Shane Ingram, Contributor
Left: INGRAM - Right: Hylton - NCB managing director
DESPITE ENCOURAGING corporate reports from NCBJ and RBTT last week, the bears continued to reign on the JSE. Investors stayed away from equities even as news of a reduction in benchmark yields on T-Bill and record tourism inflows for December entered the marketplace.
These conditions are indicative of low confidence - a situation that can only be reversed by the materialisation of the favourable economic conditions predicated by Standard & Poors and the Planning Institute of Jamaica.
COMPANY SPOTLIGHT: NCBJ OFF TO A GOOD START FOR 2006
Buoyed by widening interest margins and cost containment, National Commercial Bank (JA) reported $1.14 billion in net profits for Q1 2006 or 17 per cent above that of Q1 2005. Net interest income climbed 16 per cent to peak at $2.93 billion driven by a rise in net interest margins from 49 per cent to 53 per cent. Intensified loan activity brought about a 13 per cent hike in loan interest to $1.71 billion while interest income from securities rose by 5.4 per cent to $3.86 billion.
Despite the 32 per cent jump in fee-based income, total non-interest income fell seven per cent to $1.33 billion chiefly on account of the 36 per cent decline in trading income and 31 per cent drop in dividend income arising from the tight local trading conditions and the decline in equities. Thus, net revenue increased only eight per cent to $4.26 billion for the quarter. Meanwhile, the productivity ratio continued to trend downwards to a five year low of 65 per cent. The improved efficiency stemmed from NCB's success at capping growth in operating expenses to two per cent, which caused operating profit to jump 20 per cent to $1.5 billion at the end of the quarter. Associated companies contributed $37.6 million, albeit less than the $47.7 million a year earlier. After taxes were considered, net profits surfaced at $1.14 billion (EPS = $0.46) against $971.1 million (EPS = $0.39) in the prior year period.
Although the wealth management and banking arms remained the bread-winners for the group, the disparity between these two widened significantly in the period. Wealth management accounted for 17 per cent of group profits for the quarter compared to 43 per cent in Q1 2005. In contrast, banking contributed 78 per cent to profits as opposed to 55 per cent a year earlier. Profits from Banking climbed on the back of a strong rise in inflows from treasury-based activities and retail banking's return to profitability.
DEDICATION
Over the years, NCBJ has gradually dedicated more of its asset base to loans such that loans accounted for 20 per cent of assets as at December 2005, up from 7.0 per cent at year-end 2000. Simultaneously, loan quality has improved steadily as indicated by the decline in the ratio of non-performing loans to total loans from the high of 24.5 per cent in 2000 to 4.27 per cent at December 2005. Notwithstanding, NCBJ still lags BNSJ which boasts a comparable ratio of 1.59 per cent as at October 2005. As interest rates remain low and local banks focus more intently on expanding credit, NCBJ will rely on its distribution advantage and highly respected brand to sustain, if not augment, its current deposit growth rate. The group also intends to balance this strategy with increased diversification toward more stable funding sources including fixed income and corporate paper. Sustained growth in deposits should fund an expansion in total earning assets, which together with improved interest margins point to higher interest income for the bank.
Meanwhile, other income streams should be buoyant given NCBJ's dominant position in the local foreign exchange market and its strength in fixed and equities trading. Its share-ownership in Kingston Wharves should also contribute to NCBJ's profitability as Kingston Wharves is also expected to sustain its growth momentum in the medium to long term. Despite these positives, shares in NCBJ have not recovered from last year's 'Dyoll debacle' such that they still trade far below the historic P/E and that of peers. However, brokers both here and in Trinidad do not expect this condition to last and so have assigned NCBJ as one of the best buys for 2006.
RECOMMENDATIONS
We hold favourable outlook for CWJA, NCBJ, PJAM, DB&G, and BNSJ. Seprod, D&G, CRTS, and Goodyear could also perform well over the short-term. Please contact DB&G's Stockbrokerage department at 1-888-CALL DBG for further information on these and other stocks or visit for detailed analyses.
Disclaimer: All information contained in this article has been obtained from sources that DB&G believes to be accurate and reliable. All opinions and estimates constitute the Author's judgement as of the date of the article. No warranty as to the accuracy, timeliness or completeness of this article and as to the opinions based thereon is given or made by DB&G. DB&G and/or its employees or directors and/or any associated person may have an interest in, or interest in the acquisition or disposal of, the securities or class of securities mentioned herein. Call 1-888- CALL DBG if in doubt about the content of this article. Decisions based on information contained in this article are your sole responsibility.
