03.2
High8.610.59.38.05.14.84.0
Low2.9−2.5−4.60.52.62.52.2
South PacificMedian2.02.51.81.71.31.11.0
(excluding foreign exchange income)High3.13.93.32.42.11.32.1
Low1.2−6.6−7.2−2.0−0.40.80.6
Australia1.40.70.91.11.11.01.2
New Zealand1.51.30.81.01.41.21.5
Latin AmericaMedian2.02.01.71.81.71.81.9
High3.13.93.64.03.94.35.0
Low1.10.90.10.61.11.31.1
Sub-Saharan AfricaMedian2.73.22.32.83.23.22.7
High3.84.93.94.65.25.46.2
Low1.41.4−8.80.50.31.41.2
Middle East and Central AsiaMedian2.01.41.21.51.81.51.7
High3.93.82.62.83.23.02.9
Low0.9−2.5−5.5−1.4−0.60.20.2
Emerging EuropeMedian1.71.40.60.80.50.60.6
High2.63.43.33.12.22.42.0
Low0.7−0.6−4.5−2.7−1.1−2.0−0.2
Sources: Country authorities’ central bank data; Autralian Prudential Regulatory Authority; Reserve Bank of New Zealand; and IMF, Global Financial Stability Report, Financial Soundness Indicators table, April 2015.
Sources: Country authorities’ central bank data; Autralian Prudential Regulatory Authority; Reserve Bank of New Zealand; and IMF, Global Financial Stability Report, Financial Soundness Indicators table, April 2015.

Profits from foreign exchange operations account for at least half of total profits; they are particularly high in the Solomon Islands. Data on noninterest expenses are not sufficiently disaggregated to identify expenses associated with foreign exchange activities which may overstate the returns slightly. But expenses for conducting foreign exchange activities are not believed to be significant. This is because foreign exchange operations do not require separate fixed asset investments or significant additional personnel, though an exception is perhaps foreign exchange traders whose services may be outsourced to a parent or subsidiary bank.

Credit risk does not appear to have been excessively high in the Pacific island countries in recent years. Banks’ provision expenses—the precautionary expenses banks make against loans that are not performing as expected or that are believed to pose more than a normal degree of credit risk—have remained at about 1 percent of average gross loans (Annex Table 18.1.3). The ratio has been much higher in Tonga in recent years,6 however, demonstrating the impact of high credit risk manifesting itself in a sharp increase in nonperforming loans. Even excepting Tonga’s recent experience, the provision expenses of banks in the Pacific island countries are significantly above those in Australia and in some emerging markets. They are lower, however, than in Brazil and Mexico. A similar conclusion comes from the proportion of total loan-loss reserves—the amount banks have over a number of years put aside to cover bad loans—to total loans.

Significant losses in Tonga demonstrate the downside risk. These have been well in excess of those observed in other regions in recent years—and demonstrate both the potential credit risk in the Pacific island countries and that profits in good years can protect against such risks.

Capital Requirements and Holdings

This section reviews capital requirements and holdings in the South Pacific. It assesses the extent to which capital requirements in the Pacific island countries may be contributing to high interest rates. Holding capital is expensive, and thus if banks are forced to hold more they tend to increase interest rates to retain profitability.

Headline risk-based capital (RBC) requirements for South Pacific central bank jurisdictions are either 12 percent (Fiji, Papua New Guinea, Vanuatu) or 15 percent (Samoa, the Solomon Islands, Tonga). These generally apply to all banks, including branches that are required to retain assigned capital in order to protect local depositors and creditors.

RBC requirements in the Pacific are higher than international minimum standards. Basel II requires a minimum RBC requirement of 8 percent for sound, well-managed internationally active banks. But this requirement is primarily aimed at developed markets with lower risk and more developed market infrastructure. Many emerging and developing markets set RBC requirements above the international minimum to reflect the higher risks in their markets and to provide suitable protection for depositors and creditors.

Risk is perceived to be elevated in the Pacific, so RBC requirements above minimum international standards are to be expected. Capital requirements are usually higher where risk is higher, where legal frameworks are weak, and where supervisory challenges are greater. The aim of RBC is to set an adequate cushion to protect depositors from risk. However, there is no clear formula for determining just how much capital should be maintained above the minimum international standard. Comparisons with other countries and regions may be useful since they show how other regulators facing similar market conditions have reacted.

RBC requirements in the Pacific are higher than in comparable regions, as Figure 18.6 shows. In Caribbean countries, the RBC requirement is, for the most part, significantly lower than in the Pacific, averaging 8.7 percent and only marginally higher than in Australia. However, the banking system in the Caribbean is larger and deeper than in the Pacific, so lower RBC requirements may be justified. Low-income countries in Asia tend to have RBC requirements of about 10 percent, with the exception of Cambodia at 15 percent, which is consistent with the high end of the Pacific. Maldives, whose banking system is dominated by foreign banks, has an RBC requirement of 12 percent, and in Mauritius it is 8 percent.

Figure 18.6Risk-Based Capital Requirements

(Percent, 2013)

Sources: Country authorities’ central bank data; and IMF staff estimates.

Commercial banks in the Pacific also hold significantly more capital than required. Consolidated RBC holdings at the end of 2013 were approximately 26 percent compared with the regional average minimum requirement of about 14 percent. Only in Fiji did banks maintain RBC close to the prudential minimum; in all other jurisdictions reported RBC was nearly double the minimum prudential requirement. This pattern was much the same for the previous decade. RBC holdings in most South Pacific countries have remained within the 20–35 percent range, with only Fiji consistently below this level—averaging about 14 percent (Figure 18.7). These holdings are high by international standards—average holdings in the Pacific island countries are higher than in most other regions covered by the IMF’s Financial Soundness Indicators (Table 18.7).

Figure 18.7Total Risk-Based Capital

(Percent)

Sources: Country authorities’ central bank data; and IMF staff estimates.

Table 18.7Bank Risk-Based Capital by Region, 2013
MedianMinimumMaximum
Advanced economies15.411.818.9
Emerging market and developing economies
Central and Eastern Europe17.214.420.9
Developing Asia16.712.226.2
Middle East and Central Asia18.113.325.0
Sub-Saharan Africa17.911.630.1
Western Hemisphere15.612.717.7
Pacific (unadjusted)28.814.934.2
Sources: Country authorities’ central bank data; IMF, Financial Soundness Indicators; and IMF staff estimates.
Sources: Country authorities’ central bank data; IMF, Financial Soundness Indicators; and IMF staff estimates.

In some Pacific island countries the actual capital at risk is well below reported capital holdings. Branches and subsidiaries of regionally active foreign banks often have significant net balances due from their head office.7 Deposits placed with the foreign bank home or head office effectively represent a withdrawal of capital since the funds are not at risk in the Pacific island countries, and may not be available to repay local depositors and creditors if the home or head office experiences a crisis. For this reason, many countries require assigned capital to be maintained in the country in which the foreign bank branch is operating. Adjusting headline RBC to exclude funds placed back with the home or head office reduces “excess” capital holdings. Even after adjusting for this, capital remains well above minimum prudential requirements in most South Pacific countries. Foreign banks may also impose capital charges on their Pacific operations, which would imply that return on assets and other performance indicators for the Pacific are understated.

RBC holdings do have to be carefully interpreted. Commercial banks in the Pacific island countries have been holding large balances due from other banks (including their head or parent office and the central bank). These and other liquid asset holdings attract low risk weightings. RBC ratios would likely fall if lending volume picked up as these lower-risk-weighted liquid assets were invested in higher-risk-weighted loans.8 This would be moderated, however, if banks chose to hold more capital owing to the increased risk profile of their assets. These movements would not occur using a simple leverage capital ratio (capital to total assets), which uses total assets as a proxy for the relative risks in the balance sheet. Tables 18.8 and 18.9, and Annex Table 18.1.5, show that, in the Pacific island countries, these ratios have been increasing over time and are high by international standards. On an unadjusted basis, leverage ratios in the Pacific exceed those in all the regions in the Financial Soundness Indicators database. That said, care should be taken when considering leverage capital positions since they do not consider off-balance-sheet business and risks or the relative risks of different types of assets.

Table 18.8Trends in Consolidated Leverage Capital Positions(Percent)
2007200820092010201120122013
Fiji6.48.69.611.38.47.77.6
Fiji adjusted14.46.59.611.36.5
Papua New Guinea11.312.611.913.212.513.314.7
Samoa7.618.418.117.018.618.619.7
Samoa adjusted117.618.218.016.718.4
Solomon Islands12.717.515.218.717.814.614.0
Solomon Islands adjusted112.717.515.213.613.2
Tonga18.019.815.618.820.324.225.0
Tonga adjusted117.917.614.817.218.3
Vanuatu11.214.514.314.315.116.316.2
Vanuatu adjusted1−57.6−37.4−12.8−5.41.3
Source: IMF staff calculations based on country authorities’ central bank data.

Excludes net balances due from head/home office when calculating total capital and total assets.

Source: IMF staff calculations based on country authorities’ central bank data.

Excludes net balances due from head/home office when calculating total capital and total assets.

Table 18.9Bank Leverage Ratios by Region, 2013(Percent)
MedianMinimumMaximum
Advanced economies7.04.824.0
Emerging market and developing economies
Central and Eastern Europe11.38.021.1
Developing Asia9.66.717.5
Middle East and Central Asia13.27.119.8
Sub-Saharan Africa11.07.920.0
Western Hemisphere10.06.914.8
Pacific (unadjusted)15.47.625.0
Sources: Country authorities’ central bank data; and IMF, Financial Soundness Indicators bank data.
Sources: Country authorities’ central bank data; and IMF, Financial Soundness Indicators bank data.

Policy Implications

Banks in the Pacific are sound and profitable. This critically important outcome from a financial sector stability perspective enabled the Pacific to withstand the global financial crisis without significant shocks to its financial systems or significant government intervention and financial support. The dominance of Australian banks in the region’s banking sectors, which were able to withstand the crisis better than most international banks, contributed to this outcome. In cases in which banks made losses and capital fell below required levels, the strong position of parent institutions enabled swift and appropriate recapitalization.

However, although interest operations are in line with expectations, in some cases banks do make very high profits. This is because:

  • Lending rates and spreads do not appear to be out of line with comparable economies after taking into account likely determinants of interest rates such as country and credit risk and shallow financial markets. Over time, lending rates have stayed broadly constant with a slight downward trend. These findings are consistent with the findings from an International Finance Corporation study that assessed interest rate levels from a microeconomic perspective (IFC 2010).
  • Foreign exchange income and other noninterest flows add substantially to profits, reflecting the high level of international trade in goods and services.
  • Banks generally remained highly profitable over the last decade, with an average ROA of 4.9 percent since 2001, the majority of which is based on income received from foreign exchange activities. The healthy profits may also reflect the limited competition in South Pacific financial systems.

The hypothesis that high minimum capital requirements in the Pacific cause elevated lending rates does not appear to be borne out by reality. If banks genuinely believed that RBC requirements were excessive for the amount of risk they faced, it would be expected that they aim to hold capital closer to prudential requirements with only a small buffer to avoid breaches of the limit. This is not the case, however, in most South Pacific countries, even after deducting net balances due from their home or head offices.

High capital holdings are likely to be driven by risk perception. The main reason for high capital holdings in most countries is likely to be commercial bank management’s high risk perception in a given market. Given this, banks hold additional capital to protect against the risk eventuating. Exchange control requirements making it difficult to remit profits to the head or home office are another potential cause for high capital holdings. However, these restrictions have been eased in recent years and so are unlikely to be playing a large role.

Regulatory Responses

During the global financial crisis, South Pacific policymakers considered whether a policy response was required, particularly given the economic pressures. At that time, some central banks took policy action and others examined whether their regulatory frameworks provided an appropriate framework to allow interventions. After the crisis, central banks in the region took the following measures:

  • Fiji, in early 2009, imposed restrictions on the growth of lending rates (constraining them to levels at the end of 2008 for each commercial bank), and a ceiling on the interest rate spread of 4 percent for all banks. These formal restrictions were lifted in late 2009, but banks are still strongly encouraged to keep spreads within the 4 percent guideline.
  • Tonga, in mid-2009, gained voluntary agreements from banks to reduce exchange rate spreads charged to customers and, through regulation, required banks to disclose effective interest rates (including all fees and charges) to customers. The agreements came alongside reducing reserve requirements as part of a monetary policy move to encourage credit growth.
  • Samoa, in the context of revising its central bank act, introduced a provision for the central bank to have a more active role in regulating fees and charges of commercial banks.

The need for a response depends on the ultimate policy objective. There are a number of possible objectives that policymakers in the South Pacific may have, including increasing access to affordable credit for domestic businesses, moderating bank profitability, and enhancing consumer protection. These are not exclusive to one another, and many policy objectives can and should be addressed through institutions other than central banks.

In central banking terms, the long-term means to achieve these objectives are clear and are already being pursued by all South Pacific countries. These include:

  • A credible and effective monetary policy framework—This is vital for providing central banks tools to address interest rates. But it will require better transmission mechanisms than currently exist in most Pacific economies.
  • Well-functioning financial markets—Deeper financial markets will improve transmission mechanisms and increase the efficiency of the financial sector. Priorities include the development of securities markets, foreign exchange trading, and other financial products. This will require building better market infrastructure, such as credit bureaus, secured transactions laws, and collateral access.
  • Competitive financial markets—Maintaining space for new market entrants and monitoring actions through high-quality supervision within an appropriate prudential framework and effective competition policy will boost competition.
  • Reduced country risk—This requires maintaining a stable macroeconomic and political environment, and continuing progress on structural reforms to improve the business environment.
  • Improved consumer protection and financial literacy—Consumer protection bodies such as financial ombudspersons can help protect customers from predatory practices. However, the vital requirement is a population that is financially competent, which requires progress on a number of fronts, in particular building financial literacy and developing clear business guidelines that protect the interests of both consumers and banks.

Taking additional short-term measures to control interest rates or profitability is risky and requires careful consideration of the costs and benefits. A particular risk is the potential for these measures to act against progress on the long-term agenda already outlined. Short-term regulatory measures that control bank profitability or interest rates can frustrate market development, and the short-term benefits need to be substantial to justify them.

Interest rate regulation can influence rates in the short term, but it throws up many challenges and can lead to unintended outcomes. Direct regulation of rates can achieve the immediate aim of ensuring banks charge interest rates at the required level. However, this may not achieve longer-term policy objectives and can undermine the effectiveness of the banking sector. Some possible outcomes are:

  • Reduced efficiency—The financial sector is particularly reliant on price signals, and restricting the ability of banks to price their services to include risk is likely to lead to other, less efficient, means of allocation such as rationing.
  • Increased charges in other areas—For instance, loans can be priced at the same effective rate through fees and charges rather than using interest.
  • Contractions in credit—Banks may achieve reductions in interest rates by reducing credit to higher-risk customers rather than by reducing the interest rates across the board. Higher-risk sectors such as small and medium-sized enterprises are particularly sensitive to this.
  • Slower market development—Current market participants are less likely to invest in new products and services if they are unable to control their prices. Similarly, potential new entrants will have less incentive to invest.
  • Pressure on supervision services—Supervision departments, which in the Pacific island countries are already stretched, are put under additional strain by having to monitor interest rate practices.

Regulation and/or increased taxation of profits is less damaging to market development but remains challenging. Regulating profits and/or taxing profits at higher levels has the advantage of not interfering with the pricing mechanism and therefore has less damaging impacts on efficiency. But it can share the problems of interest rate regulation in terms of discouraging market development and deterring new investors. It also has significant challenges for identifying targets or maximum levels of profits and monitoring compliance. This is particularly relevant given the limited capacity in many supervision departments in the South Pacific and the absence of well-formed competition policies and supporting institutions.

Stepped-up action on the longer-term agenda may yield better and more sustainable short-term outcomes. Given the policy and administrative challenges inherent in the short-term regulatory actions available to address price and profit levels, scarce resources may be better devoted to more aggressive actions to build deep and competitive financial markets.

Holding excess capital is costly to banks and elevates lending rates, but central banks can do little to reduce holdings in the short term. Because capital is well in excess of minimum requirements in most South Pacific countries, it is not obvious that if central banks lower their RBC requirements to reduce borrowing costs that it would lead to lower capital holdings by commercial banks or to lower lending rates. Capital requirements are generally set with regard to prudential concerns rather than to influence interest rates. Any move toward lowering capital requirements should therefore be taken with great caution to ensure that commercial banks are obligated to retain adequate risk protection in the country in which they operate.

Actions to reduce commercial banks’ perception of risk could help lower capital buffers closer to minimum prudential requirements. But this will only yield results in the medium term.

Regional Actions to Support Financial Sector Development

While the focus of efforts must necessarily be at the national level, coordinated regional action may also be able to contribute to financial sector development. The underlying regulatory system is very similar across the South Pacific, as are the main actors in the banking system. This provides scope for adding to national policies through regional coordination. To conclude the chapter, we identify a number of areas that could be considered, mostly building on activities already taking place.

Regular and frank dialogue between central and commercial banks can lead to improvements in market functions and outcomes. Commercial banks are likely to be willing to discuss amending their pricing structures in a cooperative environment that takes account of their own constraints. Ultimately, financial deepening, which is the underlying aim of many of the measures proposed in this chapter, is to the benefit of the banking industry, and banks themselves should be keen to engage in discussions to achieve this. These will predominately be at the national level, but regional forums can also be used. Given the strong regional network of the main banks in the Pacific, it may be valuable to establish a regular dialogue between regional managers and governors attached to the annual meeting of central bank governors.

Transparency and disclosure provide important support and accountability. Measures such as ensuring banks disclose effective interest rates (as implemented in Tonga), allow customers to better determine and compare the cost of borrowing. Dissemination of financial data, including interest rates and financial soundness indicators, can also contribute to accountability. There has been some movement toward this, nationally and regionally, through the websites of central banks and the Association of Financial Supervisors of Pacific Countries. Improving the breadth and timeliness of published data could build on these initiatives.

Enhanced supervision is also critical. Effective supervision not only helps monitor and assess the health and condition of the banking industry, but also provides vital information to policymakers, including financial soundness data and indicators. Supervisors need to understand the risks that banks face and to be able to identify what is driving banks’ costs and profits. Significant progress has been made in improving supervision and regulation in the South Pacific, but many improvements can still be made. Priorities include updating prudential regulations, enhancing and automating bank reporting to allow easier and more comprehensive analysis, improving on-site inspection techniques, and deepening capacity in supervision departments. Given the similarity of the regulatory environment and the main players in the banking system in the region, formal and informal interaction in the context of the Association of Financial Supervisors of Pacific Countries should continue to benefit supervisors in the South Pacific. Harmonizing returns and systems across jurisdictions could yield economies of scale to regional banks and help reduce the cost of banking. Enhanced cooperation with the Australian Prudential Regulation Authority may also yield benefits given the dominance of Australian-supervised banks in the South Pacific.

Governors of South Pacific central banks could also consider harmonizing RBC requirements (minimum levels, risk weightings, and the definition of assigned capital) across the region. This would reduce the regulatory burden on regionally active banks and allow central banks to compare regionwide financial sector behavior more easily, including implications on interest rates for loans.

Increased competition is also likely to lead to lower consumer costs. However, prospective entrants into South Pacific banking markets have to consider competing with established players with the advantages of a regional network, with accompanying efficiencies of scale and large market shares. The available returns, while potentially high in proportionate terms, will be low in absolute terms given the smallness of the individual national markets. This could deter additional large regional-level players from entering these markets. However, addressing this issue at a regional level is difficult and will be limited to information sharing and cooperation on effective competition frameworks while efforts to encourage and foster private, local bank ownership continue at the national level. Competition can come from outside the banking sector, particularly given the influence of noncore banking operations on banks’ profits. The promotion of efficient foreign exchange markets and nonbank financial institutions can also broaden consumer choice and lower costs.

Strengthened consumer protection will still be required. While this will primarily be an issue to be taken forward at the national level, central banks and other consumer protection bodies can cooperate regionally with the aim of having broadly similar regimes. This would facilitate low-cost compliance by banks with a large regional presence. For example, regulators could require that loan and deposit contracts clearly specify the frequency and basis of any adjustments to the interest rate and any fees. To prevent predatory practices, adjustments to loan interest rates and fees should be required to be calculated against an independent index specified in loan contracts—and these should clearly specify how and when adjustments (both increases and decreases) are to be calculated. Loan contracts should also require repayments to be increased or decreased to reflect any adjustment in interest rates or fees, and ensure that loans amortize within the contract period.

Building financial competence and inclusion is fundamental to long-term financial sector development. South Pacific central bank governors and finance ministries have already recognized regional and national initiatives to improve competition. In addition, increased investment in physical and technological infrastructure will be required to bring the unbanked into the financial sector in a cost-effective manner. The challenge is to ensure that the regional coordination of these many initiatives is manageable and does not cause unsustainable demands on financial sector managers.

Annex 18.1. South Pacific Banking Indicators
Annex Table 18.1.1Simple Interest Ratios(Percent)
2000200120022003200420052006200720082009201020112012Average
Average Loan Yields
Samoa24.812.312.411.711.912.312.512.912.711.110.410.09.412.7
Solomon Islands14.513.814.815.717.815.315.113.713.716.114.514.013.314.8
Tonga10.511.910.710.412.810.611.411.612.510.910.910.311.511.2
Vanuatu19.27.812.412.712.012.313.412.311.811.010.59.79.211.9
Average small island states14.711.212.612.914.212.813.312.512.612.712.011.311.312.6
Fiji7.97.67.26.98.19.38.17.87.37.26.77.6
Papua New Guinea6.58.810.28.27.76.76.66.87.09.86.97.7
Australia7.37.78.08.46.06.87.26.47.2
Average Cost of Deposits
Samoa7.93.43.84.04.03.84.66.25.03.72.22.12.14.1
Solomon Islands2.71.40.91.21.50.70.50.61.13.22.01.10.41.3
Tonga3.94.73.23.23.83.75.05.26.54.53.52.92.44.0
Vanuatu3.42.83.43.33.63.84.34.34.33.32.52.62.63.4
Average small island states4.43.12.82.93.23.03.64.14.23.72.62.21.93.2
Fiji0.90.80.80.82.53.31.12.32.51.81.21.6
Papua New Guinea1.41.81.81.20.50.60.50.81.11.00.70.41.0
Australia4.34.65.05.73.13.84.13.64.3
Simple Spread
Samoa16.98.98.67.87.98.57.96.77.77.48.27.97.38.6
Solomon Islands11.812.513.914.516.314.614.613.112.613.012.512.812.913.5
Tonga6.67.27.57.29.07.06.46.46.06.47.47.49.17.2
Vanuatu15.85.19.09.48.48.69.18.07.57.78.07.16.68.5
Average small island states12.88.49.89.710.49.79.58.68.48.69.08.89.09.4
Fiji7.06.86.56.15.66.07.05.54.75.35.56.0
Papua New Guinea5.17.08.47.07.16.16.16.05.98.86.26.7
Australia3.03.13.02.82.93.03.12.93.0
Sources: Country authorities’ central bank prudential data; and IMF staff estimates.
Sources: Country authorities’ central bank prudential data; and IMF staff estimates.
Annex Table 18.1.2Net Interest Income(Percent)
2000200120022003200420052006200720082009201020112012Average
Samoa9.55.65.75.45.65.96.66.06.15.55.86.05.66.1
Solomon Islands6.86.76.86.45.75.26.87.68.68.56.15.24.56.5
Tonga5.26.15.66.06.07.05.74.7−2.5−4.60.52.63.23.5
Vanuatu5.82.63.53.23.13.53.93.63.63.63.94.14.23.7
Average small island states6.85.25.45.35.15.45.75.53.93.34.14.54.45.0
Fiji8.34.54.64.54.54.64.54.65.24.23.33.63.64.6
Papua New Guinea0.04.86.57.04.64.13.73.63.83.64.73.33.54.1
Australia1.81.81.61.61.71.71.81.71.7
Sources: Country authorities’ central bank prudential data; and IMF staff estimates.
Sources: Country authorities’ central bank prudential data; and IMF staff estimates.
Annex Table 18.1.3Credit Risk Indicators(Percent)
2000200120022003200420052006200720082009201020112012Average
Provision Expense to Gross Loans
Samoa0.00.00.00.00.00.80.20.41.00.50.31.10.90.4
Solomon Islands1.20.51.30.00.10.30.71.51.21.20.31.8−0.00.8
Tonga1.10.51.21.11.60.41.13.210.410.23.81.10.92.8
Vanuatu0.50.50.81.30.80.10.40.50.60.00.20.10.10.5
Average small island states0.70.40.90.60.60.40.61.43.33.01.11.00.51.1
Fiji2.40.70.50.60.50.4−0.11.00.21.1−0.20.20.10.6
Papua New Guinea0.00.00.00.00.00.00.00.20.60.00.00.00.1
Australia0.20.20.20.80.80.50.30.40.4
Loan Loss Reserves to Gross Loans
Samoa3.43.43.43.74.13.32.83.34.15.13.74.15.53.8
Solomon Islands3.95.15.63.53.91.11.12.02.33.94.05.14.33.5
Tonga4.74.54.54.64.82.52.43.66.414.315.112.811.57.1
Vanuatu3.02.43.54.05.04.65.14.44.54.03.15.25.44.2
Average small island states3.73.84.24.04.42.92.93.34.36.86.56.86.74.7
Fiji3.33.83.93.52.61.61.92.72.21.51.31.41.32.4
Papua New Guinea5.74.67.65.94.83.22.62.32.02.63.33.53.94.0
Australia0.80.70.61.01.21.31.21.11.0
Sources: Country authorities’ central bank prudential data; and IMF staff estimates.
Sources: Country authorities’ central bank prudential data; and IMF staff estimates.
Annex Table 18.1.4Profitability Indicators(Percent)
2000200120022003200420052006200720082009201020112012Average
Return on Average Assets (Pretax)
Samoa10.56.26.25.04.65.66.35.05.54.34.64.43.15.5
Solomon Islands4.65.07.28.77.76.67.78.610.59.38.05.14.87.2
Tonga5.26.15.66.06.07.05.74.7−2.5−4.60.52.63.23.5
Vanuatu5.02.83.53.53.83.84.03.52.32.92.83.53.03.4
Average small island states6.35.05.65.85.55.86.05.53.93.04.03.93.54.9
Fiji5.23.33.73.63.84.03.92.94.32.82.62.62.53.5
Papua New Guinea0.05.77.58.03.94.73.54.43.93.53.42.62.64.1
Australia1.61.51.40.70.91.11.11.01.2
Return on Equity (Pretax)
Samoa68.239.434.927.726.533.637.528.131.123.326.624.516.332.1
Solomon Islands30.028.435.448.748.041.550.865.166.852.645.128.128.243.8
Tonga36.141.934.437.640.552.742.235.0−16.8−30.23.714.415.523.6
Vanuatu64.330.142.137.134.036.338.836.019.921.721.826.621.433.1
Average small island states49.735.036.737.837.341.042.341.125.316.824.323.420.333.2
Fiji78.143.449.051.054.458.551.737.749.424.420.722.325.643.6
Papua New Guinea0.056.774.768.830.337.530.039.532.328.525.819.530.036.4
Australia23.925.825.914.817.418.320.518.320.6
Return on Equity (Post-Tax)
Samoa48.027.524.319.418.723.526.320.222.616.719.217.814.823.0
Solomon Islands19.018.623.932.730.527.233.242.143.034.428.517.819.128.5
Tonga24.729.423.726.826.432.428.324.3−16.8−29.73.412.911.415.2
Vanuatu64.330.142.137.134.036.338.836.019.921.721.826.621.433.1
Average small island states39.026.428.529.027.429.931.630.717.210.818.218.816.724.9
Fiji47.330.234.738.237.941.436.426.434.817.415.315.919.830.4
Papua New Guinea0.039.952.749.623.339.220.627.422.319.618.714.227.3
Australia15.816.918.013.210.613.215.212.414.4
Sources: Country authorities’ central bank prudential data; and IMF staff estimates.
Sources: Country authorities’ central bank prudential data; and IMF staff estimates.
Annex Table 18.1.5Ratio of Equity to Average Assets(Percent)
2000200120022003200420052006200720082009201020112012Average
Samoa16.316.518.718.917.917.318.919.019.419.317.318.618.618.2
Solomon Islands15.319.021.018.517.518.516.513.919.116.520.220.317.117.9
Tonga13.616.516.416.913.014.113.515.617.713.017.519.123.016.1
Vanuatu8.810.09.710.611.910.311.110.014.313.312.213.414.711.6
Average small island states13.515.516.416.215.115.115.014.617.615.516.817.918.316.0
Fiji7.08.57.98.57.98.38.18.210.212.712.910.710.09.3
Papua New Guinea18.611.411.913.313.414.413.013.413.413.814.013.714.413.8
Australia6.85.65.65.35.75.95.85.95.8
Sources: Country authorities’ central bank prudential data; and IMF staff estimates.
Sources: Country authorities’ central bank prudential data; and IMF staff estimates.
Annex Table 18.1.6Noninterest Income(Percent)
2000200120022003200420052006200720082009201020112012Average
Noninterest Income to Average Assets
Samoa10.15.86.06.35.05.65.14.44.93.63.94.03.75.3
Solomon Islands4.45.28.810.19.78.07.68.58.67.67.96.25.27.5
Tonga4.55.14.65.76.05.65.26.76.33.83.84.84.65.1
Vanuatu1.71.82.33.03.13.23.03.22.92.93.03.23.02.8
Average small island states5.24.55.46.36.05.65.25.75.74.54.64.54.15.2
Fiji5.23.33.73.53.53.52.92.52.62.92.83.02.93.3
Papua New Guinea0.04.96.57.14.24.63.03.43.02.42.62.12.03.5
Australia2.01.71.71.31.21.20.90.81.3
Foreign Exchange Income to Average Assets
Samoa4.92.92.62.72.63.32.81.92.32.32.22.22.12.7
Solomon Islands3.43.97.08.27.96.25.56.46.66.05.74.54.05.8
Tonga3.64.23.63.93.73.13.23.54.02.62.53.02.43.3
Vanuatu0.70.71.01.81.71.91.61.61.61.71.82.01.81.5
Average small island states3.22.93.54.24.03.63.33.43.63.13.12.92.63.3
Fiji2.11.31.61.41.31.21.21.11.21.11.31.51.31.4
Papua New Guinea0.04.15.25.73.12.81.52.22.01.31.31.11.42.4
Other Noninterest Income to Average Assets
Samoa5.22.83.43.62.42.32.32.52.61.31.61.81.62.6
Solomon Islands1.01.21.82.01.81.82.02.12.01.62.11.71.31.7
Tonga0.91.01.01.72.32.52.03.22.31.31.31.82.21.8
Vanuatu1.01.01.31.21.41.31.31.51.41.21.11.21.21.2
Average small island states2.01.51.92.12.02.01.92.32.11.31.51.61.51.8
Fiji3.12.02.12.12.22.21.71.41.41.71.61.61.61.9
Papua New Guinea0.00.81.21.41.11.71.51.21.11.11.31.00.61.1
Sources: Country authorities’ central bank prudential data; and IMF staff estimates.
Sources: Country authorities’ central bank prudential data; and IMF staff estimates.
Annex Table 18.1.7Noninterest Expenses(Percent)
2000200120022003200420052006200720082009201020112012Average
Gross Noninterest Expense to Average Assets
Samoa9.15.25.56.75.95.45.25.14.84.44.84.85.55.6
Solomon Islands6.06.67.97.87.76.56.36.65.96.15.95.54.96.4
Tonga4.44.94.65.36.24.74.75.56.45.96.46.66.05.5
Vanuatu2.41.42.02.32.22.92.63.14.03.63.93.74.12.9
Average small island states5.54.55.05.55.54.94.75.15.25.05.35.15.15.1
Fiji6.84.04.24.03.93.83.53.63.43.53.73.93.94.0
Papua New Guinea0.04.15.56.14.84.03.22.52.72.53.92.82.53.4
Australia2.11.91.91.71.51.61.31.31.7
Nonsalary, Noninterest Expense to Average Assets
Samoa4.73.23.44.13.52.72.82.72.72.52.92.83.23.2
Solomon Islands2.82.93.94.04.23.23.33.33.63.73.53.43.03.5
Tonga2.02.32.52.73.72.62.63.23.83.83.83.93.93.1
Vanuatu1.41.21.51.51.41.61.41.62.21.72.01.72.11.6
Average small island states2.72.42.83.13.22.52.52.73.12.93.03.03.12.8
Fiji2.11.21.81.71.61.61.51.71.51.61.81.81.81.7
Papua New Guinea0.03.03.44.03.03.73.01.61.81.62.61.82.5
Australia1.10.90.90.90.80.90.60.60.9
Sources: Country authorities’ central bank prudential data; and IMF staff estimates.
Sources: Country authorities’ central bank prudential data; and IMF staff estimates.
Annex Table 18.1.8Ratio of Net Noninterest Income to Average Assets(Percent)
2000200120022003200420052006200720082009201020112012Average
Samoa1.00.60.5−0.4−0.90.3−0.1−0.70.2−0.8−1.0−0.8−1.8−0.3
Solomon Islands−1.6−1.50.92.32.01.51.21.92.71.62.00.70.31.1
Tonga0.10.2−0.00.3−0.20.90.61.2−0.1−2.1−2.6−1.8−1.4−0.4
Vanuatu−0.70.30.20.70.90.30.30.0−1.0−0.7−1.0−0.5−1.1−0.2
Average small island states−0.3−0.10.40.80.40.70.50.60.4−0.5−0.6−0.6−1.00.1
Fiji−1.6−0.7−0.5−0.5−0.4−0.4−0.6−1.0−0.8−0.6−0.9−0.8−1.0−0.8
Papua New Guinea0.00.81.01.0−0.70.6−0.20.90.3−0.1−1.3−0.7−0.50.1
Australia−0.1−0.2−0.2−0.4−0.3−0.4−0.5−0.5−0.3
Sources: Country authorities’ central bank prudential data; and IMF staff estimates.
Sources: Country authorities’ central bank prudential data; and IMF staff estimates.
Annex Table 18.1.9Return on Assets: Composition and Trends(Percent)
Solomon Islands20002001200220032004200520062007200820092010201120122013Average
ROA, deposit and lending activities1.21.10.20.6−0.30.42.22.23.93.32.20.70.80.61.4
Net interest6.86.76.86.45.75.26.87.68.68.56.15.24.54.46.5
Minus loan loss provision expense0.50.20.50.00.00.10.30.80.80.80.20.80.00.10.4
Plus noninterest income
Service charges and fees on deposit accounts0.91.01.31.11.11.11.00.90.90.90.70.80.60.60.9
Other noninterest income0.10.20.50.80.70.81.01.21.10.71.41.00.60.40.8
Minus noninterest expenses
Salary and benefits2.83.33.23.22.82.52.22.51.81.81.81.61.41.52.4
Other expenses3.23.44.64.65.04.04.14.14.14.24.13.83.53.24.1
ROA, foreign exchange activities3.43.97.08.27.96.25.56.46.66.05.74.54.03.15.8
ROA, all activities4.65.07.28.77.76.67.78.610.59.38.05.14.83.87.2
Noninterest income/gross income39.543.656.461.362.860.752.852.749.847.456.154.354.048.253.2
Foreign exchange income/gross income30.533.345.149.551.346.738.639.638.337.340.939.241.036.740.9
Samoa20002001200220032004200520062007200820092010201120122013Average
ROA, deposit and lending activities5.63.33.62.32.12.23.53.13.22.12.42.11.02.12.8
Net interest9.55.65.75.45.65.96.66.06.15.55.86.05.65.56.1
Minus loan loss provision expense0.50.10.30.80.40.20.90.7−0.50.5
Plus noninterest income
Service charges and fees on deposit accounts4.92.62.62.82.22.32.22.52.61.31.51.71.51.72.4
Other noninterest income0.40.20.80.80.30.00.10.10.10.00.10.00.00.00.2
Minus noninterest expenses
Salary and benefits3.21.61.72.11.92.21.91.91.61.41.51.51.81.71.9
Other expenses5.93.53.84.74.13.23.33.23.13.03.33.33.73.93.7
ROA, foreign exchange activities4.92.92.62.72.63.32.81.92.32.32.22.22.11.92.7
ROA, all activities10.56.26.25.04.65.66.35.05.54.34.64.43.14.05.5
Noninterest income/gross income51.650.751.153.847.549.143.642.444.739.239.939.739.539.545.6
Foreign exchange income/gross income24.925.822.223.324.429.024.218.421.024.823.322.122.320.723.5
Vanuatu20002001200220032004200520062007200820092010201120122013Average
ROA, deposit and lending activities4.32.02.51.72.01.92.41.80.81.31.01.51.20.71.9
Net Interest5.82.63.53.23.13.53.93.63.63.63.94.14.24.13.7
Less loan loss provision expense0.20.20.20.40.20.00.10.20.20.00.10.00.10.60.2
Plus noninterest income
Service charges and fees on deposit accounts1.01.01.21.00.60.60.60.90.60.60.60.60.60.60.8
Other noninterest income0.00.00.10.20.80.70.70.70.70.60.60.50.60.60.5
Less noninterest expenses
Salary and benefits0.80.30.50.60.71.01.01.21.51.51.61.61.71.71.1
Other expenses1.61.11.61.61.51.91.61.92.52.12.32.12.42.41.9
ROA, foreign exchange activities0.70.71.01.81.71.91.61.61.61.71.82.01.81.91.5
ROA, all activities5.02.83.53.53.83.84.03.52.32.92.83.53.02.63.4
Noninterest income/gross income22.741.039.448.649.947.743.446.844.944.443.143.941.542.242.9
Foreign exchange income/gross income9.716.917.429.228.128.223.924.224.025.826.527.825.226.023.6
Tonga20002001200220032004200520062007200820092010201120122013Average
ROA, deposit and lending activities1.61.92.02.12.24.02.51.2−6.6−7.2−2.0−0.40.81.00.2
Net interest5.86.16.56.57.36.56.16.05.85.25.95.15.14.56.0
Less loan loss provision expense0.70.30.80.81.10.30.92.58.27.72.70.70.50.22.1
Plus noninterest income
Service charges and fees on deposit accounts0.81.01.01.72.22.31.92.02.21.31.31.80.91.01.6
Other noninterest income0.10.00.10.00.10.20.11.10.10.00.00.01.31.10.2
Less noninterest expenses
Salary and benefits1.91.91.81.91.91.71.61.72.21.62.12.21.51.81.8
Other expenses2.53.02.83.44.33.03.03.84.24.34.34.44.53.63.7
ROA, foreign exchange activities3.64.23.63.93.73.13.23.54.02.62.53.02.42.23.3
ROA, all activities5.26.15.66.06.07.05.74.7−2.5−4.60.52.63.23.23.5
Noninterest income/gross income43.945.641.546.445.346.246.352.752.142.439.548.547.449.046.0
Foreign exchange income/gross income35.236.832.332.328.225.628.327.733.428.526.130.225.125.130.0
Papua New Guinea20002001200220032004200520062007200820092010201120122013Average
ROA, deposit and lending activities1.62.32.30.91.92.02.21.92.22.11.61.9
Net interest4.86.57.04.64.13.73.63.83.64.73.33.53.94.4
Less loan loss provision expense0.00.00.00.00.00.00.10.20.00.00.00.0
Plus noninterest income
Service charges and fees on deposit accounts0.71.21.31.01.61.20.80.80.81.00.81.0
Other noninterest income0.10.10.10.20.10.30.30.30.30.30.20.2
Less noninterest expenses
Salary and benefits1.12.12.11.80.30.20.91.00.91.41.01.2
Other expenses3.03.44.03.03.73.01.61.81.62.61.82.7
ROA, foreign exchange activities4.15.25.73.12.81.52.22.01.31.31.11.42.6
ROA, all activities5.77.58.03.94.73.54.43.93.93.42.62.74.5
Noninterest income/gross income50.549.850.447.752.544.648.344.639.736.038.945.7
Foreign exchange income/gross income42.140.240.334.932.622.431.828.721.518.019.830.2
Fiji20002001200220032004200520062007200820092010201120122013Average
ROA, deposit and lending activities3.12.02.12.22.52.72.71.73.11.61.31.11.21.22.1
Net interest8.34.54.64.54.54.64.54.65.24.23.33.63.63.44.6
Less loan loss provision expense1.50.50.30.40.30.30.00.70.10.8−0.10.20.10.20.4
Plus noninterest income
Service charges and fees on deposit accounts0.00.00.60.70.60.60.50.50.50.50.40.50.50.40.4
Other noninterest income3.12.01.41.41.61.61.21.00.91.31.11.11.11.31.5
Less noninterest expenses
Salary and benefits4.02.42.01.91.81.81.71.71.61.61.61.71.81.62.0
Other expenses2.71.62.22.22.12.01.81.91.81.92.12.12.12.12.0
ROA, foreign exchange activities2.11.31.61.41.31.21.21.11.21.11.31.51.31.01.4
ROA, all activities5.23.33.73.63.84.03.92.94.32.82.62.62.52.23.5
Noninterest income/gross income38.642.444.444.043.742.638.935.733.340.745.946.144.844.941.6
Foreign exchange income/gross income15.616.719.517.416.515.415.715.715.416.020.422.420.217.217.5
Sources: Country authorities’central banks; and IMF staff estimates.Note: ROA = return on assets.
Sources: Country authorities’central banks; and IMF staff estimates.Note: ROA = return on assets.
References

    DaviesM. and J.Vaught.2009. “Interest Rates and Bank Profitability in the South Pacific.Regional PapersPacific Financial Technical Assistance CentreSuva.

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    DaviesM. and J.Vaught.2011. “Capital Requirements and Holdings in the South Pacific.UnpublishedPacific Financial Technical Assistance CentreSuva.

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    International Finance Corporation (IFC). 2010. “Credit Markets in the Pacific: A Review of Loan Pricing in Four Pacific Countries.UnpublishedWashington.

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    World Bank. 2013. Global Financial Development Report.Washington: World Bank.

1

See Chapter 6 for a cross-country discussion of the banking sector in the Pacific islands.

2

The source is Delcredere/Ducroire, Belgium’s public credit insurer, which provides one of the most comprehensive publicly available listings of country risk. The ratings are highly regarded internationally and broadly reflect Organisation for Economic Co-operation and Development consensus. They do not reflect the views of the IMF, but are provided as an illustration of outside perceptions of the region as they affect investors.

3

IMF Financial Soundness Indicators data for Australia and New Zealand were supplemented with Australian Prudential Regulation Authority and Reserve Bank of New Zealand data.

4

The loan yield is total interest income for a calendar year divided by the average stock of outstanding loans for that year net of specific provisions for bad loans. It should, in the absence of large nonperforming loans, be equivalent to the reported weighted average interest rate.

5

Profits are averages across all commercial banks in a country and may have wide variation. Banks that have large branch networks in rural areas tend to have lower profitability.

6

Tonga’s banking system has gone through a prolonged period of balance sheet repair since the third quarter of 2008. During 2004–08, the stock of private credit doubled. The credit boom ended in the third quarter of 2008, driven by sharp deterioration of debt servicing capacities and moderating asset prices during the global financial crisis.

7

In the Pacific, foreign bank branches in their books maintain a separate assigned capital account, while also reflecting separate due-from (nostro) and due-to (vostro) balances with their head office.

8

Basel III provides guidance on the minimum risk weights on claims (assets) according to the underlying counterparty. These are adapted for the needs of individual countries.

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