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NDX to hit top line

Today we at Bourse are covering the performance of two of the largest creditors to the Jamaican Government and looking at the potential impact of the latest debt swap. On February 12, 2013 the Government of Jamaica (GOJ) announced the launch of the National Debt Exchange Offer (NDX). This is an arrangement through which holdings of certain bonds denominated in both Jamaica and US dollars are exchanged for new benchmark bonds with the same principal amount but in most cases with a longer maturity and lower coupon rate. The NDX will shave 1-5 per cent off coupon rates and extend maturity profiles of GOJ bonds to 2050. The debt swap is a precondition for the GOJ to receive a US$400m International Monetary Fund (IMF) loan and an additional US$400m from multilaterals. The institutions that accept the NDX will receive lower yields on Government bonds going forward.

NATIONAL COMMERCIAL BANK JAMAICA LIMITED

For the First quarter ended December 31st 2012, National Commercial Bank of Jamaica Limited (NCBJ) delivered Earnings per share (EPS) of J$1.13 relative to the J$1.12 reported in the comparative period in the prior year. The Board declared an interim dividend of J$0.23 payable on March 14th 2013.

The Group's Net interest income grew 10.5 per cent to J$5.3b. Net fee and commission income rose 15.6 per cent mainly as a result of increased card transaction volumes and increased fees linked to the growth in the loan portfolio. However, this improvement was partially offset by the 20.9 per cent and 6.9 per cent decreases in Foreign currency and investment activities and Premium income respectively. The reduction in the Gain on foreign currency and investment activities was as a result of reduced sales and trading volumes, and an increase in interest expenses from the growth in the funding portfolio. Overall Operating income climbed 8.2 per cent, or by J$697m to $J9.2b.

Operating expenses increased by 11.5 per cent to J$5.7b. The main contributor to this increase was an 80.2 per cent surge in Provision for credit losses to J$0.56b because of increased loan losses. Also, Other operating expenses rose 8.6 per cent to J$2b. The Group's Net profit remained relatively flat increasing by 0.6 per cent to J$2.8b.

Of the six major segments analysed, the Corporate Banking and Treasury & Correspondent Banking segment experienced declines in Operating profit whilst the remaining four divisions delivered increases (Exhibit 1). The Wealth Management sector remains the largest contributor to Operating profit accounting for approximately 33.1 per cent. This consistent performance of the Wealth Management sector is primarily due to increased net interest income and increased dividends received. The Treasury & Correspondent Banking segment contributed Operating profits of J$0.91b, a deterioration of 15.8 per cent due to lower gains earned on foreign currency and investment activities. Despite the decline, this segment remained the second largest contributor to Operating profits, accounting for 23.3 per cent.

Given the challenges within the Jamaican economy NCBJ has managed to produce satisfactory results for the First Quarter. On February 20th, 2013 NCBJ stated it will participate fully in the NDX. NCBJ remains the top holder of GOJ debt. According to central bank data, NCBJ holds at least J$70b of GOJ securities. Fitch ratings estimates the Group's exposure to the NDX amounts to 30 per cent of its assets and 1.6 times it equities and hence placed NVCBJ on negative ratings watch. It is expected that the debt swap may decrease NCBJ's top line Revenue due to lower interest income. Also, in analysing the balances sheet the lower yields would affect the Assets held and in turn decrease Shareholders equity. NCB Group Managing Director, Patrick Hylton, acknowledges the critical role of the bank's participation in the debt swap since the success of the bank is closely related to the strength of the Jamaican economy. Given the implementation of the NDX programme and the high credit risk in the economy NCBJ have to implement measures to control expenses. Also, improvements in NCBJ's Non-Interest income sources should be continued and augmented to combat the loss of Interest Income.

At a price of $1.30 NCBJ's dividend yield stands at 6.5 per cent, one of the highest yielding stocks in the local market. Year to date the stock has depreciated 9.7 per cent and is trading at trailing a P/E multiple of 5.04 times, compared to its five year average of 4.8 times.

JAMAICA MONEY

MARKET BROKERS LIMITED

Jamaican Money Market Brokers Limited (JMMB) delivered an Earnings per share (EPS) of J$1.95, which is 61.2 per cent higher than the J$1.21 reported in the preceding Nine months ended December 31st 2011. JMMB experienced a one-off gain of J$1.61b from the acquisition of the Capital & Credit Financial Group (CCFG) for the period under review. From our calculations, EPS exclusive of the acquisition and based on operational activities can be estimated to be J$1.14.

For nine months ended December 31st 2012, JMMB's Interest income surged 20.8 per cent moving to J$8.3b, while its Interest expense grew 12.8 per cent to J$4.8b. The net outcome was a 34 per cent rise in its Net interest income to J$3.5b. Of this increase, 13.4 per cent or J$3477m is attributable to the increase in the portfolio from the acquisition of the CCFG whilst the remaining 20.7 per cent resulted from the continued growth and effective management of the investment portfolio and cost of funds. The Net interest income margin moved from 38.6 per cent to 41.9 per cent (Exhibit 2).

Foreign exchange margins from cambio trading and commission income reflected increases of 129.1 per cent and 40.6 per cent respectively which were driven mainly by increased volume activity. However, JMMB's Gains on securities trading suffered a 26.3 per cent decline to J$1.1b.

Operating expenses grew 38.9 per cent to J$3b versus J$2.2b for the prior year. Operating costs from the acquisition of CCFG comprised 57.4 per cent or J$486.9m of Operating expenses while the outstanding J$361.4m was due mainly to performance incentive paid to staff, one-off integration costs, growth in subsidiaries in the regional markets and normal inflationary increases. As such, Operating profit declined 7 per cent to J$2b. Share of profits of associated companies shot up 252.9 per cent. The IBL Banking Group recovered from the adverse impact on its loan portfolio and continues on a positive path whilst the Dominican Republic subsidiary continues to produce robust results. Profit after tax surged 77.6 per cent to J$3.2b because of the one of gain from the CCFG acquisition.

JMMB's Net interest income accounts for 68 per cent of overall income, making it the Group's number one source of Revenue. For the past year, the steady improvement in the Net interest income margin shows efficiency at managing the company's top line. However, the implementation of the NDX may erode this improvement. Given the downside risks in Jamaica, JMMB may need to keep its focus on growing its earnings across through regional territories in order to drive long-term, sustainable growth and further enhance shareholders' value.

At a price of TT$0.65, JMMB is currently trading at a trailing P/E multiple of 6.7 times (excluding the one off gains of the acquisition). Investors are receiving a dividend yield of 2.5 per cent on the stock.

The NDX is a vital factor of the debt reduction programme and the IMF Agreement which is aimed at improving Jamaica's current economic situation. While in the short term it is expected to hamper participating companies' profitability, in the long term the NDX is intended to make a positive contribution to shareholders and the overall Jamaican economy.

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