AFTER getting doused by an increase in interest rates by various deposit-taking institutions (DTI) earlier this year, customers of three commercial banks can expect a more expensive new year as they have announced an increase in interest rates on variable rate and existing loans to be implemented in the first quarter of 2023.

First Global Bank Limited (FGB), a subsidiary of GraceKennedy Limited, sent out an e-mail to its customers, dated December 8, that they should expect an increase in interest rates on all loans of up to 2.00 percentage points. This is to take effect 45 days after the letter was sent to its customers, which is January 22, 2023. The advisory recommended customers to contact fgb@gkco.com or to contact the respective branch manager.

FGB has already increased the interest rates on some credit cards and increased some of the various fees charged on different services. It increased the interest rate charged on variable rate loans to customers in July by as much as 2.5 percentage points. Its loan book net of provisions has grown by seven per cent up to September to $33.51 billion with its total asset base at $79.79 billion as per the Bank of Jamaica’s (BOJ) unaudited assets and liabilities of commercial banks.

“This letter advises that effective forty-five (45) days from this communication, First Global Bank will increase interest rates associated with all loans to align with changes in the financial sector. Please be assured that we remain committed to serving you and look forward to working with you as we partner in business for growth,” said the FGB e-mail which was seen by the Jamaica Observer.

Sagicor Bank Jamaica Limited (SBJ) is increasing the rates on loans and deposits by 2.50 and 2.00 percentage points effective January 26, 2023. The interest rate hike on loans will only be applied to existing variable rate loans. This is the second rate hike on variable rate loans implemented by SBJ after it had an increase of up to 1.50 percentage points on June 27. SBJ’s deposit product guide shows that it was last updated in August 2019. Its loan book is up 11 per cent to $102.54 billion with total assets at $192.98 billion as of September.

“All impacted customers will be contacted individually concerning these adjustments to their credit facilities. At Sagicor, we stand committed to supporting our clients through changing economic times and invite clients with specific concerns to consult their Sagicor banking representative,” said the notice on SBJ’s online platform.

National Commercial Bank Jamaica Limited (NCBJ) is the other bank which will be implementing interest rate hikes on its customers. NCBJ increased the interest rate on variable rate loans for personal and small and medium-sized enterprise (SME) customers by an average of 1.14 percentage points on July 19. However, in its latest rate hike to take effect on February 1, existing business interest rate loans will increase between 0.23 and 1.75 percentage points. NCBJ is Jamaica’s largest commercial bank with its loan book up seven per cent to $427.72 billion and total assets of $846.54 billion as of September.

“Following the Bank of Jamaica’s increase in its policy rate, there will be an upward adjustment in the monthly repayment on existing business interest rate loans. All impacted customers will be contacted individually concerning these adjustments,” said the NCBJ advisory.

Excluding the Bank of Nova Scotia Jamaica Limited, Scotia Jamaica Building Society and Citibank, N.A., every other DTI has announced an interest rate hike in 2022 as the BOJ has moved its policy rate from 0.50 per cent to 7.00 per cent as of November 21. Its next monetary policy committee (MPC) meeting is set for Tuesday where it will consider if it will adjust its policy rate. The BOJ said at its November meeting that it would conditionally pause its rate hikes subject to the decisions of the United States Federal Reserve as well as the pass through effect of interest rates on DTI’s loans and deposit rates.

Sunday Finance has contacted every commercial bank to find out if they are expecting to increase their interest rates heading into the new year, but there are no responses up to press time. In an unprecedented move, the BOJ began publishing the deposit rates of commercial banks on December 11 as it tries to improve the flow of information to consumers on the most beneficial rates in the market.

BOJ Governor Richard Byles told the Standing Finance Committee of the House of Representatives on Wednesday that the BOJ was trying to find solutions to the slow responsiveness of commercial banks to its policy signals on interest rates. He mentioned that the peculiarities and rigidities of Jamaica’s system makes the transfer of its policy signals quite muted. The November minutes of the MPC revealed that the weighted average deposit rate offered by banks increased by 51 basis points while the prime rate for new business loans increased by 109 basis points over September 2021 to September 2022 despite the policy rate increasing 600 basis points.

However, an executive who spoke on the condition of anonymity said that commercial banks likely didn’t have a choice since there were talks that section 33 of the BOJ Act 1960 with amendments consolidated to 2015 could be used to compel the banks to adjust their loan and deposit rates. Section 33 allows the BOJ after consulting the minister of finance and giving 30 days’ notice to prescribe the minimum and maximum rates that specified financial institutions and commercials banks can impose on loans and deposits.

“In addition, in the context of the weakness in the credit channel of the monetary transmission mechanism, the committee urge the Bank’s staff to continue to develop policy options aimed at improving the monetary transmission mechanism for its review,” said the BOJ minutes from its November meeting.

The US Fed increased its federal rate by 50 basis points to 4.25 to 4.50 per cent on Wednesday with it indicating that its signal peak rate should be 5.25 per cent in 2023. Governor Byles’ in an August speech highlighted the risk that capital outflows from Jamaica and exchange rate depreciation can occur if domestic monetary policy is not properly aligned.

When Sunday Finance asked an executive at a DTI about the expected impact of the second round of interest rate hikes by commercial banks, he said, “A next round of loan increases are coming and deposit rates are raising on the wholesale funding side. We should see a more pronounced impact on the pass through of rates to consumers and a commensurate change in consumption activity which may have negative economic effects.”

Another executive at a DTI highlighted that commercial banks are absorbing the increased cost of funding in order to not push up the non-performing loans on their books at a time when their capital is under pressure from the continued fair value losses from heightened volatility in the financial markets.

“Banks have been slow to act due to rates still being market sensitive. The recent impetus by the central bank along with inability to continue to absorb the impacts have forced the move. The simultaneous nature and uniformity suggest banks are still watching each other before determining their moves. Banks will still need to be careful considering the potential impact of global headwinds impacting further growth in the latter half of 2023,” she posited.

When asked about the expected action at the BOJ’s MPC meeting, she said, “For the remainder of the calendar year I would say no. I anticipate that the BOJ will hold and continue to focus on moral suasion and forcing market pass through of existing rate hikes and observing the impact on demand and the inflation rate as well as its forecast.”

Commercial banks are currently contending with the implementation of Basel III which will require there to be more capital held on books to meet the new requirements and risk ratings. It was expected to be implemented on January 1 with the BOJ noting a transition period of July 2022 to June 2023 to provide feedback. However, some banks are concerned with the implementation and its impact not only on its overseas customers, but also on the bank’s flexibility under stress tests.

“I’m not expecting the implementation to take place at the start of the new year. At this time, I think we are in ongoing discussions with the central bank. The analysis is taking place, we’re exchanging information and our own internal checks. We’ve not been able to quantify the impact in any clinical way, but for certain, it will a cost. Technically, it could result in us effectively being able to coming to the conclusion that there may be certain loans for example, the spread that we’re getting is not sufficient to cover the capital allocated to that particular loan,” said NCB Financial Group Deputy CEO Dennis Cohen at a recent investor briefing.