Investment bank and brokerage NCB Capital Markets Limited has issued analysis showing that rival commercial bank Scotia Group Jamaica generally operates more efficiently than its peers, including its own parent, NCB Financial Group.
NCB Capital indicated in its latest analysis issued to clients that the SGJ shares are one-third undervalued and recommended that they buy the stock.
Scotia Group, which is headed by President and CEO Audrey Tugwell Henry, operates Bank of Nova Scotia Jamaica, the second-largest commercial bank in Jamaica behind market leader National Commercial Bank. Its shares are trading at around $33 on the Jamaican exchange, which is close to midpoint its one-year range.
The equity analysis, released by NCB Capital on October 3, sees a potential for the stock to trade at $43.47 within the short to medium term based on the projected growth in earnings, and for the company to deliver strong returns.
“The total return of 36.9 per cent is 2,446 basis points higher than the cost of equity of 12.5 per cent. As such we have a ‘buy’ recommendation on Scotia’s ordinary shares,” said NCB Capital, a company now headed by Angus Young, who replaced former CEO Steven Gooden on October 1.
The price target takes into consideration depressed market conditions, in which banking peers trade at seven times earnings.
The buy rating was reinforced by increased earnings at Scotia in recent quarters, driven by its mortgage and new insurance products.
Within the current fiscal period, Scotia Group made a profit of $12.8 billion over nine months ending July, up from $7.3 billion a year earlier. Its capital stands at $113.89 billion on total assets of $646.4 billion.
Its loan portfolio has grown 18 per cent to $259.6 billion over the past year, while its non-performing loans have thinned to 1.6 per cent of total loans.
NCB Capital expects Scotia Group’s performance to remain stable in the short to medium term, with commercial and retail banking driving growth. The banking conglomerate also operates Scotia Investments Jamaica Limited, a rival to NCB Capital; an insurance subsidiary, Scotia Life Jamaica; and a building society.
“However, investors should also be aware of the potential near-term business risks, including adverse real estate market trends and the possibility of an economic downturn or recession which could put pressure on net income in the next two years,” the report cautioned.
In regard to efficiency, which assesses how costs are spread relative to revenue intake, the average efficiency ratio was 63.5 per cent for the banks assessed by NCB Capital. The higher the ratio, the least efficient the bank at managing its operating costs.
“SGJ’s efficiency ratio remains one of the lowest among its industry peers and has shown a sharp improvement,” said the NCB Capital analysis.
For Scotia Group, between 2021 and 2023, the ratio went from 66.5 per cent to 59.8 per cent, and then to 50.2 per cent at at July of this year.
“The improvement in the efficiency ratio reflects revenue growth outpacing operating expenses over the period and stems from SGJ’s continued focus on improving revenues and managing expenses to achieve its targeted level of efficiency,” NCB Capital said.
The brokerage said Scotia Group has rebounded from a period of lower efficiency during the pandemic, when a fall-off in revenues in 2020 and 2021 accompanied higher operating expenses. The efficiency ratio at Sagicor Group was 34 per cent, Scotia Group was 55.8 per cent, NCB 79.5 per cent, and JMMB Group 84.7 per cent, according to the equity analysis.
From the most recent financial disclosures of the financial groups, Scotia Group leads with 50.2 per cent, followed by around 58 per cent by Sagicor, 77 per cent by NCB and 88 per cent for JMMB group, based on a Financial Gleaner review of their year-to-date results.
The outlook for Scotia Group remains solid, similar to other banking groups, with expectations that loans and mortgages will continue growing within a challenging market.
NCB and Scotia usually refrain from making statements about each other. The NCB Capital analysis avoided naming competitors throughout much of the report, except for the table comparing banking peers. Its last report on Scotia Group was in March 2019, when the shares were trading at around $55, but in that case, NCB Capital offered no guidance to clients on whether to buy, sell or hold the stock.
In August, the issue of banking efficiency was separately discussed by NCB Financial Group Chairman and majority owner Michael Lee-Chin. He criticised his own banking group for its relatively high-cost structure, saying it contributed to the hiatus on dividend payouts since 2021.
His statement coincided with the leave of absence of President and CEO Patrick Hylton and CFO Dennis Cohen; and thereafter the departure of a series of other long-standing executives, including Gooden after nearly two decades.
The new leadership of the group, currently headed by Robert Almeida as interim CEO and Malcolm Sadler as the new CFO, wants to slash $15 billion in annual costs, with roughly 20 per cent coming from executive pay, reflecting the more than $3-billion in compensation that executive directors were earning prior to the change.
Lee-Chin will oversee improvements to efficiency, governance, and customer care.
The top two banking groups have benefited from each other’s executive talent over the years.
Last month, Bruce Bowen, a former head of Scotia Group up to 2013, was hired as CEO of National Commercial Bank Jamaica Limited to replace Septimus ‘Bob’ Blake; while the current President and CEO of Scotia Group, Audrey Tugwell Henry, was once the head of retail banking at NCB.