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'Credit loss provisions impact performance'

National Commercial Bank Jamaica Ltd

For the financial year ended September 30th 2012, National Commercial Bank of Jamaica Limited (NCBJ) delivered a 27.7 per cent decrease in Earnings per share (EPS) from J$5.64 to J$4.08. The Board declared a final dividend of J$0.64 payable on December 13th 2012, which brings the total year dividend to J$1.40.

Year on year, the Group's Net interest income grew 3 per cent from J$21.2B to J$21.8B. Net fee and commission income rose mainly as a result of increased fees linked to the growth in the loan portfolio. However, this improvement was offset primarily by the 42.3 per cent and 7.5 per cent decreases in Premium income and Gain on foreign currency and investment activities respectively. Premium income fell because of the reduced sales of annuity products whereas the reduced spreads on the sale of Jamaican government debt securities were accountable for the fall in Gain on foreign currency and investment activities. As such, overall Operating income fell by 0.4 per cent, or by J$125M.

Operating expenses increased by 16.1 per cent or J$3.1B leading to a 21 per cent decline in Operating profit from a base of J$15.5B to J$12.3B. The main contributor to this increase in expenses was a J$1.7B surge in Provision for credit losses to J$2.5B because of increased loan losses. This represents approximately 2 per cent of Loans and advances. Staff costs increased by 5.6 per cent, or J$516M mainly due to the negotiated salary increase for the 2011/2012 financial year. Also, Impairment losses on securities grew by 78.5 per cent, or J$206M, signifying impairment losses recorded on securities which have been deemed impaired. The Group's Net profit suffered a 27.7 per cent decline from J$13.9B to J$10B.

Of the six major segments analysed, the Retail & SME division and the Payment services division delivered increases in Operating profit whilst the remaining four experienced declines (Exhibit 1). The Corporate Banking segment recorded a 95.5 per cent decline in its result because of loan losses on a large non- performing loan. The Treasury & Correspondent Banking segment contributed Operating profits of J$3.6B, a deterioration of 17.1 per cent due to lower yields earned on the investment portfolio. The Group's Wealth Management sector experienced a decline of 15.1 per cent, or J$705M, as a result of the impairment losses on investment securities and the decrease in interest income due to the decline in yields. Despite the reduction, the Wealth Management sector remains the largest contributor to Operating profit accounting for approximately 29 per cent.

NCBJ maintains its strong business position as the largest bank in Jamaica as there are not many other creditworthy financial entities for local depositors to turn to. Despite Jamaica's large debt burden and high risk of economic imbalances, for the September quarter, the Jamaican Finance and services sector grew by 0.8 per cent and it is one of the few sectors expected to have growth for the fourth quarter. Given the high credit risk in the economy NCBJ may need to implement measures to control expenses, more specifically the provision for credit losses. Also, improvements in NCBJ's Net interest income margin and Revenue from Non-Interest income sources must be continued and augmented.

At a current price of $1.55 NCBJ's dividend yield stands at 6.5 per cent, one of the highest yielding stocks in the local market. Year to date the stock has depreciated 28.2 per cent and is trading at a P/E multiple of 5.5 times, above its five year average of 4.9 times (Exhibit 2). As such, BOURSE recommends a HOLD.

Gracekennedy Ltd

For the nine months ended September 30th 2012, GraceKennedy Limited (GKC) reported a 6.9 per cent decline in diluted EPS, down from J$5.80 to J$5.40. The Group declared an interim dividend of J$0.70 payable on the December 18th 2012.

GKC's Revenue increased 5.2 per cent from J$43.8B to J$46.1B. However, Expenses rose by 5.7 per cent, or by J$2.4B leading to a 4.7 per cent decrease in Gross profit. Other Income declined by 21.4 per cent resulting in a 9 per cent decline in Profit from operations from J$3.1B to J$2.9B. Interest income from non-financial services increased 5.6 per cent whilst Interest expense from non-financial services declined 8.3 per cent.

Overall Profit before tax (PBT) and Profit after tax (PAT) both registered declines of 7.3 per cent and 6.4 per cent respectively, or by J$0.22B and J$0.13B.

Segmental analysis of PBT reveals that the GraceKennedy Money Services (GKMS) division remains the largest contributing division to the increase in PBT. This sector reported a healthy 10 per cent growth in Revenue and a 13 per cent growth in PBT (Exhibit 3). The cambio line continues to do well mainly due to growth in commercial businesses. Despite the rising electricity and transportation costs, GK Foods, which includes Hi-Lo supermarkets, recorded a 5.4 per cent and 10.4 per cent growth in Revenue and PBT respectively. The Banking and Investments segment had a challenging period as profitability declined 37.5 per cent.

GKC is on par with the vision of becoming a global consumer group. As such, on September 28th 2012 GKC acquired the remaining 33 1/3 per cent interest of its minority partner in Grace Kennedy (Belize). The Group has also expanded its distribution in North America by establishing further channels especially on the West Coast. To efficiently service the international customers, additional manufacturing lines for the sauces were created. In an attempt to maintain the growth in sales, GK Foods have widened product lines to better fit the budgets of consumers.

GKMS acknowledges that remittance customers across the Caribbean rely heavily on the services provided during the Christmas season therefore GKMS may not experience much difficulty in achieving sales in the last quarter. Since the GKMS and Food and Trading segment are GKC's two main operational areas, both may need to maintain their strong performance in the last quarter of the year to compensate for any further possible weaknesses in the remaining segments, especially Banking and Investments.

At a price of $3.60, GKC is trading at a trailing P/E of 6.7 times. The dividend yield is relatively attractive at 2.8 per cent. BOURSE recommends a HOLD on this stock.

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