NATIONAL Commercial Bank Jamaica Limited (NCBJ) has received $9.772 billion in equity capital from its parent company NCB Financial Group Limited (NCBFG) as it prepares for Basel III next year.
This information was revealed in the unaudited financial statements of commercial banks published by the Bank of Jamaica (BOJ) wherein NCBJ's issued ordinary share capital moved from $6.47 billion to $16.24 billion for the third quarter (April to June). JN Bank Limited and JMMB Bank (Jamaica) also recently received capital injections of $7 billion and $1 billion, respectively.
This capital injection pushes NCBJ's capital/equity to $118.47 billion while its total assets stand at $900.50 billion, an eight per cent increase relative to the $834.77 billion asset base in September 2022.
Basel III is an international, 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 (T1) and tier 2 (T2) capital, whose sum is designated as regulatory capital. Regulatory capital forms the basis for calculating capital adequacy.
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; a statutory reserve fund; and retained earnings reserves. Tier two capital comprises 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.
NCBJ's capital adequacy ratio was 13.29 per cent as of March 2023 when its total regulatory capital was $76.39 billion. This implies NCBJ's risk-weighted assets then was $574.76 billion in March. The capital adequacy ratio is the total regulatory capital divided by the risk-weighted assets of the financial institution. The regulatory minimum for capital adequacy is currently 10.0 per cent.
When the interim NCBFG chief financial officer was asked to disclose NCBJ's capital adequacy ratio he said, "When you look at commercial banks — the most recent release of commercial banks averaging 13.70 per cent in terms of capital adequacy ratio, the overall in terms of all entities regulated by the BOJ — that ratio is at 14.20 per cent, and in those ratios NCB is a large part of those ratios. With NCBJ's regulatory capital around $86.16 billion at the end of June this means that the capital adequacy ratio would be around 14.99 per cent, assuming a similar value of risk-weighted assets."
Basel III introduces a capital conservation buffer (CCB) and a counter-cyclical capital buffer (COCB), with the BOJ capital adequacy framework paper noting that licensees must hold a maximum CCB of 2.5 per cent at all times while the CCOB will be between zero to 2.5 per cent.
NCBJ's capital strengthening comes at a time when its S&P Global credit rating improved from B+ to BB– on September 14, a day after Jamaica's credit rating got an improvement. Rating agency Fitch revised NCBJ's outlook to positive and reaffirmed its credit rating of B+ in March. NCBFG is rated CariAA by Caricris, which is currently doing its annual review of credit ratings across the group of companies.
"The bank has a strong market position in the domestic financial system, diversified revenue, and effective management direction, all of which result in stable income. NCBJ has a capitalisation level that is neutral to the rating, with a projected risk-adjusted capital (RAC) ratio of about 6.6 per cent for 2023-2024. We expect NCBJ's non-performing assets to reach pre-pandemic levels of about 2.5 per cent by 2024," said the S&P Global release.
Where did NCBFG get the money from?
NCBFG, the stand-alone holding company, had $245.40 billion in total assets at the end of 2022, with $106.07 billion in total liabilities and $139.33 billion as equity. Of the $106.07 billion in liabilities, $80.82 billion was borrowed funds and $18.64 billion represented borrowings from other banks. Cash declined from $15.80 billion to $280.63 million in 2022.
$11.40 billion (US$75 million) was related to unsecured loans from its wholly owned subsidiary NCB Global Holdings Limited (NCBGH), which were due between March 2023 to March 2025. The other $69.65 billion in debt was corporate notes which are set to mature between 2021 to 2025. A tota $7.34 billion of debt was listed as current, which means payable within the next twelve months.
As a holding company NCBFG receives income in the form of management fees from NCBJ and dividend income from its subsidiaries. It also receives interest income from its investment securities and other assets.
While NCBFG has been in the debt market at different times this year to refinance maturing debt, the board of directors recently approved an additional public offering (APO) which is set to see up to 300 million shares issued in the offer. A press release on Monday noted that the APO will be used to reduce debt and interest expense and bolster capital.
NCBFG's double leverage ratio at the end of 2022 was 120.44 per cent, which was in line with the Fitch threshold of 120 per cent. The double leverage ratio is calculated as the equity investment in subsidiaries divided by the holding company's equity balance.
This means that holding companies cannot just borrow debt solely to inject into their subsidiaries as T1 capital in the form of new ordinary shares, without considering this limitation.
NCBFG received $1.23 billion in dividend income in 2022, with $1.18 billion of this amount coming from NCBJ. With Clarien Group's key subsidiary Clarien Bank not paying a dividend since the 2017 acquisition and TFOB (2021) Limited still being a start-up, the $45.77-million difference would have been attributed to NCB Global which holds the shares in Guardian Holdings Limited (GHL).
However, GHL paid TT$103.91 million ($2.32 billion), which would mean that NCB Global only paid out 1.97 per cent of what it received from GHL as a dividend to its parent NCBFG.
In 2020 NCBFG received $14.65 billion in dividend income, with NCBJ paying $13.19 billion to its parent; this leaves a difference of $1.47 billion in unaccounted dividend income. GHL paid NCB Global TT$73.33 million ($1.54 billion) which means NCB Global would have paid out 95 per cent of the dividends it received from GHL.
The Ministry of Finance, Trinidad and Tobago, has noted that some businesses are keeping more of their foreign exchange (FX) overseas rather than repatriating it to the twin-island republic which is seeing demand exceed supply in the local market. Even Republic Bank Limited, which is Trinidad's largest bank, is cutting the United States-dollar spending limit on credit card billing cycles from US$10,000 to US$5,000.
NCBFG is currently undergoing a significant internal change, with Chairman Michael Lee–Chin instituting several changes to bring cost savings of $6-8 billion in a bid to start paying dividends again (which haven't been paid since May 2021). NCBFG's share price has fallen 10 per cent this month to $65.10 on the Jamaica Stock Exchange (JSE) and is down 11 per cent on the Trinidad and Tobago Stock Exchange to TT$2.89, following the announcement of the APO.
"However, we believe the bank's financial performance and funding prospects don't depend on the group's other companies. Also, the group's corporate structure and local regulations allow for some ring-fencing that would prevent NCBJ from supporting the group to the extent that it would hurt the bank's stand-alone creditworthiness. Moreover, we think that the group's sizable equity allocation in its Jamaica-based subsidiary, and the preservation of NCBJ's brand reputation, are significant incentives to maintain the bank's creditworthiness," said the S&P release.