T&T’s banks profitable despite subdued economy

T&T's banks profitable despite subdued economy
T&T’s banking sector remains profitable despite subdued economic activity, First Citizens Investment Services (FCIS) said in its July 22 released Local Equity Crib sheets on publicly-listed Scotiabank, Republic Bank Ltd, and First Citizens Bank. “Despite subdued economic activity, the sector was profitable albeit at lower levels than the previous year,” FCIS said.

The banking sector in Trinidad & Tobago is well developed primarily due to the country’s well established energy and petrochemical industry and strong manufacturing base, FCIS said. At present there are eight commercial banks operating in the sector with a combined network of 123 branches. The eight commercial banks are Republic Bank Ltd (RBL), Scotiabank Limited, Bank of Baroda, First Citizens Bank, Intercommerical Bank, RBC-Royal Bank, Citibank (Trinidad & Tobago) and First Caribbean. However, along with Scotiabank, only RBL, First Citizens and First Caribbean are listed on the local stock exchange.

“As at June 2013, the operations of the banking sector continued to be impacted by lethargic economic conditions. Credit expansion remained moderate while investment growth was confined mainly to low yielding government securities. Despite subdued economic activity, the sector was profitable albeit at lower levels than the previous year. Capital buffers remained high and asset quality continued to improve. Non-Preforming loans to gross loans stood at 3.7%,” the crib sheets said.


Under financial performance on RBL’s Crib sheet, FCIS said: “The RBL group generated has generated consistent growth in net profits attributable to shareholders over the last three years, increasing profits from $1.12 billion in 2011 to $1.17 billion in 2013, despite the prevailing challenging economic climate of reduced growth and low interest rates.”

For the three-month period to December 2013, RBL reported a profit to shareholders of $291.2 million, an increase of 2.2 per cent over the same period last year. Total assets stood at $57.9 billion, up 6.7 per cent from the corresponding period in 2012 and 0.5 per cent from the financial year ending September 2013. Net interest income stood at $564 million up 2 per cent from $554 million in the fourth quarter of 2012. The asset base growth was due to the 7.3 per cent growth in the loan portfolio to $25.6 million. The bank has maintained a dividend payment policy of a payout of 40-60 per cent. In 2013, $4.25 dividend was paid in line with the dividend payout in 2012.

The RBL group is organized into two main business segments, retail & commercial banking, and investment banking; and into three main geographical areas: T&T, Barbados, Cayman, Guyana and the Eastern Caribbean. Retail & commercial banking accounts for 91 per cent of the total assets, while geographical T&T accounts for the majority with 75 per cent of total group assets. For the fiscal year ending 2013, retail & commercial banking accounted for 87 per cent of the total net interest income, while 68 per cent of this was from the T&T market.

FCIS said: “Based on RBL’s strong fundamental performance with an average five-year return on equity (ROE) of 15 per cent and an average retention rate of 42 per cent, supported by on average a 5 per cent compound annual growth rate (CAGR) in dividend payment growth, we have assumed an expected sustainable growth rate of 5.38 per cent for RBL. Using these assumptions with a required return on equity of 9 per cent, RBL stock is valued at $123.72. We believe that this a fair indication of the company’s worth based on it historic performance and future prospects despite a challenging economic environment.”

In its recommendation to investors, FCIS said: “With expectation that the growth in the T&T economy will be strong in 2014, we expect that RBL will continue to fare well in the coming periods. However, even in the challenging environment the company has proven that it has the internal strength to deliver to its shareholders. Trading at a price to earnings ratio (P/E) of 15.9 below its industry average of 20.34, and an intrinsic valuation of $123.72, greater than its current market price, we consider RBL to be undervalued.”


On Scotiabank’s financial performance, FCIS said Scotiabank posted a net income after tax of $144.3 million for the three-month period ended January 31, (2014) an increase of 1.3 per cent over the same period last year. Total assets rose 9.3 per cent to $19.8 billion or $1.7 billion compared to a year ago. Net interest income reflected that the bank is negatively impacted by the low interest rate environment falling 0.5 per cent to $223.6 million. Overall the earnings per share remained flat compared to a year ago. The bank continues to focus on diversifying its revenue base and growing non-interest revenue, FCIS said. However, it said that Scotia’s “capital adequacy remains strong at 28 per cent.”

The main reporting segments of the Scotiabank Group include corporate; commercial and merchant banking; retail banking; insurance services; and other functions related to the centralized treasury unit and other centralized services. The retail banking and corporate/commercial & merchant banking are the largest segments, accounting for 33 per cent and 19 per cent of total assets respectively. For the three months ended January 2014, retail banking generated $181.9 million in net interest income, fees and commissions an increase of 8.5 per cent compared to the same period last year. Profits for the segment were $101.1 million, increasing 28.5 per cent over the comparable period in 2013 with $78.5 million.

FCIS said: “We expect Scotiabank to maintain a sustainable growth rate of 11 per cent to 13 per cent. Using a comparative based model Scotiabank is valued at $68.82 per share.” It ended with: “Trading at a market price of $70.01, Scotiabank is currently overvalued.”


On the financial performance of First Citizens Bank, FCIS said the bank reported a half year profit after tax of $320.8 million as at the end of March 2014, a 4.7 per cent increase compared to the corresponding period last year. Operating profit grew 2.11 per cent to $391.9 million despite a decline in net interest income to $576.9 million from $579 million. Year on year, loan growth was 3 per cent to $11.6 billion, while total assets as at March 2014 amounted to $35.8 billion. A reduction in investments to $2.2 billion was due to lack of investment opportunities, FCIS said, and “in part a strategic decision to reduce the volatility of the portfolio.”

First Citizens is organized into five main business segments: retail banking, corporate banking, treasury management and investment banking, asset management and group functions. Treasury and investment banking is the largest segment by assets, accounting for 66.5 per cent of the group’s assets as at March 31. Treasury and investment banking generated profit before tax of $338.4 million or 84.5 per cent of total profit before tax. FCIS did not offer recommendations on First Citizens Bank.

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