May 2006 Financial News

National Commercial Bank (NCB) closes in on Bank of Nova Scotia (BNS)

May 12, 2006

THE NATIONAL Commercial Bank (NCB) could, in a couple years, overtake its main competitor, Bank of Nova Scotia (BNS) in profitability if it continues on its aggressive loan growth, analysts say.

Bank of Nova Scotia is Jamaica's profits champion, easily and consistently outperforming its rivals, but NCB is pushing harder for growth. Up to December 2005, NCB and BNS, between the two of them, they controlled the lion's share - or 74 per cent - of the $130 billion loan pie. With almost 44 per cent of the market Scotiabank dominated NCB which holds on to 30 per cent of the market.

For the six months to March 31, 2006 NCB posted net profits of $1.2 billion, a 52 per cent increase over the comparative period in 2005. During the same period the bank's interest income from loans climbed to $3.6 billion, a 21 per cent jump. In fact, total interest income for NCB grew by 10 per cent, dragged down because of the anaemic four per cent growth in interest income from securities. Overall, net interest income grew by almost 19 per cent, to $5.8 billion.

"If they are able to continue that momentum going forward where they continue to grow loans as a percentage of their total assets then NCB has the potential, by 2008, to overtake BNS in terms of profitability, said senior manager at DB&G, Vernon James.

He explained that "the earnings of both have been converging, if BNS continues grow at five per cent and NCB maintains a growth of 15-20 per cent then it would just be a matter of time before NCB catches BNS."

Scotiabank, in contrast to NCB, has experienced a slower growth in its interest income and profitability. For example, for its first quarter of 2006, interest income from loans fell by one per cent compared to the comparative period in 2005.

INTEREST INCOME GREW

On the other hand, NCB's interest income for its first quarter (to December 2005) grew by 13.2 per cent rate. And while BNS's total interest income increased by just over two per cent NBC's went up by almost eight per cent. In terms of its net interest, though, the gap between the two narrowed, with Scotiabank posting a 14 per cent growth compared to NCB's 16 per cent.

Commenting on NCB's strength, James noted, "If you look at the asset mix in terms of BNS and NCB, NCB's loan portfolio is significantly below as a percentage of total assets [compared] to BNS which is an indication that further growth is anticipated." NCB's loan portfolio represents 18 per cent of its total assets compared to Scotiabank's, which is 30 per cent.

In fact, last year BNS posted a flat performance, with net profit growing by less than one per cent even though it continues to have solid and fairly stable earnings. On the other hand, NCB, because of its focus on loan and growth in its loan portfolio, is able to extract more growth in its profitability compared to BNS. Said James, "BNS has a fairly mature portfolio. It is not as easy to grow their loan position."

Pointing to NCB's advantage, investment adviser at JMMB Securities, Doyl Smith explained, "Growth is good ? coming from revenues. Loans are not usually for six months, they are usually for a year and beyond. Expect it to be sustainable ? as long as they can keep building on that."

Another NCB advantage , according to industry watchers, is NCB's aggressiveness in the loan market as well as the depth of the bank's products. "NCB is a lot more aggressive in going after loans and growing their loan portfolio than BNS ? They are finding new and innovative ways of providing the market with what it need - loans which are not just flexible but accessible," said Smith.

He also noted that "NCB, in terms of its earnings, is a bit more diverse than BNS. It has earnings coming from all sections ... especially because of its wealth management arm, NCB Capital Markets."

But size is not all. While NCB may catch up with the leader in its quantum of profits, it has a much tougher task in closing the efficiency gap. Scotiabank had a return on equity of 30.6 in 2004 according to Jamaica Stock Exchange data. That measure of how effectively the management of a company can translate shareholder funds into profits has remained consistently high.

By contrast NCB's return on equity in 2004 was 19.7, on a dramatic upward path from just 3.1 in the bad year of 1999, but still substantially lower than BNS. To close this gap with their arch competitor is another challenge altogether .

Ashford W. Meikle
Staff Reporter
The Jamaica Gleaner
Friday, 12th May, 2006.