Scotiabank's voice heard

Published: Wednesday August 27, 2008

A billion here, a billion there and pretty soon it adds up to real money. Is Scotia Group Jamaica (JSE: SGJ) now making 'real money'?... let's talk. The earnings results of the group are out and they are solid. SGJ released its earnings of J$7.14 billion for nine months ended July 31, 2008. This represents an increase of 32 per cent over the same period last financial year. Additionally, SGJ saw an increase for the specific quarter ended July 31, 2008 of J$356 million or 18 per cent when compared to the same quarter last financial year. However, when one compares this quarter's performance to that of the quarter ended April 30, 2008, then we are faced with a decline of J$221 million or nine per cent.

The primary reason for this would have been the one-off gain that SGJ realised in the second quarter from the redemption of class C shares they held in Visa Inc, due to the Initial Public Offering (IPO).

To get a clear understanding of how these profits were achieved, a segmented analysis must be done.

Retail & corporate banking

This segment includes the Branch Banking and Retail & Electronic Banking divisions of the group. Profit before tax for this segment came in at J$3.04 billion, which represents an increase of J$561 million or 23 per cent year over year.

These results are purely creditable to former SGJ Retail head Audrey Tugwell-Henry and SGJ Branch banking head Wayne Powell. SGJ's retail and branch banking operations have managed to swell the loan book by J$7.88 billion or 11 per cent to J$82.10b for the period under review.

Additionally, the group grew its deposit base respectably by J$16b or 16 per cent to J$149 billion as at July 31, 2008. Additionally, net fee and commission moved from J$2.29 billion to J$2.84 billion - which represents an increase of J$555 million or 24 per cent.

A financial services entity must possess the ability to grant credit to not only individuals and some institutions, but to also structure large credit deals to suit large corporate clients.

SGJ has indeed shown its ability to do such. The Corporate Banking segment has posted profits before tax of J$1.82 billion for the nine months ended July 31, 2008, an increase of J$436 million or 31 per cent. This was largely due to an increase in its revenues, or in much clearer words, its ability to attract new business. Much laud has to be given to Wayne Hewitt and his team at the Corporate and Commercial Banking division for such superb performance.

The performance of this division continues to be fair. The profits before tax closed in at J$2.07 billion which is precisely 341 million or 19 per cent higher than the J$1.73 billion it posted last year. In a global financial atmosphere such as this, any level of increase in profits from its players deserves some credit. It will be very interesting to see where these profits come November.

This has been the big hit for SGJ over the past few years.

Scotia Jamaica Life Insurance Company obviously has a tested, tried and true system at work. The segment's profit before tax stood at a hefty J$1.81 billion, which is quite estimable if you consider the level of competition that exists in the local life insurance market. Over J$615 million was added to the J$1.20 billion it recorded for the same nine months last financial year. The main driver for this was the robust 28 per cent increase in net insurance premium growth; which when translated simply means, more Scotiamint and Credit Life insurance customers. It is expected that Scotia Jamaica Life Insurance Company will continue to make its presence felt in the Life insurance industry and post respectable profits.

Was the acquisition of Scotia DBG Investments (JSE: SDBG) a good or bad move?... let's see. For the nine month period ended July 31, 2007, profit before tax stood for the Investment Management segment of the group stood at J$426 million. Forward to July 31, 2008, we now see nine months profit before tax of J$1.09 billion. I say a profit jump of 158 per cent would mean a splendid move. SDBG has restructured, re-energised and repositioned itself and the result of this is now evident in the bottom line.

Recommendation

From an investor's view, the stock is reasonable from a Price to Earnings (P/E) standpoint. The current P/E for SGJ is 8.52 times. This is way below the industry average of 10 times earnings. The stock is a recommended BUY at current trading levels.

William Clarke has announced his retirement. As a matter of fact, the new pilot is now seated in the cockpit and many are anxious to see what his cruising altitude will be. Whatever it may be, the fact is, SGJ has no room for air pockets or altitude dips. To remain the most profitable institution in the country, SGJ most post in excess of J$9 billion at year end or have that title stripped.


Source: Jamaica Observer
http://www.jamaicaobserver.com/magazines/Business/html/20080826T190000-0500_139495_OBS_SCOTIABANK_S_VOICE_HEARD.asp