Bank fees and the economy

[00:00:00] Speaker A: You're tuned into the all New Freedom Formal 6.5. Formal 6.5. [00:00:06] Speaker B: Our guest this morning, Dr. Valmiki Arjun. As we talk about the state of the economy, his thoughts, his perception. Good morning to you Dr. Arjun. Hello. Good morning Dr. Arjun. Good morning. Good morning. Good to have you on the program this morning. The state of the economy. Dr. Haru June. Before we get deeper into the conversations as quickly as we can this morning, we don't have much time. Can you tell me your thoughts paying attention over the last 12 months to the fiscal position that you think we are in as it relates to our financial stability and the economy in this country? [00:00:48] Speaker A: Yeah. So given the state of where the energy prices are currently at on the global market, the fiscal situation in my view is likely to improve. And I should think that for the upcoming midiary view the Minister of Finance would likely discuss this. As we're well aware, the prices of oil and gas are quite high, abnormally so because of what's happening with this current geopolitical position on the blockages at the Strait of Hormuz and that even despite the fact that we have been in a low production environment for oil and natural gas over the last decade, both of them would have dropped by well over 30% in the last 10 years. But despite this fact, because of the high price environment that we're in right now, that has put us in a better fiscal position. Of course it does expose us to certain risks internationally where prices of course are starting to go up as well. Our major trading partner, which is the United States, prices are slowly creeping up over there. So what could very well happen, we have to be very mindful of, is that we could be, when we import other goods from the United States and even other countries, we could start seeing prices slowly starting to creep up. But again I think the overall benefit is likely to outweigh that overall cost. The benefit being that the revenue streams are likely to be in a better position. When one looks at the data, the natural gas prices right now, remember we're not just based on Henry Hub anymore. We're based on our basket which comprises of the Japan Korea marker, the Asian prices, that is European prices like Dutch TTF, the UK NBP, those prices are ranging between 15 to $20 per MMBtu. Whereas previously the Henry Hub would have been somewhere in the vicinity of between, fluctuating between 2.5 to about 4, $4 per MMBtu. But was putting us in a more advantageous position is the fact that the basket of prices that we're using are higher now when we take into account the European prices and the Asian prices. So we're getting more bang for buck. And that is helping us as well with the fiscal position. So looking at that side of things, I would say that from a financial standpoint, we should be improving. That is caused for some, for some cautious optimism. [00:03:24] Speaker B: All right, beautiful. Thank you very much. I had to ask you that question because when we look back closer to home and we're dealing with some of these local banks looking at increasing bank fees and so forth, given the fact that citizens are now they have lost jobs, some of them are working for less than they did five, six years ago. How I want to pay attention, what is the mindset of these financial institutions that they come up with these things to put and impose on citizens? [00:03:52] Speaker A: Okay, well, first of all, before we get into that, I just want to just clarify one quick thing here because I think there's a little misconception, not misconception, but it is actually not being put out in the public domain enough. Some persons, yes, would have recently lost opportunities with the closure of the CPAP and URP programs. But from, I mean, I sit on a few of these, these chambers and work somewhat closely with others as well. And what we're seeing is that some people, many people rather, who would have lost these opportunities are actually as fast as they lost the opportunities in CPAP and erp, they've gotten jobs elsewhere. And that has, as the central bank data would show, that has basically kept the unemployment levels, the rate, it is virtually unchanged. So that in itself is a positive thing in moving from these make work programs to getting a job elsewhere in the private sector that tends to create more value added and gives you a more productive type of employment compared to what would have been the case before. So I think that information has to be put out there and I think that more of that has to be studied where some of these people, many of these people rather, they actually became gainfully employed and are no longer necessarily reliant on these former make work programs. Now coming to the issue of the fees, the charges by the commercial banks. This is not a new thing. One has to recognize that this is something that has been around for a long time and has become even more evident within the last decade or so. There's been a growing reliance on transaction fees, penalty charges, et cetera. That's what we call an economics friction based income for the banks. Right. But what that has been doing is creating an environment that tends to discourage spending, productive spending. It could discourage it puts us at risk of discouraging investment activity. It raises the cost of doing business and ultimately will works against the broader national objective of stimulating economic growth and private sector expansion. So you see, what we have to consider is the state of banking in tnt, right? Republic bank, their talks of these fee increases, etc, it has to be analyzed against the overall banking environment, the structure of the banking environment. The banking environment is highly concentrated. Right. You only have a handful of major banks in this country, a country that, yes, is a small country, but does has a history of significant economic activity, primarily because of the oil and gas sector. So there's a lot of liquidity in our economy, not just now, not just presently, but historically as well. But the market is highly concentrated. The sector is highly concentrated and dominated by a few large banks. So what we say is an oligopolistic market that means consumers, they don't easily enjoy switching from one bank quickly to another bank. There's no full benefits of strong competition. Your salaries, your loans, your overdraft, your credit card, your standing orders, payrolls, merchant services, forex relationships and a whole list of other services are often tied to one institution. And that gives major banks significant pricing power because there's so little of them. So when one large bank historically would have raised their fees, the concern is not just the impact of that one single increase in that one single bank, but the concern is whether it becomes a signal for the wider market to reprice their banking services. I mean, you'd have observed in the past that when one bank push up their fees, shortly after, be it weeks or months, another bank will push up their fees and the trend continues. Now, how do banks earn their money? Two key ways. One, they earn it primarily from interest income. So the difference between what you earn on loans and investments and what you're paying deposits then. Right. Of course that difference is called the net interest income because you're paying interest on a loan and there's also interest that is that the banks will have to pay out on deposits. The difference there is called net interest income. When you look at Republic Bank's net interest income, the overall group, it would have risen from about 5.06 billion in 2024 to about 5.4 billion, approximately 5.5 billion then in 2025. Right. So the core banking remains strong for Republic Bank. Right, but that is their interest income alone. But what we've seen over the last several years is banks have increasingly placed more focus on fees, on commission income, like fees from your credit cards, your, your accounts, what you pay the transfers, overdrafts, etc. And their FE income at the group level would have risen from about 1.25 billion in 2024 to 1.354 billion in 2025. So it begs the question, is the bank's revenue model changing? Do they feel, even though they're earning substantial amounts from interest income, do they feel as though it is still not enough and they need to place more emphasis on the fee income instead? Do they feel that in recent years government borrowing would have been substantial? And of course, when governments borrow, they aren't paying high interest, right? When large institutions borrow from banks, they're not paying high interest either. So do they feel as though they need to make up for that somehow or the other by switching now to higher fee incomes to earn more money from there? There's indeed a growing reliance on transaction fees, penalty charges, these friction based income, as I would have said earlier. And that is causing the banking environment to be regarded somewhat as an environment where it is not in keeping with the objective of stimulating more productive activities, but rather focusing mainly on the objective of shareholder wealth maximization. You see, Finance101 will tell you that the main function of a bank is to accept deposits and give loans. You accept deposits and you give loans from those who have a surplus of funds, and you give loans to those who need the funds for whatever reasons they have to spend on. That's the main function of a bank. But the objective, on the other hand, the main objective is shareholder wealth maximization. At the end of the day, and what you don't want happening, is that the objective of shareholder wealth maximization takes so much precedence that it starts to stifle productive economic activity in an economy. And you also have to consider one other thing, a liquidity paradox. The banking system has large TT dollar deposits, right? But your deposit rates what you earn on your savings account, your checking account, etc, it remains very, very low. And lending opportunities are also not always that strong. Ask a lot of small and micro sized companies there, a lot of times they go for a loan and they're not getting it, they might not have enough collateral, etc, and if they do happen to get it, it comes at a very high price, a very high interest, customers being charged more to access their own money, right? So in practice this could feel to the customer like a quiet form of deposit taxation. You're earning a little bit on your savings, but you are paying more for transactions in the form of these fees. And you face penalties when your cash flow is very tight in the form of these overdraft charges, the interest on your credit card, etc. Right. That doesn't. The bank is not doing anything illegal there. Not at all. But it raises a serious question about fairness, about the balance between bank profitability, Right. And the needs of the overall wider economy. [00:12:13] Speaker B: Now, in tandem with what you just mentioned, I often wonder, and I'm quite certain persons listening, the layman on the street are a bit confused or maybe have the same thought process. So I'm asking on behalf, when one looks at the, as you say, the shareholder profitability margin, it has to increase. If a, if, if an institution continuously declares a profit, it simply means that they are able to meet their monthly objectives or yearly, quarterly calf. Yearly objectives quite nicely and smoothly so that they can yield profits into the millions and perhaps, you know, a fraction of a billion dollars. Now the profit margin may fluctuate. So this year we declare 1.6 billion, next year was 1.2, the following year we, we dip again and then we went back up. We are getting a profit. Why do we feel the need to continuously bestow fees now? The fees are always there on citizens after we continuously show that we are able to meet our objectives and still declare profit. Why is these fees imposed on citizens while other institutions are advertising zero fees? [00:13:26] Speaker A: Right. So their main just not. It's not just going to be Republic bank, it's the banking institutions as a whole. Agreed, they do have costs. There's no two ways about it. Banks have costs and of course costs have. They have gone up in recent times because of how stringent international and local banking laws have. In order to, in order at the end of the day to protect depositors, Right? Because there's people money you're dealing with right now what they're saying, the banks, they point to things like security costs, fraud, prevent costs for fraud prevention, cybersecurity, digital infrastructure compliance, anti money laundering, know your customer correspondent banking costs, etc. Modern banking, yes, agreed, is expensive. There's a cost to it, right? So okay, fine, we take that point, right? However, one, with the increased usage of technology in the banking system, right. Over the last decade or so, if not longer, that would have helped them to mitigate the level of costs. So for example, when you have to line up at the bank and see a teller, right. There's a cost attached to that too. But many people now are switched to online banking, so that minimizes that particular cost. And that's just one simple example, right? So yes, they have a lot of compliance, a lot of costs that they have to undergo. But are the costs necessarily that high in this day and age, especially when you relate it to the profits that they have been, that they've been experiencing, that they've been earning, is it necessarily that high that it cannot be absorbed and still ensure that they earn a high amount of returns, which is obviously what their key objective is. Right? So recently the VP would have spoken about the cost structure. They didn't divulge much information, we don't know exactly how much money they're paying in these costs, etc. But they would have indicated that as a result of higher costs in recent times, this is why they're pushing up the fees. But what that does is prove that costs exist. It doesn't tell me anything about what specific fee increases are necessary. Is it proportionate, is it fair? It doesn't tell me if the bank's argument, I'm sorry, that is where the bank's argument becomes weak. Because if a bank is facing rising costs, but at the end of the day is also reporting strong profits, reporting rising net interest income, and also reporting more than 1.3 billion in fee related income already, then the public is entitled to ask whether the fee increases are really about cost recovery or about protecting or expanding your income streams. And it also begs the question, let's assume hypothetically, because I don't know what the costs are, but hypothetically, if the cost is 100 million and you are pushing up your fees, so you are earning 120 million in fee income, right? That means you are not only covering your costs, but you are also earning an additional 20 million in fee income. So your margins are higher by 20 million. Right? Is that what is happening? We don't know. The public doesn't know because there's not enough information being provided out there by the banks. Right, but that could very well be a reality. You're pushing up the fees not only to cover your supposed higher cost of these of banking services, but in addition to that, you're putting on an additional margin. Are you putting on an additional margin to it as well? So that is another question that I think the public is very much entitled to ask. The argument is also weak because the bank has not clearly shown a cost bridge. They haven't demonstrated publicly how compliance technology security costs have risen, which specific services have become more expensive to provide, how much additional revenues the new fees are expected to generate. And of course another important consideration, are you taking into account vulnerable customers, vulnerable small and micro sized companies, would they consider. All right, can you not propose a new fee structure for them as well. Because without that information, the justification for these fee increases remain incomplete. So it's a very good thing that they pull back on it. Right. With fees in general, there's also a fairness issue. If costs are rising, banks have choices, especially looking at the level of profitability. They can absorb some of these costs and yeah, they might have to take on a slightly lower margin, but the bottom line is that the profitability of them is still going to be very high. I mean, you're talking about over $2.4 billion profit. [00:18:23] Speaker B: That's right. [00:18:23] Speaker A: And you're talking about earning billions in profits at a point in time in the past. Like I remember back in 2015 when I was looking at one of their reports, economy in a recession. In 2016, the economy tanked by over 6% and banks reporting over $1 billion in profits back then. And I'm shaking my head wondering what really going on. [00:18:44] Speaker B: Listen, I saw you spoke at an event out there in West Moorings and that is when you first brought some very serious realities. This is when I zoomed into Dr. Van Mickey Arjun and paid attention even in more detail. We even spoke on freedom at that same day at the event. Now why I asked you the question about the economy because you just touched on it. If we are in a fragile state, government comes and goes. We don't have any money. Our budgets in this country have been in a deficit for over a decade. Decade. We have been belching out deficit budgets since manning days. So we continue to hit a decline. We continue to have a higher expenditure more than the income. Then these commercial entities who are generating these fees, they are doing so. Then you have the governor of central bank recently speaking at an interview for the Guardian saying that listen, while the prime minister while in opposition was saying, you know, she's watching these banks and you can't be charging people this money, et cetera, et cetera. We still have no jurisdiction over them as to what they can and cannot do. So it begs to differ. Why having talks then? We just hoping that we're going to talk to them. All the people please calm down, please. And we're going to get some redress. Can government actually, can central bank actually have an inject, an intervention mitigate these challenges and help citizens? Can they really make a difference? [00:20:04] Speaker A: So I think the central bank governors, what his comments need to be taken into serious, into the wider context and in the entirety of what he said. Because I listened to his comments a couple times, right. And first of all, I would not be surprised if the fees were pulled back because of any form of moral suasion by the central bank. I mean, there was no announcement about that. But I would not be surprised because this particular governor, remember he's a bit different compared to previous governors. This particular governor is a career banker. This, this also, this, this current governor is also a former finance minister. So he has a very good understanding of how the entire system works, not just from a central banking perspective, but from a public finance perspective and the commercial bank perspective. Right. So I would not be surprised if at some level the central bank would have in fact intervened in this particular stage on using moral suasion. I mean, you hear the term moral suasion. [00:21:14] Speaker B: That's what I'm thinking. [00:21:15] Speaker A: That is not something to be underestimated. That could go a very long way. Central bank, who's the regulator. And the country comes and say, listen guys, you need to pull back this one here, right? You really need to reconsider this and pull it back then I would not be surprised if that was the situation here. Now, the central bank were technically correct that it is a. They are the direct statutory authority over the bank fees, but that their direct authority, however, is limited. Right. I think they quoted section 44A something along those lines. The act basically indicating they have a clearer authority to regulate interest fees. Right? Interest rates and charges related to loans, advances on credit facilities. That's where their direct influence tends to be. But as it pertains to other fees and penalties, etc. ATM charges, etc. That's where it gets a bit hazy. Now the broader issue is that modern central banking could however, be viewed in the context of not necessarily direct fee capping power because that is where it could also get problematic. Right. What could very well happen going forward is that the central bank could use their existing power because they do have a set of other tools available to them, macro, prudential policy tools, etc. They could use their existing powers and framework by strengthening their, their market conduct supervision in order to ensure that these fees are transparent or reasonable and properly communicated to customers. Right? I think they could, they could also, and I wouldn't be surprised if this, this is something they're already looking at clear and standardized disclosure of all banking fees. So customers can, they could compare. Right. But in addition to that, putting, putting the information out there as to why these fees are increasing by the commercial banks. What is the increased costs that the commercial banks are facing? Right. So that it could give you a better idea of your fees increase, your costs are increasing by $100 million. Well, as a result of that, we have to increase fees in some form or fashion by 100 million as well to cover them, because we really may not be able to. But that in itself might very well be unacceptable to the public, because if you, if it comes back down, your profitability very high for quite a while has been over 2 billion, $2.4 billion, then you probably could afford to absorb these fees. Right. But I think going forward, what the, what they can also do, apart from the moral suasion, if they, if they do feel that there's some legislation, legislative reform is necessary, they can advocate for legislative reform if they believe that the current powers need to expand, given our banking realities. Because as a financial regulator, they would certainly know that consumer protection and public trust are very closely linked to financial stability itself. Right. And they would want to ensure that there's no excessive and poorly disclosed fee structure undermining, and they want to prevent that from undermining confidence in the banking system and disproportionately affecting the ordinary customers and the small businesses. So while they might not have broad authority to cap fees, Right. Or to say that your fees cannot exceed beyond this particular threshold, they still have important tools, I think, available to promote fairness, transparency, more competition and consumer protection within the banking sector. What I do think they need to be very mindful of now, and this will fall under their purview directly, is that they could look at monitoring whether or not the loan rates are being pushed up or the deposit rates are being pushed or might be pushed down. Because if it is, some sort of moral suasion was used recently to prevent these fees from going up, at least at this particular point, one has to be mindful, okay, the fees and didn't go, the fee income didn't go up in this regard, could they try to now earn this money in another avenue, possibly by pushing up the loan rates or by pushing down the deposit rates? I don't think they might push down the deposit rates. But is it that. It begs the question, is it that they might try to get that money elsewhere by doing something as simple as pushing up the loan rates for a certain group of customers? [00:25:56] Speaker B: And that is a very, very frightening reality. All right, we get set to wrap the interview and I want to thank you, but let me give a couple of persons. We're trying to get in. Good morning. Quickly and respectfully, please. Good morning. [00:26:07] Speaker C: Morning. I always get worried when people try to take the profit motive away from people who have invested their money in anything, banks or insurance or mapsis or whatever. [00:26:22] Speaker A: There are people who are sitting down, [00:26:23] Speaker C: you know, with partial information saying, well, you know, let's do it differently. And we've had the experience of banks doing bus in Trinidad and Tobago. I want your comment on that. Thanks. [00:26:37] Speaker A: Sorry, I didn't hear the full question. Caller was breaking up there a bit. [00:26:41] Speaker B: He talked about reusing the profitability margin to dictate with limited information what, what they should or shouldn't do, especially with banks. But you know, going back bursting or busting in Trinidad, former banks, he wanted to get a thought and a comment quickly from you on that. [00:26:58] Speaker A: Well, I think the profitability mode reminded. I would have discussed that a bit just now. Right, you did. And that is where putting all the information is necessary, is necessary right now. Remember, banks have, yes, they do have that profitability motive. But at the same time, you also have to consider that the situation where banks in Trinidad and Tobago, the banking system is very healthy. They're highly capitalized. At the same time, they're conservative in their nature as well, in many respects. So while other economies, we've seen it in the United States a few years ago where several banks fail, the likelihood of that happening in Trinidad and Tobago is very slim to none of the right. With respect to the profit motive, I think what needs to happen now is greater information being put out there by the banking system in order to educate the public as to what are the reasons for these fees, why are they paying more closer attention to fee income, how much fees they actually, how much costs they actually have to pay, how much these costs have increased in recent times because they have to meet global standards in terms of banking regulations, et cetera, I think now is a very good time to provide information to the public to help them better understand this situation. But at the end of the day, looking at the levels of profitability that they're experiencing for many, many years now compared to the realities of what's going on in the economy for many years now, there's a mismatch. Definitely a miss. [00:28:34] Speaker B: And that is why exactly the point. I started with that first question because one needed to understand our current economic standings right as we tie it in to what was taking place with our fees. So I hope persons listening could thoroughly understand and appreciate. Hello, good morning. Quickly and respectfully. Quickly, quickly. [00:28:53] Speaker C: What about my capital gain plus increase in my dividends? Would you like to comment on that, please? [00:29:00] Speaker B: Okay. Something with dividends. I didn't quite get it, but let's pause a minute. [00:29:04] Speaker C: You know, another thing I have a problem with Is people saying, well boy, think so hard but the bank's still making so much money. Well, let me tell you something, right? It is precisely because things are hard that the banks are making so much money. Because the banks sell credit. And when things are hard, people rely more heavily on credit. They go to their credit card, they take loans, they rely on their overdraft and as such the banks make a little more money at this time. That being said, when things are better and people rely less on credit and things are good for everybody else, banks do less. [00:29:35] Speaker A: Well. [00:29:35] Speaker C: So that's something you have to take into consideration too. [00:29:38] Speaker B: All right, Your final thought on that. [00:29:41] Speaker A: Well, I think he has a point, but to an extent not entirely so because you have many, many, many SMEs that have been denied and individuals to being denied loans. Talk about the SMEs being denied loans because things are hard. Their profitability has taken a hit and they have not shown strong cash flows in recent times or even future cash flows to projections then based on whatever business model they have, they have not been able to shown this profitability to be able to get the credits from the commercial banks, unfortunately. Right, but just our last comment here. There's a trust issue. Banks depend on public confidence, right. When highly profitable banks and when they raise fees, et cetera, it explains and explained mainly by reference to costs. Right. Customers might start to feel that the relationship is one sided. Right. If people believe that banks using market power to extract more from them trust in the financial system may not be as strong as one would hope it would be. So I think this is something those in charge of the banking system, the banks itself would want to take into account going forward. There is a trust issue. There's a public confidence issue. Right. And that is directly linked to the fees and charges that they do tend to implement. [00:31:12] Speaker B: All right. Dr. Valmiki, Arjun, I want to thank you very much for coming in this morning and chatting with us as we try to understand these commercial bank fees, what it can do for us, what it means for us, what it means for the profitability of the shareholders at these commercial banks. Thank you so much for sharing your thoughts this morning and do look forward to chatting with you in the not too distant future. Have a great day. [00:31:33] Speaker A: Sir, you're tuned into the all new freedom 106.5. 106.5.