Despite a sluggish performance from Trinidad and Tobago's economy in the past three years and lower than projected growth for 2012, the country's banking sector has remained stable.

There's an obvious double-edged sword in the banking system as cash-rich banks means poor loan sales, stability means no growth, less income.

The Central Bank's Financial Stability Report for June 2012 noted that deposits in the banking sector have been increasing at a faster pace than loans which have contributed to the excess liquidity in the financial system.

Conversely, with the fall in interest rates, deposit-taking institutions have been earning less income on their investments and other assets.

Notable highlights of the Central Bank's report on the banking sector for the last six months include:

* Banks maintained large excess liquid balances at the Central Bank which grew to a daily basis of $5.6 billion in March 2012, up from $1.7 billion in March 2011.

* Credit quality fell slightly as the ratio of non-performing loans to gross loans inched up to 6.8 per cent in March 2012 from 6.3 per cent in December 2011.

* Bank increased their provisioning for non-performing loans. The ratio of commercial banks' specific and total provisions to impaired loans rose to 31.2 per cent and 37.9 per cent, respectively in March 2012 from 28.3 per cent and 35.2 per cent in December 2011.

* Banks recorded strong, though lower profits. Net profits before taxes declined to $574.6 million in March 2012 from $699 million, a year earlier.

* Lower lending rates and more aggressive loan marketing campaigns have helped to bolster credit extended by commercial banks. Private sector credit extended by banks grew by 6.3 per cent in the 12 months to March 2012, up from 1.5 per cent earlier. Notwithstanding the improved lending conditions, commercial banks were still faced with declining interest income, as interest rates dropped and as fewer viable investment opportunities became available.

* Commercial banks remained well capitalised as the ratio of regulatory capital to risk-weighted assets increased to 26.1 per cent in March 2012 from 25.1 per cent in December 2011. These capital adequacy ratios are among the highest in the Caricom region.

With deeper than expected pockets, the commercial banks provided stiffer competition for non-bank financial institutions (NFIs). Investment portfolios for NFIs contracted by 9.8 per cent in the year to March 2012 following a decline of 10.3 per cent in December 2011. They also experienced a steeper decline in profitability than commercial banks with profits before tax amounting to 52.7 per cent in March 2012 on account of a steep decline in both interest and fee income. The Central Bank report noted that the asset quality of the NFIs were partly affected by weaker tourism activity in the Caribbean as a few NFIs reported increased delinquency in loans to the tourism and hospitality sector in the region.

Insurance companies, the report noted, "have maintained a steady path of recovery."

"With respect to financial stability, the financial soundness ratios showed that there had been no significant deterioration in the overall stability of life insurance companies," it noted.

The report noted that whereas capital adequacy ratios are somewhat stable, they have been trending downwards since 2009.

"Companies in the life sector have had to increase their actuarial reserves to compensate for lower-than expected investment income in their actuarial valuations," it said.

The insurance companies are facing the same challenges as commercial banks- earnings and profitability have been constrained by the "low interest rate environment and by insufficient re-investment opportunities."

Unlike the commercial banks though, the liquidity levels of the life insurance companies "remained relatively satisfactory as companies held more short-term assets in their portfolios in 2011."

With regard to non-life insurance companies, the Central Bank report noted that higher premiums from property business contributed to a 4.6 per cent increase in gross premium income in the non-life sector in 2011 while income from the motor vehicle business stagnated in 2011.