Scotiabank Trinidad and Tobago Limited

For the First quarter ended January 31st (Q1 2013), 2013 Scotiabank Trinidad and Tobago Limited (SBTT) delivered a 0.6 per cent growth in Earnings per share (EPS) from $0.803 to $0.808. The Board of Directors declared an interim dividend of $0.40, payable on April 17th, 2013.

Despite a 5.5 per cent decline in Net interest income to $224.7M, Net interest and other income showed positive growth of 5.6 per cent to $347.9M as Other income increased 34.2 per cent to $123.1M. Overall, Non-interest expenses increased 9.9 per cent to $162.2M. Loan loss expense declined 8.8 per cent to $9M due to strong credit policies whilst Other expenses increased 11.3 per cent to $153.2M.The net effect of Interest and other income and Non-interest expenses resulted in a 0.6 per cent increase in Profit after tax to $142.4M.

Segmental analysis of Profit before tax (PBT) reveals the Retail Banking division achieved only a 0.6 per cent growth; however this segment remains the largest contributing division, representing approximately 42.4 per cent of the Group's PBT. When compared to prior period, the Corporate/Commercial & Merchant Banking segment suffered a 0.4 per cent decline in PBT to $73M. Despite the decrease, this segment accounts for approximately 39.3 per cent of PBT making it the second largest contributor to PBT. The Insurance Services sector reported the greatest improvement, delivering a 25.1 per cent increase in PBT to $33M.

Overall, the Total assets grew by 9.1 per cent to $18.1B. Total liabilities and Total shareholders' equity climbed 9 per cent and 9.6 per cent respectively, to $15B and $3.2B.

Credit conditions continue to remain weak owing to the subdued economy. For the period December 2011 to December 2012, Total Private sector credit slowed to 2.05 per cent. Consumer credit saw a slip in growth from 3.1 per cent to 2.4 per cent, with business credit declining by 0.8 per cent. However, Real estate mortgage lending was able to maintain a healthy standing, with an attractive increase of 11.2 per cent in December 2012.

For the balance of the year, high excess liquidity and persistently low interest rates are anticipated to pose a challenge for the bank, as demand for credit still has not fully recovered. In an attempt to sustain growth, SBTT has implemented strategies to diversify its revenue base and improve credit quality. These strategies have already resulted in a significant reduction in credit losses. For the past four years SBTT has managed to reduce its Loan loss provision rate which is admirable for any financial institution. The Group should also continue to look for ways to increase income in sectors outside of Banking such as the Insurance Services. The Bank is confident that its approach to risk management will ensure that SBTT is well poised to effectively meet market challenges, while preserving shareholder value.

At a price of $67.00, SBTT is currently trading at a trailing P/E multiple of 21.6 times, a premium to its 16.6 times 3 year P/E average. The stock has a relatively attractive dividend yield of 2.5 per cent. BOURSE recommends a HOLD.

GraceKennedy Limited

GraceKennedy Limited (GKC) reported a 26.6 per cent increase in diluted Earnings per share (EPS), from J$8.30 to J$10.51, for the Financial year ended December 31st, 2012 (FY 2012). The Group declared an interim dividend of J$0.70, payable on March 27th 2013.

GKC's Revenue increased 5.4 per cent to J$61.3B. However, Expenses rose by 5.8 per cent, or by J$3.2B. Other Income remained relatively flat at J$1B. Profit from Operations fell 1.2 per cent to J$4.2B leading to a decline in the Operating profit margin from 7.3 per cent to 6.8 per cent. Interest income from non-financial services increased 5 per cent whilst Interest expense from non-financial services declined 8.8 per cent. Share of associates increased 11.8 per cent to J$176.2M.

Overall Profit before tax (PBT) increased 1.1 per cent to J$4.1B. However, taxes paid fell 76.1 per cent. This significant decline was mainly attributable to a lower tax rate of 25 per cent (down from 33 1/3 per cent) that was legislated on 28 December 2012. This change gave rise to a hefty deferred tax credit of J$578.3M for the reporting period. Subsequently, Profit after tax (PAT) grew 28 per cent to J$3.8B.

The five operating segments all contributed higher figures to PBT as compared to 2011. Food Trading remained the highest contributor to revenue with 66 per cent, while Money Services maintained the top contributor to PBT with 40 per cent. Regionally, Jamaica accounts for 66 per cent of GKC's Revenues and 78 per cent of Non-current Assets. In February 2013, GKC participated in the National Debt Exchange (NDX) under which it exchanged its holdings of domestic debt instruments issued by the Government of Jamaica for new, longer dated debt instruments with lower coupon interest rates. The NDX is expected to have an adverse impact on profitability and the balance sheet. As reported, the impact of the NDX on the Company's statement of financial position is projected to be less than 2 per cent of owners' equity.

Post NDX, the weighted average coupon yield on the Company's Jamaican dollar denominated instruments with a total face value of J$1.5B fell 2.7 per cent to 7.77 per cent (Exhibit 2). The weighted average tenor of those securities was extended from 5.54 years to 10.21 years. Also, the weighted average coupon yield on the Company's US dollar denominated instruments with a total face value of US$3.7M declined 2 per cent from 7.25 per cent whilst the weighted average tenor of those securities more than doubled from 3 years to 7 years.

GKC may have a difficult 2013 ahead of them given their overweight in Jamaica (Exhibit 3). As Jamaica continues to look for ways to reduce its debt burden, changes in areas such as taxation can further hamper business expansion. GKC has indicated that the aim is to reduce their reliance on Jamaica and increase the revenue contributions of the other regions. Once this can be achieved, GKC will be better positioned to cope with the uncertainties of the Jamaican market.

At a price of $3.45, GKC is trading at a trailing P/E of 6.5 times, compared to its 5 year average of 6.3 times. The dividend yield stands at 4.1 per cent. BOURSE recommends a HOLD on this stock.