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National Commercial Bank Jamaica Ltd 2015 results

Sunday, December 13, 2015

NCBJ shot into the local spotlight when, on November 30, 2015, a joint announcement stated that it had agreed to acquire a 29.99 per cent stake in Guardian Holdings Ltd.

As yet, the detailed mechanics and purchase price of this transaction, which is subject to regulatory approvals, have not been disclosed. There are also implications for the operations of both companies which will evolve over time.

First, however, let us review NCBJ’s fiscal performance for the year ended September 2015.

Changes in financial position

Total assets rose by 4.9 per cent to J$523.8 billion from the restated J$499.3 billion as at September 2014.

The combined total of investment securities increased by 4.3 per cent to J$275 billion from J$263.6 billion. However, the pledged assets portion fell to J$110.6 billion (2014: J$159.5 billion) while the available-for-sale component rose to J$166 billion from J$105.55 billion.

Net loans and advances rose to J$165.4 billion from J$157.6 billion, or by 4.9 per cent. Among the largest recipients were personal loans, which stood at J$75.4 billion (2014: J$72.4 billion) and loans to the tourism sector, which increased from J$17.77 billion to J$20.6 billion. 

Loans to the distribution sector registered at J$17.36 billion from J$16.12 billion. Interestingly, loans to overseas residents jumped by almost 95 per cent to J$10.9 billion from J$5.6 billion.

Investments in associates rose to J$6.3 billion from J$5.9 billion.

A major movement was the transfer out of its holdings in Kingston Properties Ltd from this category to investment securities. This was because its shareholding fell to 10.76 per cent from 25.17 per cent; this reduction followed its non-participation in a rights issue by that company. Its major remaining associate is JMMB Group Ltd, in which it holds a 26.3 per cent stake.

NCBJ’s stock of cash, due from central banks and other banks rose to J$52.9 billion from J$50.2 billion. The sums due from banks climbed to J$24 billion (2014: J$20.4 billion) while that due from other sources fell marginally to J$28.9 billion from J$29.8 billion.

Its non-interest bearing statutory deposits with central banks rose to J$14.7 billion from J$13.6 billion; this reflects its higher level of deposits.

Total liabilities rose by 4.3 per cent to J$435.4 billion from J$417.5 billion.

Customers’ deposits climbed by a robust 12.7 per cent to J$227.9 billion from J$202.2 billion. All categories, savings, current accounts and fixed deposits registered strong increases of 15.9, 11.1 and 8.9 per cent respectively.

The most significant movement in its liabilities was noted in the massive increase in obligations under securitisation arrangements, which jumped from J$13.9 billion to J$44.3 billion. The largest increase was recorded under the merchant voucher receivable segment. Essentially, this involves the sale of the future cash flows from its credit card operations in Jamaica. (A more detailed explanation can be found at note 32 on page 72 of NCBJ’s 2015 financials.)

Other borrowed funds fell to J$8.6 billion from J$12 billion previously. Mostly accounting for this decline was the repayment of its loan to the International Finance Corporation, which removed $3.37 billion from its books.

Equity movements

Stockholders’ equity advanced to J$88.4 billion from J$81.8 billion.

The retained earnings component advanced to J$46.1 billion from J$41.5 billion. This figure was enhanced by J$12 billion in comprehensive income, but reduced by dividends of J$5.7 billion and transfers to various reserve accounts totalling J$1.7 billion.

Excluding its ESOP, NCBJ has 2,461,468,912 shares outstanding. The book value of these shares improved from J$33.25 as at year-end 2014 to J$35.91 as at September 2015.

Revenues and profits

Total income closed 2015 at J$47.5 billion from the previous level of J$43.3 billion, reflecting an improvement of 9.8 per cent. The main component, net interest income, advanced by 5.3 per cent to J$25.96 billion from J$24.66 billion. Significantly, interest expense declined to J$11.5 billion from J$12.2 billion. Despite higher loan balances, interest income rose by a meagre 1.6 per cent to J$37.5 billion from J$36.9 billion.

Net fee and commission income advanced by almost 13 per cent to J$9.8 billion from J$8.7 billion. This reflected higher use of its payment services, new loan fees together with higher fees from unit trust transactions and corporate financing activities.

The total of other income closed 2015 at J$11.7 billion, which reflected a solid improvement of 18.1 per cent over the J$9.9 billion recorded for 2014.

The largest improvement of 44.8 per cent was shown under the gains on foreign currency and investment activities. This component advanced to J$3.75 billion from last year’s J$2.59 billion, occasioned by the sales of debt securities and higher foreign exchange income.

Meanwhile, premium income from its insurance activities rose by 9.2 per cent to J$7.64 billion from J$7 billion previously.

Total operating expenses rose to J$31.5 billion; this was 7.3 per cent greater than the J$29.3 billion recorded in 2014.

Notably, provision for credit losses fell to J$1.8 billion from J$2.22 billion. Also declining was policyholders’ and annuitant’s benefits and expenses; this line item fell from J$4.4 billion to this year’s J$3.9 billion.

Offsetting these positives was other operating expenses, which climbed by 25.4 per cent to J$12.2 billion from last year’s J$9.7 billion. These costs covered a wide range including asset taxes and irrecoverable taxes, marketing and advertising costs and professional fees.

The net effect of these changes saw NCBJ deliver an operating profit of J$16 billion; this was an improvement of 15.1 per cent over the J$13.9 billion recorded for 2014.

After including the share of profits from associates (J$433,000) and allowing for a loss on disposal of its investment in an associate (negative J$507,000), the pre-tax profit registered at J$16.38 billion; this was 5.9 per cent greater than the J$15.5 billion recorded for 2014.

At the after-tax level, the net profit of J$12.30 billion was marginally lower than the J$12.33 billion recorded for 2014.

This result translated into an EPS of J$5.00 versus J$5.01 for 2014.

Segment performance

All segments achieved higher external revenues.

Notably, the consumer and SME segment reported the only major profit decline. This was mainly concentrated within the payment services sub-group, which experienced a 21 per cent profit contraction. Expenses increased by 18 per cent, reflecting higher loan loss provisions and the cost of a credit card marketing campaign.

The large increase in corporate banking was attributed to higher loan interest, fees and commissions.

Foreign currency and investment activities drove the treasury and correspondent banking’s results.

At wealth, asset management and investment banking, the marginal decline was attributed to costs outstripping revenue improvements.

At the life and pensions segment, growth in both individual and group life policies underpinned performance.

Higher premiums and improved fees and commissions helped the general insurance segment.

Dividend and share price

As recently as mid-September, one could buy NCBJ’s shares on the local market at TT$1.63, but by November 13, the price had reached TT$1.80. Trades of 285,000 shares on November 20 saw the price close at TT$1.95.

In its home market, the share closed at J$30 on October 1, 2015, from which base it has continued to advance relentlessly. On November 13, it closed at J$35.00, then on November 19, it ended the day at J$37.91. This reflects a 103 per cent improvement over the January 5 price of J$18.71.

So far for 2015, NCBJ has paid dividends totalling J$1.35 and, on December 11, paid another dividend of J$0.85; this brings its total calendar year dividend up to J$2.20 (calendar 2014: J$1.98). When related to its recent high of J$37.91, this gives investors a 5.8 per cent yield.

Its future with GHL (and related matters)

While this arrangement appears to provide a tolerable exit for IFC and RBC, ultimately, it may still be unsatisfactory to Lock Jack and Ahamad. 

Despite their institutional value, can we see either Arthur Lock Jack or Imtiaz Ahamad playing “second fiddle” to Michael Lee Chin for any extended period of time? In this deal, who is looking after the interests of ordinary shareholders of either company?

At this time, it might be too expensive for NCBJ to buy the remaining 70.01 per cent of GHL shares for its “real value”. Is there a timeframe before NCBJ is allowed to make a bid for the remainder of GHL? It seems likely that, over the next few years, NCBJ will probably merge with GHL.

Several questions emerge: 

Will NCBJ be required to sell its 26.3 per cent stake in JMMB Group? Who will be the buyer? Will GHL be allowed to acquire some of NCBJ’s insurance assets in Jamaica? Will the two companies market each other’s collective investment products? The list of possible questions is long.

In the medium-term, will the merged company be headquartered in Jamaica, or (gulp) Trinidad?


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