FINANCIAL institutions matched reduced income on government paper with even lower payouts to their clients and creditors to maintain margins held before the Jamaica Debt Exchange (JDX), when rates were in the high twenties, a Business Observer survey has shown.

Eight listed financial institutions examined by the Business Observer earned $13.5 billion combined from net interest income (NII) in the June quarter compared with $13.6 billion in the similar 2009 quarter. That $100 million drop in NII — gross interest income minus interest costs — represented less than 0.1 per cent decline year on year. It occured despite big cuts in interest rates which reduced gross interest income of these firms by 25 per cent or nearly $7 billion to $21.7 billion.

The results ran counter to the Planning Institute of Jamaica’s (PIOJ’s) estimate that the real value added for finance and insurance services contracted in real terms by two per cent due to a “reduction in net interest income earned by institutions”.

The data reflects the first full quarter following the introduction of the Jamaica Debt Exchange (JDX) which cut rates from high twenties to low teens in almost an instant.

“The Jamaica Debt Exchange (JDX) would have impacted us both (clients and companies) but the effect on our business would not have been that significant because we were not locked into longer term rates,” said Patrick Ellis, Jamaica Money Market Brokers group chief financial officer responding to Business Observer queries yesterday. Ellis explained that most of JMMB core products were short term — with 30 to 90 day roll-over periods — which allowed them to match new products at the reduced rates. This was reflected in its financials, JMMB during the review period recorded an 18 per cent decline in gross interest income year on year; but its net interest income actually doubled to $481.7 million. Ellis said that JMMB met all obligations to clients regarding payments and that the JDX would benefit Jamaica in the long-run.

Comparisons during June-quarter review period showed National Commerical Bank earning $5.4 billion in net interest income, or $300 million more than the comparative quarter in 2009; JMMB increasing net interest income from $223.7million to $441 million; and Barita Investments earning $60.3 million versus $36.5 million a year earlier.

Scotia Group Jamaica’s net interest income fell slightly from $5.5 billion to $5.4 billion, Sagicor Life Jamaica’s net interest income was flat at $1.64 billion, and Mayberry Investment Limited’s net interest income dropped marginally by $3 million to $54.9 million.

Capital and Credit Financial Group actually saw a large decline, from $348.6 million to $305 million while Pan Caribbean Financial Services was the hardest hit with a reduction from $656.8 million to $566.1 million.

“It seems that they have managed their books on interest expenses very well,” stated Charles Ross principal of Sterling Asset Management who responded to Business Observer query. “What you would have found in brokers is the interest rate to clients would have fallen almost exactly in line with the reduction in interest rates on government paper.”

PCFS’ response to Business Observer queries did not come up to print time. However, in June at an investors’ briefing, PCFS president and CEO Donovan Perkins noted that PCFS would lower the impact of the JDX on its operations by delving further into commercial banking activities “to attract interest-bearing accounts that enjoy more flexibility and JDIC (Jamaica Deposit Insurance Company) insurance, but carry lower funding rates”. Perkins stated that balances on both commercial and retail businesses had already started to increase following efforts at expanding its commercial banking activities.

Jamaica had executed the JDX in February which was a voluntary debt swap, reached as a conditionality of the US$1.2 billion stand-by arrangement with the International Monetary Fund (IMF). The debt swap registered a participation rate of more than 99 per cent and will result in Government saving some $40 billion on interest cost payments in its first year — due to a reduction in interest rates and extension of debt maturities.

One month following the JDX Government of Jamaica Global Bonds yields dipped 330 basis points (from January to March) reflecting increased confidence following the JDX stakeholders previously told the Business Observer.

It also resulted in an number of rating agencies upgrading the outlook for the country. Specifically, in mid-February, Fitch upgraded Jamaica’s long-term foreign and local currency ratings to “B-” from “CCC” and “C” respectively, with a stable outlook. S&P followed a week later, hiking its long-term foreign and local currency sovereign credit rating on Jamaica to “B-” from “SD” or “Selective Default” with a stable outlook. Then in March, Moody’s upgraded Jamaica’s local and foreign currency bond ratings to B3 from Caa1 on foreign currency and Caa2 on local currency, which it said reflected “diminished credit risks following the domestic debt exchange completed in February”.