sAlthough Clarien is a new name on Bermuda’s banking landscape, Capital G Bank has been serving clients as a Bermuda-licensed bank regulated by the Bermuda Monetary Authority since 2001—and traces its beginning to 1974 when Gibbons Deposit Company was formed.
We spoke to Mr. Truran about Bermuda’s economic landscape, the America’s Cup, and more.
Former banker and current Minister of Finance the Hon. Bob Richards took Bermuda’s banks to task in his 2014 Budget Statement, saying that the banking sector was “pulling in the wrong direction” and that forward economic momentum was difficult to achieve when that was the case. Was that fair comment?
We need to put those comments, with all due respect to the minister, in context. For the past five years, Bermuda has been in a severe economic recession. Some would classify it now as a depression. The fact remains that the traditional Bermuda business model has changed and consequently we are undergoing a prolonged period of adjustment. This has resulted in a shrinking gross domestic product (GDP). With a shrinking GDP, we can measure how various sectors are contributing towards that GDP in absolute or relative terms. I have no doubt in my mind that if one were to measure absolutely over that five-year period with about $1 billion of shrinkage in GDP, the absolute contribution of the banking sector has indeed reduced. In relative terms the answer is not so clear.
With an economy in a prolonged period of recession any businesses, including those in the financial services sector, must review all aspects of their operations. This includes operational efficiency, product and services delivery, and in Clarien’s specific case, a non-domestic growth strategy to drive through into our core wealth management and capital facilitation businesses. These changes are key to the success of our enterprise. Clarien is not going to shrink itself to try to shore up short-term profitability. Rather our focus is on investing into our future and bringing innovation to the business lines to which we operate, ultimately leading to the very best in client experience.
So are we moving in the wrong direction? I don’t think so, but I do believe that the financial services sector is collectively looking at ways that it can continue to support the local economy. This is certainly the case at Clarien as we continue to build upon our intellectual property base. We remain in active dialogue with the minister, and the ministry, about how Clarien, as well as the Bermuda Bankers’ Association, can continue to support the economy in a productive manner.
Have there been changes in the sector to deposit and mortgage rates, banks’ appetite for lending, since those comments?
There is a belief that there is a fairly significant gap between deposit rates and lending rates and this is pure profit for banks. The fact is that this interest rate margin helps cover the costs of operations like employment-related expenses. Clarien has done analysis and we would say that generally “like” jurisdictions have similar interest rate margins. That doesn’t negate where rate levels are, it just provides some form of comparison.
Many countries can simply “print” money in order to manipulate interest rates; this is known as Quantitative Easing or QE. The government of Bermuda doesn’t have tools at its disposal to assist in QE to affect the interest rate environment. Instead, the government has to rely solely on fiscal policy measures.
Generally, deposit rates have remained static since the minister last spoke. Remember that deposit rates are only one part of a multi-factor model, including loan demand and pricing, yields on marketable securities, such as high quality corporate bonds and United States treasury securities, and finally the actual costs of running a bank.
When considering loan demand versus loan supply and the pricing of those loans, another key consideration is the conservative nature by which all Bermudian banks operate. As a small island nation this conservative stewardship has provided stability against a very challenging economic backdrop. This cannot be said for all other jurisdictions which unfortunately saw bank failures. Bermudian banks are strong and well positioned for the future.
That being said, Clarien is certainly looking to be competitive by providing our clients innovative tools to achieve their financial goals. For example, our most recent four-year “double your interest rate” CD is indicative of such a product. This product enables clients to take advantage of an increasing annual interest rate and yet still have annual liquidity at no penalty. This protects clients from having to “lock in” low yields today should they believe that interest rates are set to climb over the next couple of years.
On the lending side, we have updated our risk-based pricing model for lending and therefore, where the risks are warranted, we can price loans at an extremely competitive rate. Some clients have been able to take advantage of this type of pricing providing significant interest savings for the life of the loan.
Overall we have found loan demand to be relatively weak which is reflective of the wider economy in Bermuda. We would expect to see loan demand accelerate as and when the economy stabilises and begins once again to grow.
From your vantage point, what stage is Bermuda at in its economic recovery from recession?
As we all know, economic cycles are made up of peaks and troughs, with a recession found on the downward sloping side of the curve, ending up in a trough. Growth and expansion is the upward slope, towards a peak. Against this analogy, I believe that economic indicators are showing that we have been in a trough over the last 12–18 months and that we are now on the rising side of that trough. Challenges remain; as I stated in the beginning of this interview, Bermuda is undergoing some structural changes to its business model. How we as a country manage these changes and seek opportunities from them will determine the timing and rate of any sort of new expansion.
What signs do you look for that would make you more or less optimistic about economic recovery?
One could typically look to GDP, but as a measurement it is a lagging indicator (particularly, it is not forward-looking). So I would look at positive sentiment, first and foremost, and I believe we have that. Then I would look to increasing consumer spending, and there are indicators of that. Third, I would look at increasing investments in infrastructure—the government is certainly working hard to increase infrastructure spending. Another indicator to look at is investment in new business opportunities. We are all collectively looking at where investment opportunities are and how to best attract those opportunities (both local and international). Getting a bit more granular, I would look at increasing transactional volume in the real estate market. Not necessarily increased prices, but increased volume. So long as there is no volume, you can be assured that we are in some form of recessionary state. We are currently seeing an increase in volume as well as, in some cases, an increase in property values. As a result, we have to revalue our real estate and mortgages frequently, and in the majority of cases, we are seeing a slight increase.
I also monitor for increasing corporate registrations on the island, and the multiplier effect of that. Corporate registrations in and of themselves don’t actually produce any real economic indicator. It is the multiplier effect of jobs that the
y create around economic improvement that proves the real indicator.
The final measurement component of economic recovery is around increased productivity, and Bermuda must look at ways of affecting this to a greater extent.
What about Bermuda’s debt situation? Just how crippling is it?
The question is do investors believe that Bermuda’s debt situation is at a crippling level? The answer would be “no” because of our ratings, and the level of interest rates demanded by investors over and above say the “riskless rate” has remained relatively constant. The sentiment cannot be that our debt is going to cripple us because otherwise investors would see a higher risk and would demand a higher rate of return.
I consider our debt load as like carrying a rucksack. When you have a light rucksack, therefore little debt, you can be quicker, more nimble, and the impact of making a mistake is not as risky. When your rucksack is full, and heavy with debt, you need to be a tad slower, more thoughtful and able to execute effectively. The worst thing in the world is stagnation, the equivalent of standing still. We need to be thoughtful, we need to be provocative, and we need to execute—and, if we can do that, then I don’t think our debt burden will cripple us.
What do you mean by “provocative”?
I mean coming up with ideas that we perhaps have not thought about in the past that perhaps may offend some—but where the long-term outcome is beneficial for all. That’s where we can all be creative, be provocative, but where we all need to do better is when we come up with those ideas, we need to make sure that everybody, all elements of society, understand why it will be beneficial for them in the long run.
Think outside the box—that is being “provocative.” Challenge the status quo—that is being “provocative.” But we must also make sure that in so doing all sectors have an opportunity to benefit and understand how they can benefit. That is because if they don’t, they will not be supportive and we as a country will continue to be fractured.
Can you give some examples of “provocative” ideas?
Gaming is one example, although it’s certainly not the “silver bullet.” Privatisation is another example. Ideas are being generated that have the opportunity to change the status quo from the way in which we have operated in the past. If we are thoughtful, we can ensure that everybody has the opportunity to benefit from that and not just those at the top of the economic spectrum.
More generally, what is your view of Bermuda’s economy going forward?
Generally speaking, I think we need to do more and tell our story of “why” Bermuda than we have done in the past, as a target for inward investment, tourism and as a platform for centralising a global footprint. The Bermuda Business Development Agency, in conjunction with the private sector, is doing a great job of trying to raise awareness of Bermuda. In support of this, we should consider the benefits of a competitive analysis of why people are going to “jurisdiction A” versus Bermuda. In doing so, we will better equip ourselves to react proactively to make Bermuda a jurisdiction of choice.
The road to improving tourism may be a little longer. The steps taken to detach the Bermuda Tourism Authority from the government were certainly the right thing to do. However, we are often too quick to give up on initiatives, and a commitment to greater investment over the long term is needed. We need to seek new markets for our product outside of the traditional eastern corridor. The island needs significant capital investment to bring its current stock of rooms up to an international standard. Such an investment can be seen via the works being done at the Hamilton Fairmont as an example.
Bringing innovation and intellectual property to Bermuda is key for the success of the island long term. At Clarien we are investing heavily into intellectual property activities such as capital markets facilitation. Many may not realise that Clarien is one of the largest listing agents for the ILS market. The message here is that when people are looking to use Bermuda, or invest in Bermuda as a jurisdiction, we can help them to take advantage of what Bermuda as a jurisdiction has to offer. This helps Bermuda leverage its already sterling reputation.
My final observation is tied to the fundamental benefits derived from an increased population and therefore the number of those contributing towards Bermuda’s GDP. Whilst many jurisdictions have failed at economic citizenship, I believe we should examine where some areas have failed and others have succeeded and build on those lessons. I am not trying to promote economic citizenship, but I am trying to promote foreign investment by individuals who either wish to use Bermuda as a home or as a centre of commerce. In either case, Bermuda has done a good job recently of moving forward with several legislative initiatives addressing this issue.
Does the recent announcement that Bermuda will host the 2017 America’s Cup make you more optimistic about our future?
The America’s Cup is the catalyst that we really, really needed. I commend the Minister of Economic Development and his team for what they have achieved. It is now time for Bermudians to come together, set aside politics, set aside any differences and make sure that we execute for the world to see. The America’s Cup is not just an investment in June 2017, but an opportunity to drive inward investment in the months and years following it. It’s a great opportunity to promote Bermuda as a tourist destination, a centre for commerce and wealth storage.
What about the recent announcements about new hotel developments? Do they make you more optimistic—or will you wait until the shovels are in the ground?
It’s no secret that the America’s Cup is the impetus that Bermuda needed for these developments to move forward. Having met with some of the hotel developers, they are certainly committed. Understandably, putting together financial models is difficult in today’s world and so I believe that the financing of some of the properties will certainly have to be creative. The government setting aside some contingent guarantees will definitely increase the probability of investment and success.
I think that we need to be willing to make some concessions that we would otherwise not have made in the past—almost as a catalyst.
As an example, outside of tax concessions, there needs to be consideration with regards to leases that are granted. Working in conjunction with government, if we have to do this at a rapid pace, then we need to be a little bit more flexible with regards to getting some assistance from external contractors. Believe me, I am not advocating for not employing Bermudians. Employ and train Bermudians, first and foremost. But we need to be flexible enough to allow for external contractors to be successful. As such, our immigration policies might need to be a little more flexible, and early indications from the ministry show they are certainly supportive of the same.
I think a “give some to get some” policy is an operating model.
What role can Clarien play in Bermuda’s economic recovery?
Domestically, there are individuals who continue to struggle with meeting some of the obligations that they have at present. We will continue to work with them with creative ideas that provide them the type of relief they need to enjoy the economic growth and expansion that’s predicted. We will also conti
nue to be as flexible as we possibly can with regard to our credit policies to support that.
From a competitiveness perspective, we will continue to invest in our products and services and our people in order to raise the bar across the board. We want our customers and clients to be receiving “best of class” advice and services here on-island, so as not to have to look overseas at other “offshore” jurisdictions instead.
We will continue to invest in the community directly through lending opportunities. We do have an appetite and capacity to lend—we have a fairly aggressive budget with regard to how and where we would like to lend. All of this obviously ties directly into our long-term business plan.
We also give significantly to the community through our corporate and charitable giving. Despite any pressures on earnings or anything else, we have not retracted at all with regard to our onward investment into the community—and we will continue to do that. We are, by roots, a community bank.
From an international perspective, there is certainly work to be done to increase awareness of Bermuda beyond the “Bermuda Triangle”—believe it or not! We have been working hard in support of the Bermuda Stock Exchange, the BTA, the Society of Trust and Estate Professionals and other organisations in Bermuda to increase the promotion of Bermuda as an international offshore jurisdiction. The more business that comes to our shore, the better off our economy will be. We invested heavily in this in 2014 with great success, and we will continue to invest to raise Bermuda’s profile and that of our own in 2015 and beyond.
Is there anything else that you would like to discuss?
With Clarien’s current market position, deeply rooted relationships with personal and corporate clients, we are well positioned for both local and international expansion. We remain committed to the success of Bermuda’s economy. With its sophisticated financial infrastructure and history as a hub for high net worth and ultra-high net worth individual wealth, Bermuda is fast becoming accepted as one of the world’s leading centres for offshore wealth and banking services. As a key player within it, we will continue to drive forward greater economic prosperity and the rewards that come with it for the banking industry, for businesses, for the tourism sector and the people of Bermuda.
