File photos
LEFT: NCB's 2007 profits climbed to $6.6 billion.
RIGHT: Scotiabank Jamaica made profits of $7.6 billion in 2007.
Ryan Reid, Guest Writer
The two commercial banking giants in Jamaica are racing like greyhounds to see who will be the king of profits in the 2008 financial year.
Scotia Group Jamaica Limited (SGJ) has had a considerable lead for quite some time, but National Commercial Bank Jamaica Limited (NCBJ) has gained significantly on this lead and is now starting to nip at SGJ's hind legs.
Before the NCBJ 2000-01 financial year, SGJ was clearly the more sound financial-services entity, experiencing record profits year after year.
The company had a settled and qualified management structure with a periphery of competent staff members.
But then came NCBJ's transition after Michael Lee Chin's acquisition of the bank.
The new chairman brought a new focus and a clear-cut plan of increasing shareholder value while increasing the value of 'Jamaica'.
With a restructured team and a heavily motivated staff, NCBJ saw record profits of $1.47 billion at the end of the 2002 financial year.
This marks the point at which NCBJ entered the profitability race.
Assets doubled
Since then, its total assets have more than doubled, customer deposits have also doubled, and net loans have quadrupled.
All have allowed NCBJ's net worth to move from $11.97 billion in 2002 to a sound $28.55 billion at last financial yearend, September 30, 2007.
The net earnings of the group have grown at an average rate of 40 per cent annually, moving from $1.47 billion to $6.6 billion last year.
However, with all these commendations to NCBJ and its team, a blind eye cannot be turned to the achievements of SGJ over the last five financial years.
Since its 2002 financial year, SGJ's total assets have also doubled, customer deposits jumped 72 per cent, and net loans have also doubled.
Net-worth growth
SGJ's net worth has moved from $14.05 billion in 2002 to now stand at $34.37 billion.
However, where it gets interesting is the fact that SGJ has grown net earnings at an average rate of 14 per cent per year, moving from $3.86 billion to $7.49 billion at its financial yearend, October 31, 2007.
We are now faced with a situation where the balance sheets of both NCBJ and SGJ are relatively the same size, but NCBJ has managed to grow its profits at an identifiably faster rate than SGJ - 40 per cent vs 14 per cent.
Should SGJ worry? Let us examine the prospects.
The first-quarter earnings results are out for both SGJ and NCBJ. Yet again, SGJ is ahead. The group reported profits of $2.19 billion or earnings per share (EPS) of $0.69.
These results are $340 million better than the $1.85 billion or $0.76 EPS that NCBJ reported for its first quarter. [Note that EPS is the ratio of net profit to the number of issued shares.]
When one looks at the variance in these results, the first question will be: What is the reason for SGJ's lead?
Well, in order to have a clinical understanding of this reason, a segmented breakdown will have to be done.
All comparisons are for the first quarter 2007-2008.
1. Core BankingThis constitutes the retail, corporate and Treasury operations of the group.
Profit before tax for the retail operations of SGJ registered at $892 million vs $849 million from NCBJ.
The profits from NCBJ retail operations have grown 115 per cent year over year, while SGJ has grown their retail profits by 13 per cent.
If one were to be conservative and project that NCBJ retail operations would grow profits by 20 per cent over the next three quarters, this would see profits averaging $1 billion each quarter for retail alone.
The corporate-banking segment continues to play its part in the earning composition of both banking groups.
Profit before tax for SGJ stood at $590.12 million vs. $342.29 million recorded by NCBJ.
SGJ continues to perform notably better than NCBJ in this area of its core operations.
SGJ grew its corporate banking profits by 40 per cent while NCBJ's earnings in this segment grew 11 per cent for the first quarter year over year.
One clear area of the core banking operations that SGJ seems to be playing catch-up with is the Treasury operations.
Pre-tax profits from NCBJ's Treasury and correspondent banking division came in at $816.29 million vs the $624 million recorded by SGJ. Additionally, NCBJ grew these profits by 21 per cent, which is six points above the 15 per cent at which the SGJ division grew profits in the first quarter.
2. Wealth management and investments
The two subsidiaries for NCBJ and SGJ, which form the fulcrum of these operations, are NCB Capital Markets Limited and the recently acquired Dehring, Bunting and Golding Limited (DBG), respectively.
Wealth management contributed $563.41 million to NCBJ pre-tax profits vs. $387.21 million recorded by SGJ Investment Management operations.
Pre-tax profits from NCBJ wealth management were flat, while SGJ's saw a spike - thanks to DBG - moving from $82.54 million to $387.21 million year over year.
Regardless, NCB Capital Markets continues to outperform its competition in the entire industry: Pre-tax earnings of $563.41 million is better than any investment house in Jamaica. SGJ has some way to go to catch up.
3. Insurance ServicesInsurance is where the quandary lies for NCBJ, and this quandary is only to SGJ's gain, literally.
NCBJ posted pre-tax earnings of $94.43 million vs the $562.20 million posted by SGJ - a difference of $468 million.
NCB Insurance Company saw its pre-tax profits fall from $175 million to $94 million for the first quarter year over year.
On the flip side, SGJ grew its insurance earnings by 45 per cent, which is the same percentage at which NCB Insurance profits plummeted.
This is the area in which NCBJ needs to button up and fold its collar.
If NCBJ is to make any considerable stride in the race for the king of profits, it must restructure its insurance operations, as SGJ obviously has a system that is working well.
4. Outlook
NCBJ has experienced growth rates averaging 40 per cent over the last five years as opposed to SGJ's 14 per cent.
If one is conservative and projects a 25 per cent growth rate for NCBJ for this financial year and 10 per cent for SGJ, then NCBJ's 2008 net profits could come in at $8.25 billion, and SGJ's at $8.14 billion. A situation like this would see NCBJ surpassing SGJ in profits.
But then one has to examine the first-quarter earnings of both groups to see their run rate.
SGJ increased earnings in Q01 by a remarkable 32 per cent, as opposed to the 24 per cent increase in earnings of NCBJ.
Therefore, it is a bit too early to call, but no doubt it will be very interesting to watch.
Ryan Reid is a research analyst at Stocks and Securities Limited, Kingston. Email: rreid@gostocksandsecurities.com
