Feb 2016 Financial News

No staff cuts, says Republic’s new MD

Feb 18, 2016

Republic Bank’s new managing director, Nigel Baptiste, has given the banking group’s 5,584 employees throughout the Caribbean and in the West African nation of Ghana that there are no plans to reduce staff.

Baptiste was responding questions based on analysis of the August 2014 Central Bank report entitled “Operating Results of the Financial System” that salary and employee benefits at the country's commercial banks had increased by 55 per cent from $1.225 billion to $1.901 billion between 2009 and 2013.

In that period, the eight commercial banks experienced a 13.6 per cent decline in their total operating income—which comprises interest income, fee income, dividends, rental, gains from foreign exchange trading, trustee services and other income.

Asked if the collective numbers for T&T’s commercial banks reflected Republic’s reality, Baptiste said he was surprised at the increase in salary and employee benefits and that the 55 per cent in the 2009 to 2013 period was not the bank’s reality.

In emailed responses, Baptiste said: “Generally speaking, our salary and employee benefits increase in line with the negotiated improvements in benefits as per the prevailing bargaining arrangement.

“I do not recall our actual negotiated increases for that period but over the last few three-year periods, it has been about 14/15 period and if I add on one or two percentage points for usual promotion increases, etc, our increase over any four-year period would have been closer to 25 per cent.

“I don’t know how you defined operating income but if that is net of expenses, then the increase would have been after the salary increases were taken into account and would have been affected by the reducing interest rate environment at that time.”

Between 2014 and 2015, Republic’s staff costs increased by 14.6 per cent to $804.8 million. Its employee expenses—which comprise staff costs, profit sharing, benefits, pension and medical contribution and general administrative expenses—totalled $1.72 billion in 2015, up from $1.48 billion in 2014, up 16 per cent.

Asked if he had any plans to address the bank's salary and employee benefits, Baptiste said: “When the top line is not expected to grow significantly, it is only prudent that we continue to manage all expenses wisely.

“We have no plans with respect to redundancy, severance or anything of the like.

“Our plans are to see how we can be more efficient and effective in how we use the skills at our disposal. We are focusing on improving the efficiency in the completion of routine-type activities to free up the resources to undertake more value-added (income-generating) activities.”

In the five years between 2011 and 2015, Republic Bank’s profit after taxation and non-controlling interest grew by 9.1 per cent from $1.121 billion to $1.223 billion, according to the bank’s 2015 annual report. That’s an annualized rate of less than 2 per cent. Between 2011 and 2015, Republic’s return on average assets declined from 2.51 per cent to 1.97 per cent and its return on average equity fell from 16.17 per cent to 14.09 per cent.

CLF’s Republic shares

In his first interview since his elevation last Thursday to managing director of Republic Bank and president of Republic Financial Holdings Ltd, Baptiste said if the Government wants to raise money by selling the Republic bank shares held by the CL Financial group, the focus may have to be on disposing shares owned by Clico Investment Bank and its St Lucian subsidiary, First Company Ltd.

He was responding to questions about the possibility that the Government may be required to move up the timetable for the monetisation of the Republic Bank shares held by CL Financial entities to treat with the huge looming 2016 fiscal deficit. Late last year, Finance Minister Colm Imbert had indicated that the Government was looking to sell the Republic Bank shares in 2017.

Asked if the bank had a preference in how the Government should deal with the sale of shares in the bank, Baptiste said the starting point has to be how much of the sales proceeds would be retained by the Government following any sale.

CL Financial owns just over 50 per cent of Republic, but the stake is divided among four entities that are/were affiliated to the group:

• Clico Trust Corporation owns 40 million shares in Republic (equal to 24.74 per cent)

• Clico Investment Bank owns 16.19 million shares (equal to 10 per cent);

• First Company Ltd, a subsidiary of CIB, owns 13.19 million (equal to 8.14 per cent); and

• Clico owns 11.78 million shares (about 7.28 per cent)

“By our calculation, this will be essentially the proceeds from the sale of shares held by CIB and First Company since all of the other holdings (Clico and CIF) are to support liabilities,” said the bank executive in emailed responses to Guardian questions on Thursday last, his first day in the chief executive’s seat.

CIB and First Company together own 29.38 million shares in Republic, which at Monday’s closing price on the local stock market of $112.05, were worth $3.29 billion.

CIB, however, has been under the control of the Deposit Insurance Corporation since October 17, 2011. According to information on DIC’s website, its assets are to be “realized (sold) and the proceeds, after payment of costs of the liquidation, distributed to its creditors according to their rights. Any balance remaining after settling the creditors is distributed to the shareholders.”

Baptiste agreed that if CIB’s Republic Bank shares are sold, the proceeds would be distributed to CIB’s creditors.

He added: “So what needs to be understood is how much of those claims are third party and how much are government owed. Remember in the case of the EFPA holders, the government directly took on the liability for the 1-10 year bond instruments while it was the 11-20 year bonds that were replaced by the CIF. So at least that 1-10 year quantum will be due to be repaid to Government.

“If you can get to the bottom of that, you will know exactly how much of those proceeds will return to the Government.

“What is undeniable however is that all of the proceeds from the disposal of the RBL shares will not be for the sole benefit of the Government.”

The new bank president, who has been an executive director at Republic for about ten years, said the bank’s “preference has always been that the shares be as widely held as possible since we believe it currently offers the best avenue for the citizens of Trinidad to participate in wealth generation that we have accomplished over the years.

Baptiste said all the “relevant” parties must have as their objective maximising the return on the shares by “exploring the route to best price.”

He said: “Because of Republic’s historic wealth generation and high dividend yield, our price/earnings (P/E) ratio is high by international standards and a premium over the current price might be difficult to accomplish regardless of the size of the block.

“If a premium is accepted as unlikely, then we would prefer to focus on the disposal of the shares in CIB and First since the rest is already effectively disposed. We remain available to explore these options.”

Asked if the bank might be willing to buy back its own stock (despite the current regulatory restrictions on that) or if the Executive Share Ownership Plan would be sufficiently fluid to be able to acquire a block of shares, Baptiste said: “Baptiste said: “The bank could buy back some of the shares but this would be limited by the regulatory restrictions to which you refer.

“The restriction affects the treatment of the re-purchased shares since they have to be deducted from capital which impacts the capital adequacy ratios. So you can buy some but you will be constrained by the impact on the capital ratios.

“The profit sharing plan (separate from an ESOP) could acquire some shares but that would not necessarily be the most prudent use of the profit sharing funds since those shares are subsequently allocated to the staff at the average price at which it is acquired.

“We have an independent committee that reviews those purchase decision and it would have to make sense (or be a need) for them to acquire. “In any event, that would still only utilize a fraction of what is available. An ESOP is possible but not really required because the profit sharing plan already provides a nice medium for staff to share in the ownership and wealth generating ability of the bank.”

He said the bank was prepared to work with the Government in arriving at a solution that would involve a limited amount of share buybacks “but also road shows to attract other local buyers (pension plans, equity funds, etc) and if at all possible, international buyers with a penchant for emerging market equities.”

 

Source:
Business Guardian, BG6
Thursday February 18, 2016