THE Jamaica Debt Exchange (JDX) and the revaluation of the Jamaican dollar, which has been taking place since January this year, has continued to affect the performance of financial institutions in Jamaica.

Pan Caribbean Financial Services is no exception. The institution, a subsidiary of the Sagicor Group recorded a 38 per cent drop in net profit for the quarter ended June 30, 2010, $142 million less than the similar quarter of 2009.

In his note to shareholders, president and CEO of Pan, Donovan Perkins indicated that lower yields on the company’s investment securities portfolio as a result of the JDX and foreign currency translation losses following the revaluation had negatively impacted the company’s income.

The JDX was effected by the Government of Jamaica this year with the exchange of its high interest bearing instruments for those with lower yields and longer maturities. The effect of the JDX caused a reduction in interest rates from the high 20s to within the range of 12 per cent on government instruments. It also signalled a move to reduce interest rates in the market in general.

As a consequence, Pan’s net interest income declined from 656.8 million in the June 2009 quarter, to 566 million in the 2010 quarter, a 13.8 per cent reduction year on year.

Additionally, foreign currency translation losses caused a 112 per cent reduction in other operating income from $22.7 million in 2009, to a loss of $140.8 million in 2010.

A move by some financial institutions to offset JDX losses with fees and commission income has led to a general increase in this line item on the income statement. Pan Caribbean is no different, with a 24 per cent, $23.3 million increase over the 2009 quarter. However, it was not enough to offset the losses caused by the revalued dollar and operating income fell 24.7 per cent over the corresponding quarters.

Operating expenses increase

Operating expenses also increased by nine per cent due in the main to a yearly adjustments to staff salaries. There was also a 109 per cent increase in credit loss provision. Non-performing loans and leases increased as a percentage of the portfolio of the company from December 2009 — at which point it stood at 2.6 per cent — to March 2010, the beginning of the quarter when it was 3.1 per cent, still less than the industry average of 5.1 per cent.

“Close monitoring of the portfolio and prudent actions will continue to ensure that asset quality ratios remain at acceptable levels,” assured Perkins.

However, Pan has benefited by over $1 billion from fair value reserve as a result of the increase in bond prices following a decline in both the US and Jamaican dollar interest rates. This is due to the fact bond prices have an inverse relationship to interest rates.

Pan also announced that it will repurchase at least 50 per cent of the $1.3 billion cumulative redeemable preference shares issued through the open market repurchase mechanism to reduce interest payments on the high yielding share. The decision, according to Perkins, was based on the decline in domestic market interest rates as a result of the JDX resulting in the preference coupon being above market rates.