Mar 2007 Financial News

CCMB Releases Year End Results

Mar 06, 2007

Results for the Year Ended December 31, 2006.
All figures quoted in Jamaica Dollars Unless Otherwise Stated

Capital & Credit Merchant Bank Limited (CCMB) reported Earnings Per Share (EPS) of $1.20 for the year ended December 31, 2006. This was 38.78 per cent less than its EPS for the previous year which was $1.96. In addition to anaemic top line growth, CCMB had an Impairment Loss of $158.633 million which cost the Company approximately 25 cents per share.

This impairment was as a result of the restructuring of bonds issued by the Government of Belize. In considering the restructuring, the present value of the future cash flows of the new bonds recognized impairment losses equal to the difference between the original cost and the market value of the instruments at December 31, 2006. Accordingly, an amount of $ 158.633 million previously recorded in the fair value reserve in equity was transferred to the profit and loss account. The recognition of these losses was not anticipated in the Groups’ outlook at the end of its third quarter when the Group projected an EPS of $1.30.

As previously mentioned there was little growth in the top line as Interest Income on Investments increased 3.41 per cent to $4.540 billion. This small increase was due to the fact that the Group operated in an environment of declining yields on Jamaican assets in the first half of 2006 while interest rates were rising on funds acquired from the United States and Caribbean sources. Within these constraints CCMB pursued a strategy of building Non-Proprietary Income streams combined with restructuring the Balance Sheet by replacing lower yielding assets with higher yielding assets. Whilst its loan portfolio increased 48.65 per cent to $3.977 billion, Interest on Loans rose 27.18 per cent to $486.411 million. However, since the majority of the Group’s Interest Income stems from Interest on Investments, Total Interest Income increased by a modest 5.32 per cent to $5.026 billion. Interest Expense rose by a larger margin of 11.92 per cent to $4.109 billion resulting in a fall in Net Interest Income of 16.69 per cent from $1.100 billion to $916.715 million.

With the exception of Commission and Fee Income which rose 33.20 per cent to $101.361 million, all other sources of income registered declines. Despite the turnaround of the Jamaican market from August last year, Net Gains on Securities Trading fell 11.88 per cent to $880.707 million. Foreign Exchange Trading & Translation dropped 244.16 per cent to $24.490 million while Dividend Income fell 20.02 per cent to $22.464 million. Other Income also declined 50.07 per cent to $14.739 million. Altogether, Net Interest Income and Other Revenue fell 11.55 per cent to $1.960 billion.

Though the Group focused on cost containment, the impairment loss mentioned earlier severely impacted the overall Non Interest Expenses which rose 18.28 per cent from $878.016 million in 2005 to $1.039 billion in 2006. Without this Impairment Loss, Non Interest Expenses would have risen minimally by 0.22 per cent. Staff Costs fell 5.24 per cent to $448.503 million while Loan Loss Expense moved from a charge of $9.613 million to a credit of $13.647 million. Other Non Interest Expenses that also declined were Bank Charges (-4.52 per cent), Property Expense (-9.22 per cent), Depreciation (-12.19 per cent), Information Technology Costs (-18.39 per cent) and Marketing & Corporate Affairs (-20.51 per cent). Professional Fees however rose 15.23 per cent to $48.358 million while Regulatory Costs also increased 98.46 per cent to $26.445 million. Other Operating Expenses rose 143.46 per cent to $54.101 million.

Ultimately, Profit Before Tax fell 31.12 per cent $921.938 million while the Effective Tax Rate rose from 13.55 per cent in 2005 to 16.28 per cent in 2006. Profit After Tax declined 33.30 per cent to $771.882 million.

The Group’s Business Outlook remains positive as it continues to solidify income streams by growing Non-Proprietary business while enhancing its Net Interest Income. The Group is also confident that advances in technology would reap rewards in customer service, product origination, risk management as well as corporate reporting, planning and research. The Group also anticipates that with the strengthening of alliances, the introduction of new products and additional services, there would be continued growth and profitability of the Group.

Given these results, we are forecasting an EPS of $1.52 (TT$0.14) for the year ended 2007. At this forecasted EPS and the current price of TT$1.33 CCMB is trading at a price/earnings ratio of 9.50 times. Given that this Company usually trades within a range of 6 to 10 times earnings, we maintain our recommendation of a SELL.