THE INTERVIEW: PATRICK HYLTON - NCB hunts regional acquisition, growth prospects hinge on broader customer base, improved efficiency
National Commercial Bank Jamaica (NCB) has been on the hunt to acquire a company that can help launch its regional growth ambitions.
The financial services conglomerate managed to take up stakes in other local entities which bolstered its profit, but it hasn't been able to land the whale that will catapult its brand outside of Jamaica.
Sitting down at the negotiation table on several occasions over the last four years have mostly been unfruitful. Other bidders priced the targeted acquisitions higher than NCB or the selling party had a change of heart in the end, explained Patrick Hylton, as he painted a picture of the type of company he was seeking to buy.
"We are looking for any institution, or group of institutions in the financial service business, that gives us the opportunity to expand into the region, and that gives us an opportunity to add value in terms of what we can bring to bear in the operations of those institutions," NCB's group managing director told the Financial Gleaner in an interview at the bank's New Kingston-based headquarters last week.
Since the Government found a buyer for the bank in Jamaica-born Canadian businessman Michael Lee-Chin in 2002, NCB's growth has largely been organic - that is, customer deposit expansion has been primarily matched by growth in lending and investment in securities.
ACQUISITIONS BOLSTER PROFIT BY 11%
On the face of it, acquisitions played a smaller role in the growth. Investments in associates never reached higher than two per cent of the financial institution's asset base. What's more, it would take seven years after NCB acquired stakes in Dyoll Insurance and Kingston Wharves, both in 2004, before the bank would take another substantial equity position in another company.
The ravaging of the Cayman Islands by Hurricane Ivan, and the subsequent claims made by policyholders, forced NCB to take an impairment loss on its investment in Dyoll - to the tune of $236 million - almost a year after buying into the now defunct insurer. The bank's wealth management operation - NCB Cayman - still operates in the British Overseas Territory today.
Lee-Chin would later acquire a majority stake in Advantage General Insurance - then United General Insurance - that would be sold to NCB in 2013, giving the banking group the largest general insurance portfolio in Jamaica.
Also in 2013, the acquisition of NCB Global Finance Limited, formerly AIC Finance Limited, gave the bank a toehold in the Trinidadian market, albeit, that JMMB Group - in which NCB bought a 29 per cent stake in 2011 - had a head start with its expansion in the region.
JMMB started operations in Trinidad in 2005, with the acquisition of a stake in Intercommercial Bank, and opened its doors in Dominican Republic the following year. Combined, the two Caribbean operations contributed $1.5 billion, or half of JMMB's net profit in the year to March 2014.
NCB's acquisitions have also helped boost its bottom line. Share of profits of associates and recognised gains contributed to over 11 per cent of the banking group's net profit since 2011. Even the gains from the disposal of its shares in Kingston Wharves represented three per cent of profit last year.
AGI likely adds another four to five per cent to the financial conglomerate's bottom line each year. The general insurer contributed four per cent of NCB's earnings when it was acquired in 2013, while NCB's general insurance segment contributed 7.6 per cent of operating profit in the six months to March 31.
EYE ON STAKE IN REGIONAL INSURER
Now, NCB may be on the verge of acquiring a stake in a major player in the insurance market in the Caribbean - Guardian Holdings.
According to Financial Gleaner sources, NCB is considering joining a consortium that would purchase a 21 per cent bloc of shares in the regional insurer that is held by Trinidadian businessman Arthur Lok Jack. Those shares are valued at approximately US$110 million, based on the last trading price on the Trinidad and Tobago Stock Exchange. Based on the stake being considered, the share of Guardian's annual profit represents around 10 per cent of NCB's bottom line. But the acquisition would just be a portfolio play, given that it wouldn't give the buyer controlling interest in Guardian.
NCB's managing director would not confirm or deny NCB's participation in the discussions. Hylton stuck to the company line: "If something comes into play regionally, we will always be interested in looking at it."
He added: "If it is not in play, and could come into play, when it does, the message we want out there is that we would like to be invited to that discussion."
The bank could certainly afford it. Just last month, NCB successfully raised US$250 million ($29 billion) in debt financing which was backed by future receipts of credit card payments from Visa and MasterCard. Hylton said that the proceeds would be used as a source of liquidity.
"Institutional investors found it (credit card merchant voucher receivables securitisation) attractive," he told the Financial Gleaner. "It was significantly oversubscribed - almost two times."
It likely helped that Fitch Ratings rated the structured instrument three notches above the sovereign - BB+, compared with B- for Jamaica's long-term foreign currency and local currency issuer default ratings.
Future receipts of payments on credit and debit card purchases and cash withdrawals made by foreign travellers visiting Jamaica is a very stable source of income for NCB, whereas, economic conditions in Jamaica are not seen as favourably. This is why those same institutional investors are not yet willing to take on an initial public offering by NCB on an overseas stock exchange, Hylton reasoned.
The bank had to write off $680 million in its 2013 financial year as a result of its flirtation with listing on the New York Stock Exchange.
FOCUS ON LOAN GROWTH
Looking ahead, NCB's growth will be hinged on broadening the bank's customer base and increasing the number of services each customer takes up, according to Hylton.
"Products per customer is not yet at the level where we would want it to be," said the group managing director of NCB. "We want to find a way for our customers to have most of their services with us."
This mostly means greater cross-selling across its business segments, which range from retail banking and money services to insurance and wealth management.
Broadening the customer base largely means expanding lending opportunities to customer types not currently served by the bank.
"Historically, the bank has been involved in traditional types of lending: motor vehicle loans, financing and so on, and a few years ago we stated with payroll financing," said Hylton. "There is an opportunity for us to engage with other customer segment that are not currently in the database - sole proprietors, persons employed with smaller organisations that are not as yet well established, which include more SME-type businesses.
"The credit bureau is one of the things that will accommodate this."
The growth in NCB's loan book over the years played a significant role in it becoming the most dominant commercial bank in the domestic market, in terms of assets. Since 2009, up to which time the financial conglomerate had been jostling for pole position with Scotiabank Jamaica, its loan portfolio grew by $70 billion, or 80 per cent.
At the same time, the financial conglomerate also deepened its investment in securities, particularly in government paper. Its securities portfolio grew by close to $100 billion, or 58 per cent since 2009. So, even though loans as a proportion of assets grew from 28 per cent to 32 per cent over that time, investment securities remained at 53 per cent of total assets.
Recently, NCB has been shedding those kinds of assets off its balance sheet, in its move to shift from a repurchase agreement (repo) client model to a unit trust-based approach.
"It (the migration to unit trust) is going very well," said Hylton about the shift. "It is going in the direction in which regulatory policy is going."
Consequently, NCB's unit trust portfolio grew fivefold to $16.9 billion over the year to March 31. Since then, it grew by a further $1 billion to approximately $18 billion at the end of May.
COST REDUCTION REMAINS A STRUGGLE
Going forward, balance sheet growth will decidedly be matched by cost reduction and improving operational efficiency, according to Hylton.
"We are evolving," he declared. "Technology is becoming an important enabler. We want to lower the cost to serve while improving the service to customers. We want to improve quality of interaction through technology."
Four years ago, the bank embarked on its 'Bank of the Future' project with the planned construction of a branch at 124-126 Constant Spring Road. The branch was so dubbed because it would encompass energy conservation systems, green technology and space maximisation, while merging the Manor Park and Manor Centre operations into one location.
Two years later, the 'Bank of the Future' project was piloted at five locations - four in Kingston and one in Portmore. This project, which would be renamed 'Bank on the Go', hinges on shifting transactions away from human tellers to higher functioning automated banking machines (ABMs), called Intelligent ABMs.
Today, the banking group has six less branches in operation and over 60 more ABMs islandwide. NCB now has a total of 235 ABMs, a quarter of which are classified as Intelligent ABMs. The bank said that 47 per cent of transactions were migrated from its branches to self-service areas during the last financial year, which ended September 2014.
Energy-conservation efforts have also been pressing ahead. The installation of LED lamps, reflective tint on windows and improved roof insulation at several locations has saved the bank over $200 million in energy consumption over the past three years.
Still, NCB's cost-to-income ratio has been climbing since 2009. The ratio - which is calculated as staff costs, depreciation, policyholders and annuitants' benefits and reserves and other operating expenses divided by total operating income - rose from 48 per cent five years ago to 56 per cent in 2012. It jumped to 68 per cent in 2013, when AGI was acquired, fell to 64 per cent in 2014, and rose again to 66 per cent in the six months to March 31 of this year.
"One of the challenges that we have as a business, and also as a sector, as margin have become compressed and as revenue generation becomes more challenging, is improving efficiency and the cost to service," Hylton told the Financial Gleaner.
"We have to improve the efficiency of our service even as we reduce the cost to service - one of the ways to do this is through Intelligent ABMs," he added. "The focus is not on customer migration, but on transaction migration.
"Don't be surprised if you see lending at ABMs in the future. I have said to my colleagues in executive meetings that it is something I would like us to do."
Existing technology already allows for such transactions. It just requires making credit lines available to pre-approved customers. What's more, NCB is the participating bank in the Development Bank of Jamaica's mobile money pilot which seeks to distribute loans through ABMs. The commercial bank also has plans for rolling out agency banking through a third party when regulations are approved.
"We are staying on top of it" is all Hylton would say on that project at this time.
In terms of acquisitions, NCB is eyeing entities which operate in the financial sector, providing services from banking and insurance to credit card processing and other IT-based supporting services. However, the growing importance of technology might lead the bank to take a stake in a company that is entirely complementary to financial services.
"As we look at the evolution of financial services, such as in mobile, there may be opportunity to partner with a firm, or acquire it, once these things are properly approved and authorised," Hylton said.