This week Bourse examines the performance of regional banks, Scotiabank Trinidad and Tobago Ltd and CIBC FirstCaribbean International Bank.

Scotiabank Trinidad and Tobago Ltd

For the six months ended April 30, 2012 Scotiabank Trinidad and Tobago Ltd (SBTT) reported a 2.5 per cent growth in earnings from $1.487 to $1.524 and declared its second interim dividend of $0.32 payable on July 06, 2012 to shareholders on record as at June 08, 2012.

For the half year ended SBTT recorded a marginal increase in Net Interest Income of 2.1 per cent due primarily to redeployment of excess liquidity used to acquire high quality investments. The Balance Sheet reveals that Net Loans to Customers was down by $351.5M while Deposits grew by $861M. Additionally, the Group's Debt Security in Issue was reduced from $800M to $618M as the Bank exercised its embedded call option feature and reissued at lower rates than the original. The redeployment of excess liquidity is seen as Treasury Bills increased by $503.1M. Other Income did suffer a 6.5 per cent decline as the Group's Merchant Banking and Wealth Managements divisions faced challenges as a result of lack of capital market activity.

Contrary to the experience of many Caribbean banks recently, SBTT managed to reduce its loan loss expense by 67.7 per cent which they attributed to strategic management of the portfolio of delinquent loans that was further bolstered by improvement in local economic confidence according to the Group.

We saw the Group's Other Expenses increased by 4.7 per cent but overall Non-Interest Expenses was down 3.2 per cent owing to the loan loss expense decline.

This led overall to an improvement in the Group's Productivity ratio from 47.1 per cent in HY 2011 to 45.8 per cent in HY 2012. Profit before Tax was up 2.1 per cent to $343.8M and Profit after Tax by 2.4 per cent to $268.7M.

In looking at the Balance Sheet it is seen that Total Assets grew to $17.3B (4.5 per cent), Liabilities by 3 per cent to $14.4B and Shareholders Equity by 12.7 per cent.

In light of the reduction in the Loan to Customers portfolio and increases in Deposits, it is imperative that the Bank maintain its spread to support its Net Interest Income. The Group's initiative in refinancing existing debt at lower rates is creditable.

Credit Demand in the market remains subdued, with Private Sector Credit having increased 3.1 per cent year on year in the month of March. Within Private Sector Credit year on year increases were seen in Consumer Credit, Business Credit and Real Estate and Mortgage Lending each increasing by 2.23 per cent, 4.76 per cent and 9.77 per cent respectively. Barring improvements in Credit Demand the Bank should also focus on Non-Interest Income streams of revenue such as Fees and Commissions as these can possibly augment growth. The continued reduction of the Bank's loan loss expense is commendable and should be maintained.

At a current price of $60.06, SBTT is trading at a P/E of 19.2 times, a premium to its five year average of 13.3 times. The dividend yield stands at 2.13 per cent. The Company continues to be stable and generate consistent and positive growth (see Exhibit 1); the Group indicated that Shareholder's Return as measured by the Compound Annual Growth Rate for the last 10 years was 19.7 per cent. The stock remains highly favoured amongst investors. Given its strong performance and considering its current valuation BOURSE recommends a HOLD.

CIBC FirstCaribbean International Bank

For the Half Year Ended, April 30, 2012, CIBC FirstCaribbean International Bank (FCIB) reported a 47.1 per cent fall off in earnings, from US$0.034 to US$0.018 due largely to a 133 per cent increase in Loan Loss expenses. Despite this performance the Group declared a dividend of US$0.015 payable on June 29, 2012.

The Group reported an improvement in Net Interest Income from US$186.7 to US$197.7M arising from a disproportionate decline in Interest Expense relative to the decline in Interest Income. The decline in Interest Expense was driven by reductions in funding costs and interest expenses related to hedging instruments. This resulted in an improvement in the NII Margin from 75 per cent to 79 per cent year on year. Operating Income grew by 7.8 per cent to US$71.4M largely due from the acquisitions of CIBC Bank and Trust Company Limited (Cayman) and CIBC Trust Co Ltd (Bahamas) in September 2011. These acquisitions also contributed to the increase in Operating Expenses by 2.7 per cent to US$168.2M.

The Group saw a 133 per cent spike in Loan Loss Expense from US$30.5M to US$71M for the half year. This was the major contributing factor to FCIB's weak performance over the last year and continuing in this half year as seen in Exhibit 2.

The resulting Income before Tax was down 51.6 per cent year on year to US$29.3M and Income after Tax by 44.6 per cent.

Total Assets were up 14.7 per cent to US$11.5B as Cash Balances with Central Bank and due from Banks doubled year on year from US$1.1B to US$2.2B. Liabilities grew by 16.8 per cent to $9.9B and Shareholders Equity also increased by 3.5 per cent to US$1.6B.

It appears that FCIB continues to suffer the effects of a low interest rate environment which negatively impacts interest income, and simultaneously faces increased loan loss impairments. FCIB's profitability has been declining almost consistently over the last five years. In an effort to maintain an attractive dividend yield they have been paying out increasing amounts of their earnings, such that in 2011 the dividend pay-out ratio was 97.8 per cent.

It is critical that the Group focus on generating revenue in its Non-Interest Income stream and effectively managing its loan loss expenses. Investors should be cognisant of the fact that in light of the muted outlook for the economies in which the Group operates (Jamaica, Barbados, OECS), this is not an easy task. The dividend pay-outs investors would have been use to in previous years will become more difficult to maintain without an improvement in profitability. This is already evident given the reduction in the Group's 2011 final dividend and 2012 interim dividend to US$0.015 each, lower than in comparative periods earlier.

With a share price of $8.50, FCIB commands the largest P/E multiple in the market at 44.3 times, significantly above market multiples as well as its 5 year average of 15.4 times (inclusive of 2011's 29.4 times multiple) see Exhibit 3. Based on the deteriorating performance and this inflated P/E multiple, BOURSE recommends a SELL on the stock.