Left: Shane Ingram - Right: Ryland Campbell, chairman of Capital & Credit Merchant Bank. - RUDOLPH BROWN/CHIEF PHOTOGRAPHER
CAPITAL & Credit Merchant Bank Limited (CCMB) reported $1.16 billion in consolidated profits for the year ended 2005, up 34 per cent on $865 million a year earlier.
The performance primarily reflected hefty inflows from securities trading and occurred despite reduced net interest income and higher operating costs. Net interest income fell two per cent to $1.1 billion, but net revenue climbed 35 per cent to $2.22 billion as net gains from securities trading shot up 194.2 per cent to $999.4 million. Securities trading benefited primarily from Global Bond price gains during 2005, in addition to a one-off $250 million gain earned from the sale of a large portion of the Bank's holdings in BNSJ to its parent company, capital and Credit Financial Group Ltd, in June 2005.
The efficiency ratio fell marginally to 39.6 per cent, mostly on account of the higher revenues as operating costs jumped 32 per cent to $878.01 million driven by higher staff-related expenses. Consequently, pre-tax profits increased 37 per cent to $1.34 billion. After considerations for taxes and minority interest, net profits amounted to $1.16 billion or ($1.97 per share), matched against $865 million ($1.47 per share) in 2004.
INDUSTRY TRENDS
Consistent with industry trends, total assets shrank 10 per cent to $53 billion at the end of December 2005. Of particular interest, however, was the cumulative $22.7 billion re-classification of assets from the originated loans and held to maturity categories into the available-for-sale category. Management contends that the decision was necessitated by the new IFRS requirements regarding originated loans as well as the need to reduce volatility in the P&L. However, the reduction in P&L volatility was replaced by balance sheet volatility, particularly in the equity section.
Total equity increased by $1.63 billion following the $1.04 billion capital injection from the rights issue, and high profit retention. Nonetheless, the volatility experienced in the assets was highlighted by the $421 million decline in revaluation reserves during the review period. Management attributed the fair value losses to the re-classification exercise and the consequent requirement to mark-to-market its devalued assets. Reductions in the value of its equity-holdings as well as declining values of some GOJ Globals bond positions in the final quarter of 2005 were the specific reasons for most of the decline in fair values. Meanwhile, CCMB loans remained virtually flat at $2.64 billion or approximately five per cent of CCMB's assets. Non performing loans at December 2005 amounted to $329.98 million or a relatively high 12.5 per cent of total loans.
CCMB intends to pursue a strategy of revenue diversification over coming quarters, specifically by expanding the contribution of fee-based income to net revenues. Accordingly, CCMB will look to introduce new products and increasingly leverage the network of retail clients it obtained through the acquisition of JUT in 2005. CCMB also has long-term plans to establish operations in other Caribbean countries and further leverage its relationship with overseas partners to tap into the Jamaican Diaspora in North America.
Of course, the securities industry continues to contract due to tightening regulation concerning capital adequacy and risk positions. These forces are only likely to intensify and thereby cause greater pressure on participants. Accordingly, CCMB would be better served by a larger branch network and less institutional client concentration. Moreover, CCMB's success depends primarily on its securities trading business. As such, CCMB will be hard-pressed to beat the results of the first and second quarters in 2005 given the contribution of a related party transaction among other strong inflows from securities trading for both periods.
RECOMMENDATIONS
We hold favourable outlook for GraceKennedy, CWJA, NCBJ, PJAM, DB&G, and BNSJ. Lascelles, JBG, and Seprod 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 judgment 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.
Uncertainties about new Cabinet and Budget
Investors remained in 'wait-and-see' mood as the uncertainties about the Cabinet and the budget for the (FY) 06/07 intensified this week.
Moreover, with the delicate issue of the public sector MoU unresolved, it is unclear what measures will be proposed to achieve the one per cent fiscal deficit target for FY 06/07.
Certainly, however, the Minister of Finance should be lobbying for lower interest rates given the normalisation in local inflation rates.
Lower rates would not only help to lower the Government's interest costs but would also encourage increased investment in equities.
