(left)William 'Bill' Clarke, president/CEO
(right)Robert Pitfield, chairman
When William 'Bill' Clarke exits Scotia Group Jamaica at the end October as group president, he will have presided over more than a decade of sustained growth and profitability at the company and left it, as this survey demonstrates - and even his most ardent detractor will admit - at the top of the heap among listed Jamaican-domiciled financial sector companies.
Scotiabank, which is more than 70 per cent-owned by Bank of Nova Scotia of Canada, is often criticised in Jamaica for its conservatism and Clarke branded as the arrogant inheritor of a bank with a historically privileged position in the market. This allowed it, the argument goes, to garner cheap money, there by enhancing its ability to ride out the crisis that undermined Jamaica's financial sector in late 1990s.
But whatever the merits or otherwise of such arguments, there is no gainsaying that Scotiabank operates in perhaps the most competitive of Jamaica's business sectors and that Clarke could have squandered any advantage he inherited when he was appointed president 13 years ago, in 1995.
As it is, during the review period of this survey, the Scotia group clearly outperformed its peers in the financial services sector in two variables (net interest margin and share price movement) of the 10 used in this analysis to rank financial service companies for investor quality, and was in the upper half of the table for the others.
Overall, Scotiabank group amassed 178 points from the aggregate of its scores for each of the variables. Interestingly, it was followed by Scotia DBG Investment (formerly Dehring, Golding & Bunting) the investing bank it acquired two years ago that remains listed on the Jamaica Stock Exchange.
Interest margin
Important for a bank, Scotia boasts a superior net interest margin of 7.75 per cent, more than a full percentage point better than the next in line for that variable, FirstCaribbean International Bank (6.66 per cent), proving that it has been better than its peers in generating net interest income from assets held.
Indeed, for the nine-month period ending July 2008, the group's net interest income jumped 28 per cent, to $5.5 billion, which helped to push net profit to $7 billion, or $2.24 a share - a 30 per cent increase on the comparative period in 2007. The company paid 53 per cent of its earnings in dividend, the second best, after FirstCaribbean International, among its peers.
Investors
This performance, would have helped to influence a 10% jump in Scotia's share price over the review period, the best of the market, indicating that investors judged the group as a quality stock to be held in their portfolios.
At the end of the last reporting period, Scotia had group assets of $287 billion, making it the largest Jamaican financial entity, ahead of National Commercial Bank ($280 billion). Only First Caribbean International Bank, whose assets ($834 billion) represents the value of its entire Caribbean operation, was ahead.
One potentially negative blip for Scotia was a 48% increase in non-performing loans, which, however, remained a mere 2.35 per cent of its overall loan portfolio, which stood at $82 billion at the end of July. This, however, is not expected to significantly affect earnings as all business lines continued to experience growth, complemented by discipline in the control of expenses.
The group's productivity ratio declined by a whole percentage point, to 53.9% from 54.9% year on year.
Sector Analysis - Financial Services
The financial services sector recorded real growth of 1.3 per cent for the first half of 2008.
This follows real growth of 3.9 per cent in 2007, more than double that reported for the previous year.
Industry figures compiled by regulators place value on the commercial banking sector at $530 billion - with commanding share held by National Commercial Bank and Scotia Group Jamaica - and the securities industry at $720 billion.
The continued expansion has been attributed to growth in the commercial banking and insurance markets.
In addition, the concerted effort of financial entities to encourage customers to utilize electronic services such as automated banking and point of sale machines has led to a rise in fee and commission income. However, overall growth in the sector has been tempered by the slowing of mortgage activity given the hike in house prices.
Total assets
For the period January to June 2008, there was a 3 per cent expansion in the total assets of institutions supervised by the Bank of Jamaica - commercial banks, near-banks and building societies.
The increase in assets largely reflect a 10 per cent increase in loan portfolios.
The Planning Institute of Jamaica, which tracks the performance of sectors in the economy, anticipates growth of 1.8 per cent and 2.0 per cent for the September quarter and calendar year, respectively. Growth is likely to be derived from increased loan activity and non-interest income associated with increased utilisation of financial services.
However, growth could be constrained by the sector's exposure to problem plagued US broker/dealers and the possible impairment in loan quality given the demise of alternative investment schemes. Furthermore, higher domestic interest rates will continue to negatively impact gains on securities trading.
This as high interest rates depresses the value of securities and limit retail demand for stocks.
Competition has intensified among financial institutions as investors demand improved customer service and more innovative products consistent with their appetite for high returns.
This has resulted in the mushrooming of mutual funds and structured products, which allow investors to take advantage of opportunities in specific industries or regions across the globe.
In June, the commercial banking sector added a seventh bank, PanCaribbeanBank Limited, which formerly operated in the merchant banking sector. That sector is now down to three players.
Pan Caribbean's outlook on Scotia Group Jamaica
Scotia Group Jamaica is on track to deliver its 12th consecutive year of increased profitability and is well positioned to become the sole member of a $10 billion profit club (2007: $7.6 billion). The group's financial year ends October 31.
Scotia Group Jamaica is on track to deliver its 12th consecutive year of increased profitability and is well positioned to become the sole member of a $10 billion profit club (2007: $7.6 billion). The group's financial year ends Oct 31. Scotia should benefit from higher net interest income as domestic interest rates trend upwards while deposit rates largely remain flat. This should offset possible higher provisions for doubtful loans. In this regard, even if the company's earnings remain flat at $3.00/share, we anticipate that the P/E will rise to at least 8.5x (relative to 6.8x currently), suggesting that Scotia could trade closer to $25.50 up from $20.00. . Scotia Group is recommended as a BUY.
