Scotia aided by lower loan loss expense
Scotiabank Trinidad and Tobago Limited (SBTT)
For the nine months ended July 31, 2012, Scotiabank Trinidad and Tobago Limited (SBTT) reported a 2.2 per cent growth in Earnings Per Share (EPS) of $2.30 compared to $2.25 for the same period last year. SBTT maintains its consistent dividend payout ratio policy and will pay a third interim dividend of $0.32 on October 9, 2012.
For the nine months, the 2.9 per cent increase in Net Interest Income and 6.2 per cent decrease in Non-Interest Income led to a marginal 0.3 per cent increase in Total Income to $950.4m relative to $947.7m for the corresponding period in 2011. The Insurance Services segment was the performance leader recording a 9.6 per cent rise in Net Interest Income as well as a notable 36.3 per cent increase in Fees and Commissions. The marginal increase in Net Interest Income can be attributed to the 2.8 per cent and 9.6 per cent increase from the Retail Banking and Insurance Services segments, respectively, which was tempered by an 11.6 per cent decline in Net Interest Income from the Corporate/Commercial and Merchant Banking segment. The negative trend in the latter could be traced to the elevated levels of excess liquidity in the financial system because of weak credit demand, with Private Sector Credit remaining relatively flat having increased 3.11 per cent year on year during the month of June. For the Private Sector there were year on year increases in Consumer Credit, Business Credit and Real Estate and Mortgage Lending by 0.56 per cent, 5.73 per cent and 10.39 per cent respectively.
The negative trend in Non-Interest Income is associated with the 20.3 per cent and 6.3 per cent fall in revenues from Fees and Commissions from the Retail Banking and Corporate/Commercial and Merchant Banking segments, respectively.
Non-Interest expenses declined by 2.8 per cent mainly because of the notable 80.8 per cent decrease in Loan loss expense over the nine months (Exhibit 1), indicating a decrease in risk, from a debt standpoint, and can be credited to the Group's effective risk management framework and cost containment strategies.
After two consecutive quarters of economic contraction for the latter half of 2011, with real GDP finally receding to 0.0 per cent in the first quarter of 2012, Scotiabank Group's Profit After Tax still improved, although only marginally, by 2.2 per cent to $405.4m from $396.6m for the same period last year.
Total Assets grew by only 1.8 per cent to $17b for the period ended July 31, 2012. There was a 5.6 per cent fall in Net Loans to customers due to the downward trend in credit demand for the period. Liabilities fell by only 0.24 per cent to $14.15b. Although deposit rates remained low during the review period, SBTT managed to grow their deposits by 2.6 per cent.
Although The Central Bank kept the repo rate at 3 per cent since July last year, bank lending rates still declined, with the exception of rates on Mortgage loans. The levels of liquidity in the financial system remain problematic for Commercial Banks due to poor commercial and consumer credit demand. SBTT has however successfully kept the risk that they face to manageable levels, evidenced by growth in the Balance sheet commensurate with the moderate fall in Net Loans to customers as well as the slight increase in Deposits. Overall, SBTT positive performance can be credited to their Risk management framework.
At a current price of $62.75, SBTT is trading at a trailing Price/Earnings multiple of 20 times, a premium to its five-year average of 13.3 times. The stock has a dividend yield of 2.04 per cent. In light of the stock's stable performance and illiquidity, Bourse recommends a HOLD.
International Bank (FCIB)
For the nine months ended, July 31, 2012, CIBC First Caribbean International Bank (FCIB) registered a 36 per cent fall off in Earnings per Share (EPS) from US$0.045 to US$0.029 due primarily to a year on year increase in Loan Loss Expenses.
At the top-line, FCIB reported an improvement of US$17.8m in Revenue. This upswing was an outcome of an increase of 4.6 per cent in Net Interest Income (NII) from US$282.6m to US$295.6m, which was driven primarily by lower deposit rates. This resulted in an improvement in the NII Margin from 75 per cent to 79 per cent year on year. Another contributory factor that gave rise to an increase in Revenue was a 4.8 per cent surge in Operating Income, largely due to the acquisitions of CIBC Bank and Trust Company Limited (Cayman) and CIBC Trust Company Limited (Bahamas) in September 2011.
These acquisitions were also responsible for an increase of 3.2 per cent in Operating Expenses by US$8m. The Group experienced an 85.7 per cent spike in Loan Loss Expense from US$51.96m to US$96.5m for nine months 2012. This was the major contributing factor to FCIB's weak performance over the last year and continuing in this period as seen in Exhibit 2. However, this expense declined when compared to the last three quarters, which may be an indication of better management in this regard. FCIB's taxation expenses were $20 million less "due to lower earnings in taxable jurisdictions"
The resulting Income before Tax and Income after Tax dwindled 41.6 per cent and 32.8 per cent respectively. Total Assets were up 11.8 per cent to US$11.2b as Cash Balances with Central Bank and due from Banks increased 69.1 per cent year on year from US$1.2b to US$2b. Liabilities grew by 13.14 per cent to $9.67b and Shareholders Equity also increased 4.3 per cent to US$1.6b.
As the Group proceeds forward, the low interest rate environment will continue to impact the Group's Interest Income. On a brighter note in May 2012, the Group introduced a new Wealth Management Centre in Trinidad and Tobago in an effort to strengthen its operations. The FCIB group believes that this line of business is an engine for growth and competitive differentiation.
It is critical that the Group focus on generating revenue in its Non-Interest Income stream and continue managing its loan loss expenses. Investors should be cognizant 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. In addition, a large percentile of revenue for FCIB is generated from more tourist-based economies, thus substantiating a weak revenue outlook.
With a share price of $8.44, FCIB commands the highest P/E multiple in the market at 43.96 times, significantly above market multiples as well as its five-year average of 15.4 times (inclusive of 2011's 29.4 times multiple). Based on the deteriorating performance and this inflated P/E multiple, BOURSE recommends a SELL on the stock.