NCB cuts rates as loan portfolio declines
Come August, National Commercial Bank of Jamaica (NCB) will cut its base lending rate by three percentage points, moving it to 17.75 per cent from 20.75 per cent. NCB now joins Scotiabank and FirstCaribbean in reducing interest rates, but bank capital is still in high double digits despite years of lobbying by producers for rates that are more competitive with those of regional and other trading partners.
The announcement Friday was made alongside the release of the banking group's nine-month results to June 30, 2010, that reflected a 10 per cent increase in net profits - a pleasing outcome for NCB group managing director Patrick Hylton.
"The bank has continued to demonstrate strong performance even in the context of difficult circumstances, particularly the JDX," Hylton said at a briefing on the nine-month results.
"It is a very good performance and demonstrates that in terms of our business model, we are focused on the right thing at the right time."
10.1 per cent profit increase
For the nine-month reporting period, NCB earned net profit of $8.08 billion, a year-on-year increase of 10.1 per cent.
Profit for the quarter also rose relative to the second quarter at March 2010, but just by J$203 million, or 7.9 per cent, to J$2.76 billion.
Net-interest income for the nine months amounted to $15.5 billion, an increase when compared to the corresponding period last year, but the quarter reflected a four per cent decline.
The banking segment of the company's operation continues to be challenged, with an $823 million drop in operating earnings from the combined retail, corporate and treasury units.
At the same time, the bank's loan portfolio has shed value, dropping by J$3.9 billion to $85.1 billion, due to a "reduction in the rate of loan growth, as well as the effect of the appreciation of the Jamaican dollar
Total assets, however, improved by J$12 billion, to J$322 billion.
NCB expects the loan market to remain sluggish in an environment of increasing competition. To attract business, the bank has cut 300 basis points off base rates to 17.75 per cent, and will be reducing rates in other loan categories that are not directly tied to the base rate.
Hylton said those rates would be adjusted by 100-50 basis points in direct offers to selected clientele.
He also announced that effective September 1, the bank would be setting up a unit to focus on companies that are at the larger end of the SME sector.
"We have embarked on a programme to establish a middle-market unit within the bank to give more focus to the larger tier of SMEs, or the middle market," said Hylton.
"Discussions are still ongoing internally and we are looking at some benchmarks, but we have not settled on them yet."
With the advent of the JDX, which sliced an average of six points off bond prices, several complaints were raised about the slow pace at which lending rates were trending down, which Hylton dismissed at the company's investor briefing on Friday.
"We expect that rates will come down over time, and we are seeing them coming down, but there are some structural issues which will affect the pace at which they come down," said Hylton.
"One issue, for example, is the pace at which investors and depositors are willing to take a lower rate of interest for their own funds. The fact of the matter, though, is that we operate in an environment where we have high costs - we have high costs for security, high costs for transportation, high costs for energy. Those are some of the issues which we also need to digest."
Diversified business model
Hylton contends that at the end of the day, the market will determine what is the appropriate rate, "and if there is an institution that is not pricing in accordance, the market will punish them", he added.
In the meantime, NCB noted that its diversified business model was paying off for the company.
The banking group's wealth and asset-management segment contributed nine-month operating profit of J$2.63 billion.
NCB Capital Markets Limited, the main unit in that grouping, is preparing to enter the unit-trust market and is now going through the regulatory process and putting internal systems in place.
The company's insurance segment achieved net profit of J$1.23 billion, an increase of $74 million, when compared to 2009.