Mar 2010 Financial News

JDX has forced Scotiabank to focus on non-government business — Bowen

Mar 05, 2010

SCOTIABANK CEO Bruce Bowen says the silver lining in the Jamaica Debt Exchange (JDX) programme is that it has forced the firm to agressively focus on non-government business and balance its risk.

According to Bowen, some 35 to 40 per cent of Scotiabank's total assets are in some way or another related to Government loans, with Jamaica's largest banking entity having over US$2 billion credit exposure to public entities.

"(Government) owes us more money than they do the International Monetary Fund (IMF)," he said, referring to the US$1.25 billion stand-by borrowing arrangement that the Bruce Golding-administration recently signed off with the IMF.

That's a whole lot of money to one borrower if they can't make their interest payments," Bowen declared, adding, "I'd much rather lend the money out to a good credit-quality private sector than to the Government."

The Scotiabank boss made the comments on Tuesday, during his address on the implications of the domestic debt restructuring on financial institutions, at a Jamaica Manufacturers' Association (JMA) luncheon. The JDX, which ended last month, involved the exchange of nearly J$700 billion of expensive domestic securities for longer-term instruments at reduced interest rates.

According to Bowen, Scotia began to aggressively look beyond Government for business from as early as October after "seeing what was happening". He said, however, that Scotiabank and other commercial banks will now have to look at boosting non-interest revenue to negate the fallout in income from the programme. Financial institutions earn a significant portion of their revenues from the interest payments they receive from government securities, which would be reduced under the Government's debt swap.

"The commercial banking sector needs to be managing the margins and looking at overall liability and asset rates," said Bowen.

"We need to focus on business lines that generate non-interest revenue," he continued. "That doesn't just mean an increase in fees but it means those business lines -- foreign exchange, investment management, investment sales, cash management etc... you'll see a big push into those areas to generate revenues that's not dependent on interest."

Additionally, Bowen said that firms will have to have a renewed focus on operating efficiencies.

"This is something we started last year, and with the JDX we have doubled the speed at which we are trying to do these things such as utilising technology efficiently, outsourcing work, and centralise operations to get our efficiencies down in order to offset the reduction in net interest margin," he said.

JMA president Omar Azan, in his address, reiterated the JMA's support of the JDX and its objective to reduce interest rates. But he warned that the loans must be accessible if it is to have the desired impact of stimulating the productive sector and growing the economy.

"Competitive interest rates will encourage business expansion and the establishment of new businesses, which will lead to the creation of well-neeed employment," said Azan.

"As it stands, interest rates are slowly trending downwards, but still hava a far way to go, to have any significant impact on the sector," he continued, adding that "while low interest rates are important, manufacturers must also be able to access these loans, and collateral requirements remain an issue."


Source:
JULIAN RICHARDSON Assistant business co-ordinator editorial@jaamaicaobserver.com
Jamaica Observer
Friday, March 05, 2010

http://www.jamaicaobserver.com/business/JMA-Luncheon-the-final_7464051