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Scotia Investments defends low returns as profits rise

Published:Friday | March 24, 2017 | 12:00 AMSteven Jackson
Lissant Mitchell, CEO of Scotia Investments Jamaca Limited.

Scotia Investments Jamaica Limited (SIJL) defended its return on equity, or ROE, which at nine per cent was its second-lowest in a decade, saying the outcome is linked to its transition strategy.

It comes as the company increased annual profit for the first time in four years, underpinned by a strategy to increase non-interest revenues.

"In keeping with its long-term strategy, your company continued to diversify its earnings away from interest income towards a more balanced composition, where it relies more on non-interest revenue for growth," said CEO Lissant Mitchell in the company's newly released annual report.

Following the release of that report, SIJL also published its first-quarter results ending January. Profit spiked 27 per cent year-over-year, which produced an improved ROE of 4.02 per cent for the period.

Mitchell indicated in his annual report missive that during the year ending October 2016, SIJL made three main advances to achieve its transition.

The company returned to a positive trajectory for ROE, which rose from 7.3 per cent to 9.3 per cent in 2016, while growing earnings per share from $2.42 to $3.19. Second, SIJL achieved a positive operating leverage at 10 per cent, compared to a negative 31.81 per cent in 2015. Mitchell explained that a positive operating leverage occurs when revenues grow more quickly than expenses, and reflects increasing productivity.

Third, the company maintained strong capital ratios for the remaining balance sheet business. For instance, its capital adequacy ratio, a key measure of risk, remained at 43.02 per cent, well above the 10 per cent statutory requirement.

Scotia Investments has produced ROE in the past decade as high as 32 per cent, which it hit in 2009. It has declined precipitously since then, with the lowest point being 7.3 per cent in 2015.

Strong capital position

In 2016, the company's shareholder equity or capital base shot up by more than $800 million to $14.9 billion.

"Our strong capital position also enables us to take advantage of future growth opportunities," Mitchell said.

Shareholder equity dipped back marginally to $14.8 billion for the quarter ending January, but ROE pushed higher from 3.33 per cent to 4.02 per cent.

In that quarter, Scotia Investments chalked up $150 million of net profit, which was 27 per cent above the comparative period a year ago.

The company, which is keen on transitioning to earning more fee income, recorded $756 million in total revenues for the quarter, up from $729 million a year earlier.

"Our first-quarter results reflect consistent performance in our core asset management business line, which is in keeping with our ongoing strategic initiative of diversifying our revenue sources so as to be less reliant on net interest income," said Mitchell in statements accompanying the financials.

Capital adequacy remained at a robust 42.24 per cent.

As part of its transition to fees, to minimise balance sheet risk, Mitchell said SIJL executed structural cost 'realignment initiatives'.

"For instance, some functions within select areas of our operations were consolidated within the wider group. Lastly, your company also embarked on some business line realignment which will contribute to overall cost savings in the future," he said.

Last year, Scotia Investments made annual profit of $1.35 billion, up 32 per cent. Its best year in the past five was 2012, when it made $2 billion; its lowest was 2015 when it earned $1 billion.