Scotia Group profit rises in uncertainty
Banking conglomerate Scotia Group Jamaica Limited, SGJ, earned $3.4 billion in profit for the January first quarter, up 173 per cent, due in part to higher interest rates.
But market response to the gains were muted on Friday amid a reduction in the group’s capital base over the past year, from $114.2 billion to from of SGJ at $105.2 billion.
Higher interest rates allowed the bank to charge more on interest-bearing services, which accounted for two-thirds or $8.6 billion of its total income while its total operating revenue amounted to $13.3 billion. A year earlier it earned $5.9 billion in net interest income while total operating revenue amounted to $9.4 billion.
“Growth in our loan portfolio, both corporate and retail, resulted in higher net interest income in the period,” said Scotia Group president & CEO Audrey Tugwell Henry. Additionally, the group recorded “higher insurance revenues, from improved cross-selling initiatives and deepening of our customer relationships,” she said at the company’s annual general meeting on Friday in Kingston.
Scotia Group operates Jamaica’s second largest bank and is also in the business of insurance, investment banking and mortgage lending.
Its loan portfolio is valued at $237 billion of which just 1.75 per cent are non-performing or in arrears. Tugwell Henry said there was a 19 per cent rise in the loan portfolio in the January quarter.
Its dip in capital reflected fluctuations in the value of investment assets, but was still well above regulatory requirements.
“This was due primarily to the reduction in the carrying value of the defined benefit pension plan asset and dividends paid which was partially offset by internally generated profits,” Scotia Group said in market filings.
The quarterly dividend was cut to 25 cents from the quarterly 35 cents paid previously. It reduces the sum of the distribution from just over $1 billion per quarter to $778 million. Minority shareholder Orette Staple demanded that the bank increase the dividend due to be paid out on April 20, but Tugwell Henry said the smaller distribution reflected economic uncertainty, locally and globally.
“We started with COVID-19 and then there was the geopolitical occurrences. Then there are threats of recessions from our major trading partners. That may have some impact on operations here,” she said, adding that new capital adequacy requirements under the Basel III international banking rules means banks will have to preserve more capital.
Scotia group currently holds $125 billion in cash, down from $132 billion a year ago.
The negative impact of higher interest rates relates to the reduced asset values on the investment securities, such as bonds and stocks, that Scotia Group holds. The higher interest makes government-backed treasury bills more attractive, but that in turn makes private bonds and stocks riskier, and less attractive.
SGJ holds $146 billion worth of investment securities on its books, which fluctuate in value. After factoring in changes in the fair value of its investments, the group recorded a comprehensive net loss of $1.1 billion in January, compared to a comprehensive profit of $2.38 billion a year earlier.
The Bank of Jamaica has been hiking interest rates to cool inflation, with the policy rate now at 7.0 per cent. And inflation has fallen from nearly 12 per cent to 8.1 per cent amid the monetary tightening.
Other central banks around the world have been taking similar steps.
“We expect interest rates to come back down over time. And you will see a return to normalcy in pricing,” said SGJ Chief Financial Officer Gabrielle O’Connor in response to a query about the erosion of capital at major banks globally, due to the erosion of asset values on their books.
On a per share basis, Scotia Group earned $1.10 in the January quarter, compared to 40 cents a year earlier. Despite the profit rise, the stock still trades in the same $34 band it did a year ago, said minority shareholder Arthur Ellison at the AGM. He wants the board to consider enacting a buyback to pivot the stock upwards.
Scotia Group Chairman Anya Schnoor gave no direct answer, but indicated that all options are being weighed.
Staple also raised the issue of fraud in financial institutions, although Scotiabank has not factored in the cases now before the court, all of which involve female staffers.
“I am concerned about our females. Do not trouble the banks or investors’ money. Do not trouble it,” he said. “I am tired of this fraud situation. Our company needs to address this problem to make sure that those caught in fraudulent situations are dealt with,” Staple demanded.
“You have our assurance it is something that occupies the attention of the board and management team,” Schnoor assured him.
Scotia Group is led by a female chairman and a female CEO, an anomaly in Jamaica’s business and financial landscape.
At the meeting, Tugwell Henry also pointed out that her executive team included a female CFO and vice president, a position held by O’Connor, and female legal head and corporate secretary, Maia Wilson.
Scotia Group’s board of directors also has seven women among the 13 members, its latest market filings on Friday show.
“I think the board needs more diversity,” said minority shareholder Anatol Clark Allwood.
For years, Clark Allwood has advocated for increased gender balance in management and at the board level across all public companies.
“I congratulate you, I really do. I am asking that women please continue to be committed, and maintain your integrity. It is easy to lose sight of it. Please be vigilant about it,” added Clark Allwood, also alluding to the fraud cases that have come to light at other financial institutions.