First Caribbean International Bank Limited

First Caribbean International Bank Limited (FCIB) reported an EPS of US$0.08 for the nine months ended July 31, 2010. This represents an unchanged EPS from the corresponding period in 2009.

FCIB's Interest Income declined by 16 per cent year-on-year from US$471.4M to US$395.8M. Interest Expense also fell, declining 26.4 per cent from US$144.6M to US$106.4. As a result FCIB's Net Interest Income moved from US$326.8M to US$289.3M, representing an 11.5 per cent decline at the top-line. The decline in Net Interest Income was attributable to lower average loan and securities volumes and trades. Even with the decline in Net Interest Income, the Net Interest Income Margin improved, moving from 69 per cent in 2009 to 73 per cent in 2010.

Operating Income grew 32.7 per cent to US$136.1M, thereby offsetting the decline in its Net Interest Income. Operating Income was up "due to non recurring higher gains on the sale/repurchase of investment securities /debt mark to market losses and higher fee income".

FCIB's Operating Expenses fell 3.2 per cent to US$233.9M over the period. On a quarterly basis Loan Loss Expense moved from US$12.1M to US$21.6M (Exhibit 1). At the nine months Loan Loss Expense stood at US$55.3M, if annualised it would result in a loan provision rate of 1.13 per cent, compared to the FY2009 rate of 0.63 per cent, and a previous high rate of 0.78 per cent in 2001 (Exhibit 2).

Income before Tax for FCIB was down 9.7 per cent, moving to US$134.1M for the year. The Group benefited from lower Income tax expenses which fell to US$9.5M, because of the lower income earned in the higher tax jurisdiction. This resulted in a relatively flat Net Income of US$124.5 when compared to the same period in 2009.

Looking at the Balance sheet, total assets fell by 7.2 per cent year-on-year. FCIB's Loan and Advances to customers declined by 4.5 per cent to US$6.6B. On the Liabilities side, total liabilities was down 9 per cent to $US8.3B as Customer deposits and other borrowing funds fell by eight per cent to $US8.1B.

Going forward, growth in Interest Income may continue to be challenged as lower demand for loans and lower interest rates persist. Continued growth in Operating Income such as fees and income securities trading will be vital in offsetting the declines that can be faced in its Interest Income.

In fact, Operating Expense as a percentage of the Group's Operating Income and Net Interest Income improved slightly for the nine months ended July 2010 to 55 per cent.

From a valuation perspective, at a current price of $8.26, FCIB is trading at a trailing P/E multiple of 11.63 times in line with its 3-year historical average. Historically, FCIB has traded at a premium over the market, but within the last three years this premium has faded. (See Exhibit 3) At the current price, the stock is fairly valued. BOURSE maintains a HOLD recommendation.

Jamaica Money Market Brokers Limited (JMMB)

Jamaica Money Market Brokers Limited (JMMB) recorded an EPS of J$0.12 for the three months ended June 30, 2010 representing a 20 per cent increase from the J$0.10 reported in the comparative period of 2009.

At the top line, the Group's Interest Income was down 19.0 per cent moving from J$3.4B to JA$2.8B.This was followed by a 28.4 per cent fall in Interest Expense which moved from J$3.2B to J$2.3B. Overall, JMMB's Net Interest Income margin improved from 6.6 per cent in Q1 of 2010 to 17.4 per cent in Q1 2011, resulting in an increase in Net Interest Income from J$223.7M to J$481.7M year-on-year.

Other Operating Revenue moved from J$403.4M to J$266.2M mainly as a result of the fall in the Gains on securities trading (net), which declined 47.7 per cent to $183.4M year-on-year. However, Fees and Commission Income increased 66.6 per cent to J$48.3M, while Foreign Exchange Margins from Cambio Trading was also up, moving from J$23.5M to J$34.5M for the period.

Despite the eight per cent increase in Operating Expenses to J$522.2M, the Group's Operating Profits increased 53.2 per cent reaching J$229.8M year-on-year. According to the director, the increase in expenses was a result of inflationary increases granted to staff at the beginning of the financial year. The Operating Profit margin also improved moving from 24 per cent to 31 per cent.

Net Profits was up 12 per cent to J$176.9M as the Group faced a higher taxation charge of J$54.7M compared to the J$2.8M a year ago.

It should be noted that the total assets base fell from J$123.0B as at March 31, 2010 to J$118.3B in Q1 2011. According to the Group's chairman "this decrease in assets was due mainly to realising gains from the investment portfolio in addition to utilising proceeds and other maturities to liquidate debts."

The Group's Capital to risk weighted assets ratio stood at 34.6 per cent, which is above the minimum requirement of 14 per cent by the Financial Services Commission (FSC), while its capital to total asset ratio was 8.9 per cent, which is above the FSC's benchmark of six per cent.

JMMB's ability to continue its performance would be tested in the following quarters. Going forward Interest Income is expected to be lower as a result of lower interest rates stemming from the Jamaica Debt Exchange (JDX). The Group produced commendable improvements in its Net Interest Income margin and continued improvement in this margin will be important.

The Group will need to continue its efforts in growing non-interest income such as the Fees and Commission Income as well as Foreign Exchange margins from Cambio Trading.Foreign Exchange Gains may remain flat as the exchange rate is expected to remain fairly stable at current levels. For the year ended March 31, 2010 the Group benefited from strong performance of the gains on security trading, net which accounted for 82 per cent of Non Interest Income. In the first quarter this was only 68.9 per cent. It will be a challenge to match the J$0.57 in the next three quarters if there is no improvement in this income stream.

In terms of valuations, at a price of TT$0.28, JMMB is currently trading at a trailing P/E multiple of 5.68 times.Over the last five years, JMMB traded at an average double digit P/E multiple of 14.4 times. Within the last couple of years valuations have fallen into single digits with the decline in net profits. BOURSE's recommendation is a HOLD.