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NCB raises US$250m in debt backed by future credit card receipts

Published:Friday | May 22, 2015 | 12:00 AM
Winston Sill/Freel;ance Photographer Group Managing Director of NCB, Patrick Hylton.

National Commercial Bank Jamaica (NCB) has raised US$250 million ($29 billion) in debt financing, which was backed by future receipts of credit card payments from Visa and MasterCard.

The successful issue, which was completed on Monday, marks the return of the banking group to securitisation of its credit card receivables since NCB exited that type of arrangement in 2012.

The structured deal also provides a means of transferring its risk, as well as an additional source of financing for the bank, given that over 10 per cent of its liabilities are now based on securitisation of its receivables, or future flow of funds.

NCB had started to shift its liabilities away from these types of obligations in 2009 when it began winding down its credit card and cash advances, as well as debt backed by international wire transfer receivables.

The global financial crisis, which started seven years ago, took its toll in Jamaica. The pace of growth in credit card receivables, which were showing strong double-digit growth for most of the last decade - reaching as high as 40 per cent - had dramatically slowed by mid-2009. Twelve-month growth in credit card receivables fell to less than four per cent by the end of that year, and it wouldn't return to double-digit growth until late 2012.

Borrowers facing a tougher economic climate also experienced greater difficulty servicing loans owed to the banks in Jamaica. Systemwide, non-performing loans (NPLs), or debt not serviced for three months or more, tripled in value and as a proportion of total loans between 2008 and 2011. NCB's loan book quality saw a similar slide. Its NPL ratio climbed from 2.3 per cent to 7.2 per cent over the three-year period.

Remittance inflows also took a turn for the worse as the economic environment in the US and other markets where the Jamaican diaspora has a large presence made it harder for persons to send funds back home.

Consequently, the commercial bank pulled back from securitised obligations, reducing it from $27.2 billion, or US$305 million, which represented 10 per cent of NCB Group's liabilities in 2009, to $2.6 billion (US$29 million) by the end of 2012.

By the following year, when remittance inflows returned to pre-crisis levels, NCB started to increase the amount of transactions via the SWIFT system which it had securitised through its Jamaica Diversified Payment Rights Company.

Tourism growth has also picked up since, hence the latest issue done by special purpose vehicle Jamaica Merchant Voucher Receivables mainly securitises future receipts of payments on credit and debit card purchases and cash withdrawals made by foreign travellers visiting Jamaica.

With each transaction, NCB advances payments to merchants and cash to customers, thus creating a dollar receivable from Visa and MasterCard. The debt issue this week brings its obligations by securitisation to $43 billion, or just over 10 per cent of the banking group's total liabilities.

NCB's card business contributes to more than 10 per cent of the bank's operating profit, although the implementation of strategic payment services initiatives contributed to a 29 per cent decline in the segment's earnings during the six months to March 31. This project also contributed to a 48 per cent increase in operating expenses for the bank's payment services in 2014.