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Scotia cools as First Caribbean dives

Today we at Bourse cover local subsidiaries of two major Canadian banks which have been rated among the safest in the world. The first is Scotiabank Trinidad and Tobago Limited (SBTT) operating primarily in Trinidad and Tobago. The other is CIBC FirstCaribbean (FCI), which spans the English and Dutch-speaking Caribbean.

Scotiabank Trinidad and Tobago
For the six months ended April 30th 2014 (the period), Scotiabank Trinidad and Tobago (SBTT) reported an Earnings Per Share (EPS) of $1.42 which was a 7 per cent decrease from the $1.52 reported in the comparable six months ended April 30th 2013. With a trailing Price/Earnings (PE) ratio of 22.9x, SBTT is trading above its 5-year average of 17.8x and has the highest trailing PE among its peers.
A second interim dividend of $0.40 (2013 - $0.40) is to be paid on July 10th, 2014 with the stock going ex-div on June 9th, 2014. The stock’s trailing dividend yield stands at 2.71 per cent (see Exhibit 1).
At the top-line, Net Interest and Other Income declined marginally by 0.9 per cent from $680.2M to $674.3M due mainly to the persistent low interest rate environment driven by record levels of liquidity and the effects of the Mortgage Market Reference Rate (MMRR), which was introduced by the Central Bank of Trinidad and Tobago (CBTT) two years ago.
Cooling revenues coupled with increasing expenses resulted in SBTT reporting Income after tax of $249.7M, down 7.4 per cent from the $269.8M reported in 2013.
Despite the challenges of the financial landscape, SBTT has maintained stability with a strong balance sheet with Assets of over $20.1B, a 10 per cent increase over the $18.3B stated as at April 30th 2013. The main contributor to this appreciation was SBTT’s robust Customers loan book posting a 7 per cent increase to reach $10.8B from $10.1B.

Sluggish Credit Demand
Relative to the other locally-listed banks on the TTSE, SBTT has posted the highest trailing 12 Month Return on Equity (ROE) of 16 per cent per dollar invested (see Table 1). This speaks to SBTT’s performance in the face of a challenging economic and financial market conditions over the past year.
Sluggish growth in demand for credit, particularly in the corporate segment continues to dampen the Group’s Net Interest and Other Income. Its Corporate/Commercial & Merchant Banking segment witnessed a fall in Net Interest and other income of 31 per cent or $50M from $162M to $112M at the end of April 2014.
On the retail side of business, SBTT’s Retail Banking segment reported a 14 per cent increase in Net Interest and Other Income, climbing to $448.2M from the $391.9M reported in 2013.

Sector Outlook
The continued low interest rate environment observed in Trinidad and Tobago has been accommodated by the CBTT so as to increase credit and investment. This is broadly seen as a measure used to spur on the economy in times of slowed growth. The accommodative policy prescription has had limited success, as business credit continues to be muted (although mortgage loans have shown good growth). A smaller spread between interest rates charged on loans and the rates offered on deposits coupled with increased competition between lending institutions has been experienced by banks generally. High liquidity and muted loan demand will likely put pressure on bank spreads at least over the next year.
At the current price of $70.00, SBTT has declined 3.52 per cent year-to-date. In terms of valuation, the stock has trailing yield of 2.7 per cent and is trading at a trailing P/E multiple of 22.9x, a premium to its peers as well as the market average for the stock over the last five years. At the current price, BOURSE maintains a HOLD rating on the stock.

CIBC FirstCaribbean
International Bank Limited
CIBC FirstCaribbean International Bank Limited (FCI) reported a loss per share of US$0.12 for the six months ended April 30th 2014. This reflected a US$0.15 decrease from the US$ 0.022 EPS recorded in the first six months of 2013. Even with this fall in EPS, the Board of Directors have approved an interim dividend of US1.5¢ per share to be paid on June 27th, with the stock going ex-div on June 10th, 2014.
The difficult economic conditions facing many of the Caribbean countries, especially in the Eastern Caribbean and Barbados, are reflective of the challenging conditions facing banks operating in these economies. The ability to grow Interest Income has posed a challenge to the Group, given the economic environment in which FCI operates. Top line growth was muted as the majority of the Group’s income is generated from tourist based economies.
FCI’s Net Interest Income remained flat for the six months ending April 30th 2014 at US$185M. Despite the adverse environment FCI has commendably managed to keep its revenues consistent leading to a stable top line.
For the six month period, Net Operating Income increased by 3.4 per cent, to US$90M from US$87M. However, a US$ 169M Loan Loss Expense and a US$116M Goodwill Impairment charge resulted in a Net Loss for the period of US$199M.

Outlook
As of April 30th 2014, FCI’s majority of Revenue came from Barbados, the Bahamas, the Caymans and the Eastern Caribbean. Based on the Group 2013 Annual Report, Exhibit 2 shows the geographical revenue exposure.
With more than 75 per cent of the company’s revenue originating from Barbados, Cayman Islands, the Bahamas and the Eastern Caribbean, the Group’s performance will depend heavily on its skill in maintaining traditional banking operations. Loans to customers have accounted for 52 per cent of FCI’s asset base, enabling FCI to produce financial results that were not heavily dependent on income from an investment portfolio. Loan Loss provisions of 2.7 per cent (as a percentage of Total Loans and Advances to customers in 2014) are not expected to increase at the substantial rate going forward in the year ahead.

Bourse View...
At a current price of $5.50, FCI is trading at a Market/Book multiple of 1.0x, below its 5-year average of 1.2x (see Exhibit 3).
Currently, the dividend yield stands at 3.51 per cent offering investors a good return. Despite the write-offs which resulted in a Net Loss for the period, the bank maintains a strong capital structure. This position is tempered by the company’s ability to organically grow the business in increasingly challenging business environments. It is on that basis that BOURSE maintains a HOLD rating on the stock.

For more information please contact Bourse Securities Limited, at 628-9100 or email us at research@boursefinancial.com.
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