Jun 2010 Financial News

Scotia Group Jamaica continues to grow. Deposits increase in Q2.

Jun 18, 2010

The implementation of the Jamaica Debt Exchange (JDX) and a contracting economy has not cooled the ardour of the country's largest banking entity to aggressively grow all lines of business.

Despite the testing environment, Scotia Group Jamaica was able to grow total revenue in the second quarter ended April 30, 2010 to J$15.8 billion, representing an increase of J$1 billion or 6.8 per cent from the prior year. Net interest income was J$12 billion, up J$238 million compared to last year. According to Scotia Group, this was as a result of strong growth in earnings assets, as interest margins have contracted due to significantly lower market interest rates subsequent to the JDX.

Profit attributable to stockholders for the period under review came to J$2.56 billion, J$92 million below the quarter ended January 31, 2010 and J$235 million less than the J$2.80 billion posted for the second quarter last year. For the six months ended April 30, 2010, net income available to common shareholders was J$5.22 billion compared to J$5.20 million for the same period last year. So what accounts for this drop in profits? Scotia Group points to these results including two months of lower yields on securities due to the impact of the JDX, which was completed in February of this year.

Growing deposits

Of particular note and signalling an ominous warning to its competitors is Scotia Group's ability to grow its deposits. With the economy contracting and still a degree of uncertainty prevailing, depositors are opting for the integrated venerable institution, which has become a byword for conservatism, security and reliability. For the second quarter Scotia Group's deposits stand at an impressive J$160.2 billion, J$5.2 billion more than the same period last year. Earnings per share (EPS) for the quarter came to J$0.82 compared to J$0.90 last year. For the six-month period EPS came to J$1.68 while the year to date Return on Average Equity (ROE) was 22.05 per cent.

Speaking with Caribbean Business Report from his corporate offices in downtown Kingston, Scotia Group's President and CEO Bruce Bowen said: " Obviously the biggest impact has been the JDX and the economy. I am pleased with what we have achieved in view of all of that . All institutions including ourselves leading up to the JDX and completion did a forecast of what its impact would be and where we would end up. We are slightly ahead of where we thought we might be, but it is early. It is only two months of the quarter, post- JDX. Our sales people are out there drumming up business and I believe we are winning market share and I am quite confident that we are doing so on the commercial side. Our sales teams in the retail branches are very motivated and doing very well. With the JDX the big thing is managing our margins."

Lowering interest rates

Scotia Group has led the charge to lower interest rates, but the other banks have not followed and continue to remain tentative. "We took the conscious decision to lead the market down in rates, especially commercial rates. It is a personal frustration that we have dropped our prime rate to 17.75 per cent while our competition's remains above 20 per cent," said Bowe on the matter of lower interest rates.

Many have noted that while the Bank of Jamaica has continued to drop rates the commercial banks have not chosen to follow suit. The question is why.

Bowen believes that in the short run as a commercial bank you can make more money if you drop your deposit rates but do not raise your lending rates. But in his view, the banks bet huge amounts of money on the government when they agreed on the JDX plan. Because if the plan does not succeed it would have proven to be a wrong bet and the bank would have forgone income and they would have ended up in the same place.

"But that only works if rates come down and they helped to stimulate the economy. Now we have seen it in car lending rates and that is good and we at Scotia have lowered our small business lending rates. However, the majority of mid-market companies borrow based upon prime rate. Now if you are borrowing over 20 per cent, you are borrowing at a premium. I'm not satisfied that our 17.75 per cent is where we need to be because the BOJ continues to drop rates, so we need to be moving them down as well," said the Scotia Group boss.

So where would the Scotia Group CEO like to see interest rates end up?

He would not be drawn on a specific figure but did say that the more stability there is in the market it should allow the spread between the government borrowing rates and the commercial borrowing rates to begin coming down. The risk earlier on was this was all going to be short-lived and then the rates would jump up again, but that is becoming less likely. Over the last month rates have come down and the Jamaican dollar continues to appreciate. This shows confidence in the prescriptions taken and should be the green light for banks to further reduce borrowing rates.

Bowen further added: " Is there another percentage or two in the short to medium term that it should come down? I think so. I think it is important that we are leaders but we have to see the new business coming in. It is good for the economy if everyone started dropping their lending rates because it would motivate us to keep bringing our rates down. Given the reduction we have done in lending rates we have still managed our margins well and balanced doing the right things for consumers and the economy vs. making sure we maintain our non-interest revenue."

Non-performing loans are worrisome

Non- performing loans at April 30, 2010 totalled J$3.90 billion, up J$335 million over the second quarter of last year, and J$242 million above the previous quarter ended January 31, 2010.

A press release issued by Scotia Group read: " The year over year increase reflects the financial difficulties being faced by borrowers, especially retail loan customers. The Group continues to apply strong credit risk management measures, in an effort to minimise the growth in non-performing loans. Scotia Group's non-performing loans now represent 3.99 per cent of total gross loans and 1.21 per cent of total assets compared to 3.81 per cent and 1.16 per cent respectively one year ago."

One of the things Scotia Group has successfully been able to do is grow its total earning assets and this will go some way to mitigate the shock of the JDX. Its retail loan book for the quarter under review fell to J$35.80 billion from the J$36.38 billion posted for the same period last year. The banking giant grew its commercial loan book and saw it move to J$38.23 billion as opposed to J$37.11 billion for the same period last year. There was a slight dip in government loans, which registered at J$12.66 billion whereas for the same period last year the figure was J$12.90 billion.

All in all total assets increased year over year by J$17 billion or 5.5 per cent to J$324 billion as at April 30, 2010. The Group's loan portfolio came to J$94 billion, up J$1.6 billion over the previous quarter, with growth reflected mainly in the commercial loan portfolio. Like other banking entities in the country, Scotia has seen its Non Accrual Loans (non-performing loans) increase as the contraction of the economy and unemployment continue to rise. For the second quarter of 2010, Scotia saw this segment jump to J$4 billion compared to J$3.5 billion for the same period in 2009.

Scotia Group explained: "Our Non Accrual Loans (NALs) as a percent of total loans has increased slightly in the last quarter. For the consumer loan portfolio, NAL as a percentage of total loans peaked in the first quarter of 2009 but has improved slightly since then and now stands at 5 per cent.

"The commercial portfolio, NAL as a percentage of total loans has been increasing and now stands at 2.3 per cent reflecting the current difficulties being faced by commercial customers. We continue to work closely with the customers to try and stem the growth of the NALs and increase our collection efforts."

Bowen stressed that NALs and PCLs are areas where the bank will be focusing on over the remainder of the year. He notes the total NAL increase of 5 per cent but when he sees the huge increases in NALs released by the BOJ, it does give him some comfort that this is not peculiar to just Scotia Group.

Operating expenses must be contained

"In Scotia DBG our strategy has been to move off balance sheet instead of selling people the underlying unit trusts and mutual funds, and that is going very well. Our assets under management off balance sheet have been growing significantly faster than our balance sheet. Scotia Life, our annuity business, just goes from strength to strength. Where we are challenged is on the expense side. Our businesses expense side when inflation was in the 15 to 20 per cent range was heading in a certain direction and we are trying to slow that down. Others have taken the route of letting significant numbers of their staff go. If you can manage without doing that I think that over the long run it is better for the business, because huge staff cuts always create some disruption. The key is to have your staff manage the little day-to- day things a little bit better.

"We are not quite where I had hoped we would be during the quarter though we have seen reductions, but I would like to see them come quicker. The aim now is to keep the focus on expenses so that we can avoid doing the things we would not like to do in order to get those numbers down," said Bowen.

Non-interest expenses which include salaries and staff benefits as well as property expenses for the period under review came to J$7.56 billion, a whole J$1.2 billion more than the J$6.78 billion posted for the same period last year. The task now is to contain operating expenses.

Insurance arm is an ace in the hole

A cursory look at the segment reporting reveals just how much Scotia Group's insurance arm has come and its contribution to Group revenues. For the second quarter, 2010 total revenues for Scotia Jamaica Life Insurance Company Limited (SJLIC) were an impressive J$3.13 billion resulting in net income attributable to shareholders of J$2.33 billion, a 44.60 per cent contribution to the Group's net income. This is a greater contribution than that of Bank of Nova Scotia Jamaica Limited, which was 41.41 per cent. Other life insurance players operating in Jamaica have good reason to look over their shoulder at SJLIC .

Scotia Jamaica Building Society(SJBS) continues to make its presence felt, contributing J$216 million to the Group's net income attributable to common shareholders. Residential mortgages for the period under review jumped to J$7.10 billion, a notable increase on the J$6.37 billion registered for the same period in 2009.

Bowen sees the big picture

Bowen continues to take a big-picture view. He has managed to steer the Group into a creditable performance in spite of the challenges and his personal stock in Jamaica continues to grow. His relaxed, intelligent manner has gone a long way in winning friends and influencing people and has endeared him to Jamaica's business community.

"If we can get the economy starting to strengthen, then that's the end game for the JDX. Take the hit now to get the economy growing so that you are expanding your business through private sector lending rather than government lending. In the next 18 to 24 months the playing field will be back level where the strength of our capital base will be less of a competitive advantage as people become more comfortable and there is also good competition around. We have that period to improve our service and relationships so that when the competition gets back and becomes stronger people will stay with us because of the service they are getting and not because they feel we are the biggest bank on the block. We now have to raise the bar, particularly in the commercial service area where the competition is perceived as weaker or a little bit distracted. If you look at the BOJ's statistics, our market share has increased in 80 per cent of the detailed categories so we are taking market share and are looking to continue to do so," said the Scotia Group boss.


Source:
By Al Edwards
Jamaica Observer
Friday June 18, 2010

http://www.jamaicaobserver.com/business/Scotia-Group-Jamaica-continues-to-grow--_7720692