Despite the slow rebound in economic activity across the Caribbean, NCB Financial Group Limited (NCBFG) achieved its best second quarter (January – March) on record as its net profit attributable to shareholders rallied by 295 per cent to $7.79 billion.

This performance, which not only exceeded the $5.89 billion in the first six months of 2021, but even higher than the $6.28 billion set in Q2 2018.

The financial conglomerate, which controls NCB Jamaica Limited (NCBJ), Guardian Holdings Limited (GHL) and Clarien Group Limited, experienced growth in five of its seven segments with the banking and investment activities and insurance activities seeing improved performance. The banking and investment activities segment saw its net result rise by 34 per cent to $28.70 billion while net result from insurance activities climbed 45 per cent to $6.62 billion for the quarter.

While this growth signifies a potential return to pre-pandemic growth, rising interest rates in various jurisdictions could potentially impact the growth of its loan portfolio in its banking segment along with its wealth, asset management and investment banking segment which is largely composed of NCB Capital Markets Limited. NCBJ and Clarien Bank Limited wrote off historic loan balances in 2021 as the pandemic impacted clients across the region.

“We as a bank are constantly refining our understanding of the implications at the macro level and how that transmits to our balance sheet and income statement. Interest rate increases may boost the net interest margin if interest rates and loans rise at a faster rate than the cost of funding. Obviously, if we see, depending on the rate of increases in interest rates, it may dampen demand for loans. We have been taking steps to pass through some of these interest rate increases to our various activities. We are optimistic about the economic recovery based on the evolution of our loan portfolio,” stated chief executive officer at NCBJ Septimus Blake at the company’s virtual investor briefing held on Tuesday. The briefing also saw the introduction of a sign language interpreter for the first time.

The Bank of Jamaica (BOJ) increased its policy rate to 4.50 per cent at the end of March as it continues to watch point-to-point inflation run higher. The BOJ’s monetary policy committee is set to meet next Thursday to decide on its next course of action. This will come three days after the inflation numbers for April are released.

Blake explained that the bank has already started to increase the cost of its products for new facilities as of March and will be looking to make changes for existing facilities later this month. He added that the bank was looking at ways to continue reducing its cost of operations, which recently included the closure of five branches across the island, and focus on payment services where applicable.

However, NCBJ came under fire in January for increasing its various banking fees which led it to make changes back then. Blake also pointed out that new mortgages could be impacted by higher rates while the repricing of rates on current mortgages might impact debt service abilities.

These considerations come before the bank transitions to the new Basel III requirements in January 2023 as prescribed by the BOJ. This coincides with the implementation of IFRS 17 – insurance contracts which directly relates to GHL. Basel III is an internationally agreed set of measures developed by the Basel Committee on Banking Supervision of the Bank for International Settlements. It outlines the designation for tier 1 and tier 2 capital which forms the basis for capital adequacy and regulatory capital.

“Based on our internal modelling, we anticipate increases in terms of the quantity and quality of the capital required as a result of the implementation of Basel III. Standing still, one would expect that those enhanced capital and liquidity requirements would likely affect the ROE (return on equity), but we’re not standing still as an organisation. We’re looking at implementations around pricing, the composition of our risk weighted assets, assets which may have lower risk weightings. We’re looking at our fee-based business which is not capital intensive. We’re looking at opportunities in respect of some of those direct deductions from capital, eg software. We’re focused to ensure that transition is smooth and without having any attendant negative impact on the business generally,” Blake explained on the impact of Basel III for the bank. NCBFG transferred $1.85 billion from its retain earnings to its retained earnings reserve as at March.

The BOJ is reducing the liquid asset requirement by five percentage points (pps) on April 1, five pps on July 1, and four pps on October 1. The cash reserve requirement for local currency and foreign currency prescribed liabilities remains at five per cent and 13 per cent, respectively.

The impact of tightened policy rates has already impacted the wealth segment, which has reduced deal flow in the Jamaican market and reduced trading opportunities for fixed income and equities. NCBFG also recorded a $15.13-billion mark down on its investment securities measured at fair value through other comprehensive income. This was also the fourth-consecutive quarter in which the group’s board decided not to declare a dividend payment to shareholders as it continues to strengthen its capital base.

NCBFG’s total assets increased by 11 per cent year-on-year to $2.06 trillion as loans and advances — net of credit impairment losses — along with investment securities rose to $555.89 million and $728.98 million, respectively. Cash in hand remained flat at $70.11 billion while due from banks balance grew by 20 per cent to $204.17 billion.

This asset base growth was funded by $1.86 trillion in liabilities with customer deposits up 17 per cent to $706.64 billion and repurchase agreements up 17 per cent to $249.22 billion. Equity attributable to shareholders decreased by four per cent to $156.54 billion.

NCBFG’s stock price got a two per cent boost to $110.00 on Tuesday, but the stock still remains down 11 per cent year to date, which includes a 52 week low of $91.01. The market capitalisation of the company stands at $272.57 billion.

The group’s net profit to attributable to shareholders of $10.43 billion for the first six months puts it in line to surpass the $14.23 billion earned in 2021. This is likely to be led by GHL, whose life and health insurance and pension fund management segment, contributed 59 per cent of the $22.66 billion operating profit for the six months. The group is also planning to recognise the 185th anniversary during the year through celebrations to be announced.

“The group, through its diversified business model, continues to implement strategies to drive performance and transform the business into a digital driven financial services organisation. This has positioned us to achieve consistent growth in all our business segments. We are seeing uneven economic recovery across our operating territories and noted improvement in the general economic conditions. We continue to focus on building and improving our capabilities as we expect these to translate to a stronger and more adaptive organisation that will be well positioned to grow and thrive in the post pandemic era,” chief financial officer of NCBFG Dennis Cohen closed.