Scotiabank Trinidad and Tobago

For the nine months ended July 31, 2010, Scotiabank Trinidad and Tobago (SBTT) produced an EPS of $2.06. This represents a 10.2 per cent increase in earnings when compared to the EPS of $1.87 recorded in the comparative nine months ended July 31st, 2009. The directors have resolved that the Bank pay a third interim dividend of $0.25 (2009 - $0.25) per share on October 7, 2010 to shareholders on record as at September 7, 2010.

SBTT's Net Interest and Other Income increased 9.6 per cent from $819.8M to $898.8M. Net Interest Income grew 3.3 per cent to $628.5M despite a six per cent decline in the loan portfolio. Other Income contributed handsomely to revenue as it increased 27.8 per cent to $270.3M year-on-year. (See Exhibit 1). Furthermore, Other Income as a percentage of Other Income and Net Interest Income increased from 25.8 per cent in 2009 to 30.1 per cent in 2010. (See Exhibit 2).

Unlike similar financial institutions locally and regionally, SBTT was successful in reducing its Loan loss expense. Under the Group's non-interest expenses, Loan loss expense fell 3.0 per cent year-on-year from $59.7M to $58.0M. The Loan loss provision rate, when annualised stands at approximately 0.80 per cent, lower than the prior year's provision of 0.84 per cent. Other non-interest expenses rose 11.4 per cent to $374.3M. Overall, Non Interest Expense rose 9.2 per cent to $432.3M year-on-year.

Despite the recorded increases in the Group's expenses, SBTT's Income before Taxation improved 10 per cent in the first nine months of 2010 from $424.1M to $466.5M. The provision for taxation moved up 10 per cent to $103.5M. Income after Taxation increased to $363.0M year-on-year.

The Group's Total Assets for the period stands at $15.4B, a 7.9 per cent decline from the comparative period in 2009. The decline in assets was as a result of subdued credit demand, which impacted the Group's Loan Portfolio. Net Loans to customers contracted 6 per cent to $9.7B year-on-year. Non-core categories such as Investment Securities and Treasury Bills also contracted. On the liabilities side, Customer deposits fell six per cent while Total Shareholders' equity rose to $2.4B.

SBTT produced commendable results given the economic challenges that were faced during the year. Despite the decline in private sector credit, the Group has been able to produce growth in its Net Interest Income. Other Income also registered growth for the period. More emphasis may need to be placed on Other Income, as the subdued credit demand is expected to continue. Focus should be initiated in maintaining or even improving its productivity as this can contribute towards an improved bottom line. If the fall in SBTT's Loan Loss expense continues, this together with a focus on managing cost across the Group can result in an improvement in the productivity ratio. Further, continued risk management, business line diversification and employee engagement can also help in maintaining performance.

At the current price of $34.00, SBTT has appreciated 10.6 per cent year-to-date. In terms of valuations, the stock is trading at a trailing P/E multiple of 12.3 times, in line with its 3-year historical average. The Group has proven itself by achieving growth in earnings as well as cost containment in such challenging times. At the current price, BOURSE recommends a HOLD on the stock in the short term. Over the medium term, the recommendation is a BUY.

Scotia DBG Investments Limited (SDBG)

Scotia DBG Investments Limited (SDBG) reported an EPS of J$2.57 for the nine months ended July 30, 2010, a decline of J$0.73 when compared to the J$3.30 reported in 2009. The board of directors has approved an interim dividend of J$0.33 per share, payable on October 7, 2010 to stockholders on record as at September 15, 2010.

SDBG's Interest income for the nine months was down 20.5 per cent year-on-year from J$7.4B to J$5.9B. Interest expense also contracted, moving from J$5.0B to $J3.5B, representing a 31.3 per cent decline year-on-year. This resulted in a Net interest income growth of 2.8 per cent to J$2.4B for the Group. Net interest income as a margin improved from 32 per cent to 41 per cent of the top-line revenue year-on-year. On a quarter-on-quarter basis, this margin improved from 40 per cent in the second quarter to 45 per cent in the third quarter.

The Group's Total non-interest income was down 5.8 per cent from J$454.3M to J$428.1M. In the third quarter of 2010, the sale of SGBG's subsidiary, SDBG Merchant Bank, took place resulting in a one-off charge of J$86.8M. Included in these charges were transactions costs and the write off of goodwill. If this charge was excluded, non-interest income for nine months would have been higher.

Total Operating income rose one per cent year-on-year to J$2.8B. Operating expenses fell 2.3 per cent to J$949.6M year-on-year. As a result SDBG's productivity ratio (non-interest expense as a percentage of net revenue), a key measure of its cost efficiency, showed some improvement moving from 35.0 per cent in 2009 to 33.9 per cent for the nine months ended July 2010.

Profit before tax was up 2.7 per cent to J$1.8B. Increased taxation charges for the period resulted in Profits for the period being 22.2 per cent lower than the J$1.4B reported in 2009.

Total Assets for the Group stood at J$66.6B, a 10 per cent decrease from the J$74.0B reported in the prior year. The decline in the asset base was as a result of the disposal of SDBG Merchant Bank in the third quarter as well as the migration of funds into its Unit Trust and Mutual Fund products as part of the Group's strategy to shift to its new business model. Total Liabilities contracted 12.4 per cent to J$58.1B, while Stockholders' Equity moved up 10.7 per cent to J$8.5B.

SDBG was able to maintain its top-line revenue despite the fall-off in interest rates. The consequential effects of lower interest rates resulted in the Group diversifying its business model away from dependency on Interest Income. A recent Jamaican news article cited the SDBG's CEO noting that the major shift in its business model from repurchase agreements to mutual funds and unit trusts saw SDBG becoming the dominant player in the market for the combined collective investment schemes with 52 per cent of the J$31B market. The CEO indicated that the off-balance sheet strategy would reduce the Group's reliance on net interest income as its major source of revenue. It was pointed out that the Group's dominance in the market implies that the strategy is a successful one and that consistent focus in transforming this new business model can produce significant results. SDBG had a noteworthy improvement from the second quarter EPS of J$0.48. Results would have been even better if not for the one-off charge and higher taxation. This is a move in the right direction. Apart from efforts in growing income, the Group will need to continue its maintenance of cost efficiency for non-interest and interest expense.

At the current price of TT$1.30, SDBG is trading at a trailing P/E multiple of 4.0 times and a forward P/E of 5.2 times. SDBG has been proactive in recognizing and executing on the strategy to diversify income streams. This is reflected in the marginal improvement in Profit before Tax. In the immediate future however, the Group will be constrained as is the case with other financial institutions. BOURSE recommends a HOLD on this stock.