The JMMB Group acquired 90 per cent of the Dominican Republic bank, Banco Rio de Ahorro y Credito JMMB Bank SA, on July 1, 2015. The purchase price was US$2.15 million or J$254.5 million, which approximates TT$13.76 million. This acquisition increased its operating expenses for the second quarter, thus lowering its profits for that period. Despite this distortion, its year-to-date results continued to improve.
Let us now further expand on these and related issues that impacted on its half-year results.
Changes in financial positions
Total assets expanded by 2.8 per cent to J$223.8 billion from the March 2015 year-end balance of J$217.7 billion.
The main constituent, investments and resale agreements, which remains the largest component, declined marginally to J$154.3 billion from J$157.5 billion.
Helped by its banking acquisition, net loans and receivables advanced by 11.6 per cent to close at J$35.6 billion from last March’s J$31.9 billion.
Cash and equivalents also rose strongly moving from J$18.7 billion to J$23.6 billion as at September 30, 2015. This was also partly due to the inclusion of J$265 million from the new bank, Banco Rio.
Finally, property, plant and equipment advanced to J$3.57 billion from J$3.09 billion. Total liabilities grew by 3.2 per cent to reach J$202.2 billion from J$196 billion.
Securities sold under agreements to repurchase registered at J$146.6 billion; this was 1.4 per cent greater than the J$144.5 billion held as at March 31, 2015.
Customers’ deposits increased by 6.4 per cent to J$40.9 billion from the year-end balance of J$38.5 billion. About J$1 billion of this improvement can be attributed to the Banco Rio acquisition.
Both notes payable and other payables rose. The former moved to J$4.26 billion from J$3.64 billion while the latter climbed to J$3.3 billion from J$2.36 billion.
Its redeemable preference shares held steady at J$4.2 billion.
On the other hand, the amounts due to other banks increased to J$519 million from J$435 million.
Equity changes
Total equity declined to J$21.56 billion from J$21.72 billion. After allowing for minority interests, shareholders’ equity also fell to J$20.81 billion from last year-end’s J20.96 billion.
Both share capital and retained earnings reserve held steady at J$1.86 billion and J$9.6 billion respectively.
In contrast, the investment revaluation reserve fell to J$1.02 billion from J$2.04 billion; this reflected a negative comprehensive income for the period. This was mainly due to unrealised losses on available-for-sale investments and, to a lesser extent, foreign exchange translation differences.
The retained earnings component benefitted from the current period’s profit of J$1.18 billion before giving back J$261 million in dividends to shareholders. These changes saw the ending balance improve to J$8.49 billion from J$7.57 billion as at last March.
With 1,630,552,530 shares outstanding, each share has a book value of J$12.76 (March 2015: J$12.86).
Revenues and profit
Total interest income fell to J$6.52 billion from J$6.83 billion. Interest expense, however, fell by a greater percentage to end at J$3.75 billion from J$4.13 billion.
These favourable swings allowed JMMB to record a higher net interest income of J$2.77 billion from last half-year’s J$2.7 billion.
All other major sources of income registered strong improvements.
Fees and commission income climbed by 46.4 per cent to J$441.3 million from J$301.4 million.
The net gains on securities trading improved by 35.2 per cent, moving from J$1.55 billion in 2014 to J$2.1 billion in the current half-year. These gains were fuelled by volume increases combined with the buoyancy of the Jamaican Stock Exchange, especially since about mid-year.
Foreign exchange trading gains were also robust, moving from J$430.6 million to J$562 million; this reflected an improvement of 30.5 per cent.
Meanwhile, dividend income rose to J$12.75 million from J$8.53 million.
These changes allowed JMMB Group to report total income of J$5.88 billion; this showed a 17.8 per cent improvement over the J$4.99 billion earned for the comparative 2014 period.
Distorted by higher expenses under its banking segment, total operating expenses climbed by 17.3 per cent to J$4.29 billion from J$3.66 billion previously.
This allowed JMMB to report a pre-tax profit of J$1.59 billion; this represents an improvement of 18.4 per cent over the J$1.34 billion recorded for the six months ended September 2014.
With the effective tax rate increasing from 19.53 per cent to 23.77 per cent in the current period, the after-tax profit improved by only 12.2 per cent to J$1.21 billion from J$1.08 billion.
The non-controlling interests fell to J$28.7 million from J$55 million; this change helped JMMB report a profit attributable to shareholders of J$1.18 billion versus J$1.02 billion.
This result translated into EPS of J$0.72 (2014: J$0.63).
Divisional performance
Both major segments reported higher external revenues and greater pre-tax profits.
Notably, there was a marginal decline in the operating expense at the financial segment. On the other hand, the banking segment experienced a doubling of its operating expenses; this was mainly caused by the one-off expenses triggered by both the asset tax (J$184.9 million) and the Banco Rio acquisition.
In the case of the latter, the purchase price of J$254.5 million exceeded the provisional valuation of the net assets acquired of J$155.8 million, which gave rise to a goodwill charge of J$98.7 million. It is expected that the final valuations of the assets acquired will be concluded by the end of the fiscal year in March 2016.
The decline in interest income was most pronounced under the financial services segment.
Most of the group’s profits are derived from its Jamaican home base. There, the merchant bank subsidiary contributed J$221.5 million to the group’s after-tax profits; this represented an improvement of 76 per cent over the prior period’s results.
Its operations in the Dominican Republic contributed J$77.1 million to these results. Those results were derived from its securities and mutual fund operations as well as its newly acquired bank, Banco Rio de Ahorro y Credito JMMB Bank SA.
Locally, JMMB Investments (T&T) Ltd and the Intercommercial Bank Ltd combined contribution amounted to J$96.8 million.
The group also derives significant income from managing off-balance sheet funds for its clients on a non-recourse basis. The value of those managed funds increased by 77.7 per cent to J$58.3 billion from last year’s J$32.8 billion.
Dividends and share price
On July 2, 2015 JMMBGL share price closed at J$7.50. A few weeks later, on July 22, it had declined to J$7.07. For the next couple of months the price drifted within a narrow range.
During October, the price advanced to J$8.41 on the ninth, then closed at J$8.90 on October 20 and then further advanced to J$9.93 by the October 27.
The price closed at J$10.00 on November 3, 2015, when 1,030,443 shares changed hands. By November 12, it was at J$10.99 at which point it started to exhibit some resistance.
Under its old corporate name and structure, JMMB’s 2014 calendar dividend was J$0.33. On December 18, 2015, JMMBGL will pay a dividend of J$0.19; this, when added to the mid-year dividend of J$0.16 will bring its total dividend for calendar 2015 to J$0.35.
That total dividend, when related to its recent peak price of J$10.99, gives investors a yield of 3.18 per cent.
On the local exchange, the share price has moved in a very similar fashion. The share was traded at TT$0.45 in July and then fell to TT$0.41 in August. The release of these results has seen prices as high as TT$0.53 on November 13 and again on November 23.
Prospects
On September 16, 2015, shareholders approved a resolution for the issuance of six billion cumulative redeemable preference shares. Very likely, these new instruments will be used to replace and/or augment the existing stock of J$4.2 billion when they are redeemed. The existing preference shares bear interest rates ranging from 7.25 to 8.75 per cent.
Although JMMBGL has commercial banking subsidiaries in both T&T and the Dominican Republic, it does not yet own a commercial bank in its home country. The group eventually expects this to become a reality, possibly within two years.
Investors may recall that, many years ago, Republic Bank Ltd’s foray into the Dominican Republic did not end well for the bank and its shareholders.
Perhaps, this may one reason why JMMBGL is buying only 90 per cent of Banco Rio; it probably expects that having a local shareholder will improve its chances for success.