THE VM Group said part of its proposed $11-billion capital raise will be directed to strengthening the base of the building society. The move is designed to allow the conglomerate’s building society — VM Building Society (VMBS) — to be able to lend far more than it is doing right now as it boosts its capital base ahead of the July 1 timeline to implement the new Basel III accords.

The VM Group has seen its consolidated loan base nearly triple from $48.97 billion in 2018 to $112.13 billion at the end of 2022. The bulk of this growth is attributed to VMBS whose loan book grew from $48.88 billion to $102.61 billion in the same time frame. This has come as the mutual building society has diversified its product offerings to offer car loans and expand its business banking segment. Its subsidiary Victoria Mutual Investments Limited has also built up its investment banking capacities along with margin loans business.

However, with the shift to a proprietary building society and regulatory changes coming from Basel III, the VM Group will be restructuring VMBS’ capital base to ensure it falls in line with the new standards and is adequately positioned for growth. This will be done with the VMFG exchanging $7 billion worth of VMBS’ deferred shares from the current holders for one of the three classes of preference shares, redeeming the deferred shares from VMBS and being issued permanent proprietary shares by VMBS for the same value. This will be done on a one-to-one basis with the offer to close on Friday.

“When we inject $7 billion into VMBS as equity capital, VMBS’ primary ratio is likely to get to 13 per cent. The requirement is six per cent. You might say that you’re going to be under leveraged, but the point is not about being under leveraged. The point is to look for growth. We’re trying to triple our profits in three years, that is what is required to set the foundation for that growth. That build-up in loans we talked about, we cannot get there unless we set the foundation right now,” said group chief investment officer and head of investments Devon Barrett at a recent Jamaica Observer Business Forum.

Currently, Basel II requires a minimum total capital ratio (MTC) of eight per cent with there being an equal split between tier one (T1) and tier two (T2) capital. Under Basel III, T1 capital has increased from four to six per cent as a make up of the MTC. As a result, various deposit-taking institutions (DTI) including VMBS have been making moves to shore up T1 capital to meet the new requirements.

T1 capital is the highest quality of capital and is the first line of defence to absorb losses without putting a strain on the financial institution. T1 capital is made up of ordinary share capital, non-redeemable, non-cumulative preference shares, statutory reserve fund and retained earnings reserves.

T2 capital is supplementary capital of a financial institution and has a weaker loss-absorbing capacity as defined by the Bank of Jamaica’s standard of sound practice on minimum capital requirements document. T2 capital is made up of deferred shares, general loan loss provisions, share premium, non-redeemable, cumulative preference shares and redeemable preference shares having an original term to maturity of five years or more. The sum of T1 and T2 capital makes up total regulatory capital.

“We’re currently compliant, but we’re preparing for Basel III. We’ve made some conservative assumptions and we’re running ahead of that situation to ensure that for the foreseeable future, we’re not only compliant with Basel III, but we have the capital to grow,” added group president and Chief Executive Officer (CEO) Courtney Campbell.

Before the restructuring of the VM Group in February, VMBS was the parent company of the overall group and as a mutual building society could not issue ordinary shares like that of a regular company. As a result, it issued deferred shares which were for a fixed term and could not be redeemed during its cycle. These were classified under T2 capital with the value included in the T2 calculation diminishing every year by 20 per cent once the maturity was under five years.

While VMBS’ capital adequacy ratio remains well above the 10 per cent minimum, the figure has decreased from 17.81 per cent in 2020 to 14.84 per cent in 2022. This figure measures VMBS’ total regulatory capital to its risk-weighted assets.

The group CEO explained that the capital adequacy of an institution dictates how much it can raise in deposits and how much it can lend as per the Banking Services Act.

“The rising interest rates being experienced in Jamaica and the US financial market has put downward pressure on bond prices, with the result that the mark to market accounting rules have caused financial institutions in Jamaica to write down the value of their bond portfolios. VMBS is still within its statutory limit prescribed by the Banking Services Act but its margin of tolerance over the statutory requirements has narrowed,” stated the preference share memorandum.

The remaining $4 billion to be raised from the preference share offer will support the growth activities of its investment arm and capitalisation of its other financial subsidiaries. The building society currently plans to launch an individual and business visa debit card, upgrade its online banking platform and implement a group-wide onboarding solution to allow members and customers to seamlessly join the building society remotely. VMBS’ consolidated net interest income and other revenue improved 18 per cent to $12.83 billion with its group surplus rising 86 per cent to $3.32 billion in 2022.

“What we expect is that VMBS is going to be over capitalized when this first capital raise is done. The idea is to make VMBS a very strong proprietary building society. When you’re looking at what’s going on in the world, what you want to see is a strong financial entity to work with and what we’re doing is strengthening the capital base of VMBS,” Barrett explained.

The 144-year-old member owned building society reorganized its operations on February 1 to have the mutual owned VM Group Limited with three subsidiaries under its remit. This included the VMFG which holds all the financial entities, VM Innovations Limited for the non-regulated businesses and the charitable VM Foundation Limited. VMFG will execute most of the fund-raising needed for the growth of the financial subsidiaries.