LISSANT Mitchell, CEO of Scotia Investments Jamaica Limited (SIJL), states that investment houses and securities dealers in general are facing harder times due to challenges encountered on the regulatory front and also in the domestic fixed income securities market.

   In an overview delivered in the company’s just released annual report for 2015, Mitchell said with the introduction of a trust-based framework to manage repo liabilities in August 2015 it has created, “a fundamental shift in the core business model of the industry, from a large dependence on interest income towards more dependence on non-interest revenues”.

   The shift, he explained, will also be driven by clients, some of whom will likely find repos as less attractive than market-based alternatives, and thus diversify away from repos to more market-based products.

   However, another key issue facing investment houses, Mitchell said, was the illiquid nature of GOJ local currency NDX bonds, especially those with longer tenors, as the market for such securities remained mostly inactive.

   The investment manager stated, “While the central bank cut interest rates to a record low of 5.25 per cent during the financial year and provided local currency liquidity through a number of mechanisms, those initiatives had very little effect on local currency NDX securities.”

   In fact, he said, a new 14-day auction mechanism (put in place by the central bank) resulted in a tightening of liquidity conditions, sending short-term interest rates climbing.

   “This resulted in a dual challenge for the sector, as on one hand, falling longer-term interest rates impacted the margins on the balance sheet business, while rising shorter-term rates increased the cost of funding towards year end,” Mitchell noted.

   Explaining his company’s slimmed down balance sheet, he also pointed to volatility on the international capital markets – related to swings in commodity prices, concerns about global growth stemming from Chinese weakness, and anticipation of a US Federal Reserve interest rate hike – which affected investor appetite for various international financial products and affected some business lines during the year ended December 2015.

   For SIJL, net profit for the year was $1.02 million, a decrease of $824 million over the prior year’s restated profit of $1,848 million.

   One other investment house, Proven Investments, this week reported earnings reduced by one half, year-over-year, for the nine months to December 31, 2015.

   Mitchell noted that Scotia Investments was accelerating its transition from a balance sheet business model to focus more on being a market asset management and brokerage firm; also noting a reduced reliance on income from interest.

   The CEO said the company’s off-balance sheet strategy has been delivering results.

   SIJL, he added, has also embarked on some “structural cost realignment initiatives”, including consolidating some functions; and “business lines realignment” which are expected to reduce expenses in the future.