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Economic conditions affect performance

FirstCaribbean International Bank Limited

FirstCaribbean International Bank Limited (FCIB) registered Earnings per share (EPS) of US$0.044 for FY 2012, a 4.35 per cent decline from the EPS of US$0.046 reported in FY 2011. The Directors have approved a final dividend of US$0.015 per share, payable on January 31st, 2013. This brings the total dividends for the year to US$0.030 versus the US$0.045 paid in 2011.

At the top-line, FCIB reported an improvement of US$36M in Revenue. This upswing was an outcome of an increase of 6 per cent in Net interest income (NII) from US$374M to US$397M, which was predominantly due to lower deposit cost of funds, lower interest rate swap volumes and higher interest recoveries on non-performing loans. This resulted in an improvement in the NII margin from 76 per cent to 79 per cent year on year. Another factor that gave rise to an increase in Revenue was the 10 per cent surge in Operating income to US$146M, largely due to increases in Net fee & commission income of $26M.

Operating expenses climbed 3 per cent to US$348M mainly attributable to the acquisition of CIBC Bank & Trust entities. Year on Year, Loan loss impairment increased 38 per cent to US$120M. It was reported in FCIB's Management's discussion and analysis that the ratio of loan loss impairment to gross loans grew by 0.4 per cent to 1.7 per cent whilst the ratio of non-performing loans to gross loans decreased to 12.4 per cent. Profit after Tax decreased by only 2 per cent to US$72M.

FCIB's results reveal that excluding the Loan loss impairment allowance the Bank's performance continues to be encouragingly satisfactory. The last two quarters have shown signs of improvement as the Loan loss impairment allowance has declined by approximately 53 per cent to US$23M.

In an effort to strengthen its operations during FY 2012 all segments of the Group that handle international and domestic high net worth clients were grouped under the Wealth Management Segment. This segment results increased 46 per cent year on year by to US$44M. However, FCIB continues to be challenged by the economic imbalances of the majority of territories in which the Group operates. Also, these economies are more tourist based economies and have been adversely affected by the lacklustre economic recovery in the US and Europe.

At a price of $8.01, FCIB is trading at a trailing P/E of 28.4 times, significantly above its 5 year average of 15.4 times (Exhibit 1). The dividend yield on the stock stands at 2.40 per cent. In the short term there seems to be little hope of significant turnaround in the economic climate in the majority of territories the Company operates in. Therefore, BOURSE maintains a SELL.

Scotia Investments Jamaica Limited

For the Financial Year (FY) ended October 31st, 2012 Scotia Investments Jamaica Limited (SIJL) reported Earnings per share of J$4.54, or a 3.2 per cent decrease year on year. The Board has approved an interim dividend of J$0.45 per share, payable on January 14th, 2013 bringing the total dividend for FY 2012 to J$1.74.

Interest income for the Group was down 4.8 per cent to J$5.2B whilst Interest expense fell 9.8 per cent to J$2.4B. Net interest income remained relatively flat falling 0.16 per cent to J$2.81B. The Group's Net interest income margin improved from 52 per cent in FY 2011 to 54 per cent in FY 2011. There was also an improvement in the Company's Impairment losses on loans which declined by 36.8 per cent to J$21M.

SIJL's Non-interest income climbed 21 per cent to J$1.29B, as all line items had healthy growth (Exhibit 2).

For the period, the Non-interest income accounted for 31.4 per cent of the total Operating income versus 27.2 per cent last year. Total Operating income, including Net interest revenue and Other income increased 5.4 per cent year on year to J$4.13B.

As a result of the new tax measures announced in the Government's 2012 budget Operating expenses rose 8.6 per cent to J$1.37B. During the year the Group continued its focus on expense management which is part of a wider strategic imperative. Its productivity ratio, which is an important measure of cost efficiency improved marginally in FY 2012 as it moved to 33.1 per cent from 32.2 per cent.

SIJL's Profit before Taxation climbed 4 per cent to J$2.76B from the previous year. However, as a result of a higher effective tax rate in 2012 (tax rate increasing from 25 per cent to 30 per cent), Profit after Tax fell 3 per cent to $1.92B.

Both total Assets and Liabilities remained relatively flat increasing 1.4 per cent and 0.01 per cent to J$73.8B and J$48.3B respectively. On par with the initiative to focus growth on the off-balance sheet portfolio Assets under management including the company's custody book increased 10 per cent to J$103.2B due to the improved net asset values on the managed funds.

The emphasis on growing the off-balance sheet portfolio and diversifying revenue streams has indeed proven to be beneficial as the Group was able to produce a satisfactory performance amidst the sluggish economic growth and increasing exchange rate volatility. The positive performance of the Scotia Premium Money Market Fund is evidence of the success of this strategy. Management expects this trend to continue within the context of a low interest rate environment.

In the previous years, the contribution of Non-Interest Income as a percentage of total Operating Income has steadily increased. In an attempt to improve the Group's bottom line the company may need to continue focusing on expense management to improve or at least maintain the productivity ratio. However, uncertainties surrounding the final tax legislation of the government's existing budget are expected to impact the performance of the company.

At a price of $2.31 SIJL is trading at a Trailing P/E of 7.09 times, a premium to its five year average of 6.2 times. The dividend yield stands at 5.23 per cent, one of the highest yielding stocks in the market. BOURSE recommends a HOLD on this stock.

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