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NCBJ staff cost increases

In our article this week we will have a look at the Jamaica equity market and review the performance of the second largest bank in the country by market capitalisation.

The JSE Market Index which comprises of all ordinary companies is down 4.14 per cent for the year, while the JSE All Jamaica Composite Index which comprises only Jamaican companies was down 6.05 per cent (Exhibit 1). This decline may have been triggered by the uncertainty surrounding the policies of the newly elected government as well as the ongoing stalemate with the IMF.

Jamaican officials are expected to meet with IMF officials this month to continue discussions with the new government on its priorities as well as the key challenges facing Jamaica, arising from the high public debt and low economic growth. According to the IMF, the authorities in Jamaica indicated that they are working on the early implementation of a set of policies aimed at "placing the debt-to-Gross Domestic Product ratio on a decisive downward path, while stimulating growth and job creation in a sustainable way". Successful negotiations could lead to price stability and would be dependent on the terms and conditions of any new agreement.

In 2011, Jamaica would have benefited from a relatively stable foreign exchange rate against the USD. If negotiations with the IMF are not resolved in a timely manner, it could have an impact on the exchange rate.

National Commercial Bank of Jamaica Limited

National Commercial Bank Jamaica Limited (NCBJ) reported Net Profits of J$2.8B for the first quarter ended December 31, 2011. This translates into an earnings per share of J$1.12. In the comparative period last year Net Profits amounted to J$3.0B, equivalent to an earnings per share of J$1.22. This decline was as a result of higher expenses incurred as well as the lower revenue generated for the quarter. The Board has declared an interim dividend of J$0.38 per ordinary stock unit. The dividend is payable on February 24 for stockholders on record as at February 10th 2012.

For the quarter, the Group's Operating income, which is Net interest income and Non-interest income combined was J$8.5B, 1.6 per cent lower than the amount recorded for the comparative quarter the prior year. NCBJ recorded J$7.5B in interest income, while interest expense was J$2.2B, a fall of 8.4 per cent. The Net interest income of J$5.3B recorded represented a 1.2 per cent decline from the prior year. Despite this decline, the Group's Net interest income margin improved, moving from 69 per cent to 71 per cent.

Non-Interest Income fell 2.2 per cent year-on-year to J$3.1B largely as a result of a 66.5 per cent fall in Insurance premium income to J$281.5M stemming from lower levels of annuities booked when compared to last year. Net fees and commission income accounted for 57.5 per cent of the non- interest income and this income stream was up 12.2 per cent year-on-year to J$1.8B.

NCBJ posted a 5.6 per cent increase in operating expenses of J$5.1B. The growth in expenses was mainly attributed to the 19 per cent increase in staff costs. This increase in staff cost was as a result of the negotiated salary increase for the financial year as well as increase staff benefits paid for the last financial year. Provision for credit losses was up 20.0 per cent to J$312.5M, while depreciation and amortisation expenses moved upwards 22.9 per cent to J$170.7M.

NCBJ's total assets grew 5.6 per cent year-on-year to J$360.5B. Loan and advances increased 14.3 per cent to J$101.2B.Customer deposit, advanced 9.1 per cent year-on-year to J$155.3B. On the liabilities side, total liabilities increased 2.7 per cent to J$297.9B. The risk-based capital adequacy ratio of the Group was 15.1 per cent which exceeds the minimum statutory requirement of 10 per cent stimulated by the Bank of Jamaica.

In 2011, interest rates in Jamaica continued its downward trend. The Bank of Jamaica reduced the rate on its certificates of deposits from 8 per cent in October 2010 to 6.25 per cent in 2011. For the period as well average yields on 30-day, 90-day, and 180-day T- Bills fell. If this downward trend on interest rates continues then pressures could be placed on NCBJ's interest income. Whereas, the Group can be commended for growing its loan portfolio, it must monitor its non-performing loans as this can result in a decrease in interest income from loans. NCBJ must be commended for its continued effort in improving its interest income margin.

NCBJ mentioned its objective of revenue growth and its focus on growth opportunities in untapped markets as well as its openness to acquisition opportunities that may arise both locally and within the region. NCBJ's share of profits of associates increased from J$58.3M to J$145.4M, a reflection of the success of the acquisitions made in 2011.

At the current price of TT$2.19, the stock is trading at a trailing P/E of 5.7 times, closely in line with its 5- year average of 5.4 times. The dividend yield on this stock of 3.97 per cent is fairly attractive. The Group faced some challenges in the first quarter which has dampened the momentum of the bottom line. In the coming months it will be critical that measures be put in place to reverse the decline. BOURSE revises its recommendation to HOLD.

Other Market News

Republic Bank Limited (RBL) reported earnings per share of $1.69 for the first quarter ended December 31st 2011, 2.4 per cent above the earnings of $1.65 reported in the comparative period last year.

Further details on the performance of RBL would be given in a subsequent article.

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