May 2007 Financial News

Capital & Credit to restructure

May 21, 2007

Continues to look for a partner outside of Jamaica

"We have not lost money.We are not losing money. And we don't intend to lose money." Chairman of the Capital & Credit Financial Group (CCFG) Ryland Campbell faced Capital & Credit Merchant Bank (CCMB) shareholders on Wednesday at the Pegasus Hotel undaunted by the recent performance of the listed company. The company plans to reorganise itself and seek alliances outside of Jamaica.

CCMB will seek to operate under a holding company structure similar to the one used by Scotiabank. In this structure, the merchant bank will be the subsidiary of a company, thus freeing the company to use its capital resources more effectively.

"The merchant bank has the money but Bank of Jamaica regulations restrict how this money can be invested. A reorganised group will allow us to be able to access the capital held by the merchant bank and give us flexibility going forward," Campbell told shareholders.

Campbell proposed that CCMB be reorganised into the CCFG. Under this initiative, the remittance arm, Capital & Credit Remittance Limited would be brought under the umbrella organisation. The chairman also proposed that the shares of CCMB would become shares of CCFG.

Reinventing the 13 year old financial institution is necessary in light of declining profits. It was reported last week that the listed company's net profit dramatically fell by over half for the first quarter ended March 31, 2007, coming in at just J$154 million. This compares with J$346.32 million for the comparative quarter in 2006. For the financial year ended December 31, 2006, net profit before tax came in at $922 million, a significant drop from the $1.339 billion earned the previous year.

"In business, there are cycles. There will be low and high times," Campbell explained. "If anyone in this room can show me a company in the world that has never had a low point, I will transfer all my shares in CCMB to them - subject to approval of my lawyer."

CCMB President Curtis Martin outlined the reasons for the less than stellar performance put in by the banking group. "Our performance has been impacted by the flattening of the yield curve. In March of 2003, the Bank of Jamaica rate on 365-day paper was 24 per cent. The rate on 30-day paper was 12.95 per cent. Back then, we were able to make a spread of 11.05 per cent."

The spread between rates are one of the main areas were securities dealers like CCMB make their money. Martin continued, "By March of 2006, the BOJ's 365 day paper paid 13.6 per cent. The 30-day paper paid 12.6 per cent. Our spread dropped from 11.05 per cent to one per cent."

The movement in United States interest rates also impacted the profits earned by CCMB. In January 2003, CCMB was able to borrow money from the US at 1.25 per cent. Four years later, that rate was hiked to 5.25 per cent. Curtis told shareholders that the result is an inverted funding cost structure. "In 2003, we earned a spread of 0.439 per cent on US denominated assets, by 2007, it became difficult for us to make money because of the inverted yield curve."

Other changes in the financial landscape hurt CCMB's bottom line. Martin said, "There has been a decline in the local equities market and Government of Jamaica bonds are fully priced. We don't expect growth in that product." Another challenge faced by CCMB, and the entire financial sector, is that of alternative investment schemes. While CCMB has some of the more favourable interest rates and exchange rates in the industry, it is hard to beat monthly double digit returns. Taking a militant stance, Campbell told shareholders, "Don't ask me about other people's business.

I am not going to speak on the matter of who is doing what with money and what returns they are giving. That is that. I am only concerned with CCMB's business and getting our profits to a level to which our shareholders have become accustomed to."
That said, Campbell said, "An organisation must be nimble enough to reposition itself." Part of that repositioning strategy will be its previously announced plans to operate an investment brokerage in the United States and partner with a Trinidad & Tobago investment bank.

"The T&T partnership blew hot and cold for a while, but we are working to see if we can bring that on stream before the end of the year."

As to the brokerage firm in the US, Capital & Credit International Inc, Campbell stated that, "We expect that within another couple of months we should be ready. This new entity, which will offer a wide range of services, including sales of corporate debt, brokering of U.S. Government securities and retailing of U.S. and offshore mutual funds, has established a Clearing House alliance with Pershing, the largest Clearing House in the United States and a subsidiary of the Bank of New York."

Source:
Dennise Williams
The Jamaica Observer
Sunday, May 20, 2007

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