With 1,255 employees, more than 7,000 shareholders and total assets (as at October 2011) of $17 billion Scotiabank T&T Ltd generated earnings per share of $3.09 in 2011. Dividends for the year totalled $1.28 and represented the seventeenth consecutive year that the bank increased its dividends to shareholders. This achievement is a reflection of the bank’s strength and stability. The bank is a subsidiary of Scotiabank Canada, which owns 51 per cent of its outstanding shares. A further nine prominent local institutions collectively own slightly more than 56 million shares or about 32 per cent of the outstanding shares. This leaves about 17 per cent of the shares floating on the open market. With the exception of Craig Reynald, all of the bank’s directors own shares in the bank in their own name. This is always a good sign. Typically, the bank’s largest asset comprises loans to customers of $10.67 billion or 62.75 per cent of its total assets. This reflected a modest 2.9 per cent increase over the 2010 figure of $10.36 billion.
Deposits with the Central Bank total $2.78 billion; a large portion, which is the primary reserve of $1.65 billion, does not generate any interest. Treasury bills, amounts due to banks and related companies and cash total a further $2.44 billion. The bank had total liabilities of $14.2 billion and shareholders’ equity of $2.8 billion. The largest component of its liabilities column was deposits from customers, which totalled $12.42 billion. Another significant entry was a debt security totalling $800 million, on which it paid interest at the annual rate of 8.41 per cent. In August 2011, a previous bond of $200 million matured and was settled. In February 2012, the bondholders approved a deed of variation, which resulted in the lowering of the interest rate on these bonds. Bonds with a face value of $457 million will now pay interest at 4.15 per cent and mature in February 2017 while bonds with a face value of $161 million will pay interest at 4.80 per cent and mature in February 2018. These reduced interest payments will improve profitability in subsequent periods. Consistent with the growth of its long-term insurance business, policyholders’ funds stood at $533 million, which was a 21.4 per cent increase from $439 million at the end of the previous year.
Out of total equity of $2.8 billion, the bank’s stated capital was $267.6 million. Statutory and investment reserves added a further $428.2 million, while retained earnings stood at $2.1 billion. With 176,343,750 shares outstanding, the book value of a share was $15.83. Its profitability and efficiency ratios continue to be healthy. Overall, net interest income increased to $897.3 million; this was a 3.7 per cent increase from the $865.1 million recorded in the previous year. This result was only possible by instituting a very severe contraction in the rates of interest paid to its loyal depositors. Total interest income fell from $1.078 billion in 2010 to $1.040 in 2011, or by 3.5 per cent. Backing out other interests, interest on loans were $977.5 million down from $998.4 million in 2010. When we relate this interest income figure of $977.5 million to total loans outstanding of $10.67 billion, we derive a figure of 9.16 per cent, which is broadly indicative of the rates charged on loans.
If we look now at the change in the deposit interest expense figure, we see that this sum fell from $212.8 million in 2010 to a more modest $143 million in 2011, or by an astounding 32.8 per cent. Again, backing out interest on the outstanding bond and other miscellaneous expenses, we actually have only $55.9 million being paid to depositors. This was 51.5 per cent lower than the $115.1 million paid to depositors in 2010! Relating this interest of $55.9 million to customers’ deposits of $12.42 billion, we obtain a figure of 0.45 per cent, again broadly indicating the low rate of interest paid to willing depositors.
The apparent interest-rate gap of 8.71 per cent (9.16 per cent - 0.45 per cent) between the two figures is so huge that it seems to require some kind of exhaustive or detailed explanation. More likely than not, there is probably a huge pile of deposits on which no interest has been or will ever be paid. This situation is at least partly due to customers’ neglect in efficiently managing their cash resources. The popular consumer belief, which has not been convincingly refuted, is that banks in general are very nimble when reducing rates paid to depositors and very lethargic when they may be able to (or, are obliged to) lower rates to lenders. Aside from net interest income, almost 29 per cent of the bank’s total income amounting to $360.4 million is classified as “other income”. Breaking down this figure, the two largest components are fees, commissions and net premium income of $252 million and foreign exchange earnings of $97 million. With competition on interest-rates likely to be more open, the fee income category looms as a more stable and predictable source of revenue for banks. Non-interest expenses fell from $592 million in 2010 to $559 million in 2011. A big factor in this reduction was the decline in its loan loss expense; this figure fell by more than $29 million or from $77.1 million to slightly under $48 million. No doubt, this was due to a better loan recovery experience.
The bank divides its operating segments into four units: “corporate, commercial and merchant (CC&M) banking”, “retail banking”, “insurance services” and “other”. While in both periods retail banking was the largest in terms of revenue, its profitability was challenged in 2010. In that year, corporate, commercial and merchant (CC&M) banking generated a much higher profit of $363 million than the $267.5 million earned by the retail sector. In 2011, Retail banking made a strong recovery and contributed $332.9 million while CC&M’s contribution fell from $363 million to a more modest $324.6 million.
Importantly, insurance services reported a healthy increase in both revenue and profit from 2010 to 2011. After all, how many businesses can, in 2011, report revenue of $98.2 million and pre-tax profit of $86 million? This is certainly a very healthy margin of almost 88 per cent! This segment was reported to have contributed 15 per cent to the group’s after-tax profits, or about $82 million of the total of $544 million. With this type of margin, one can expect more resources to be allocated to this business unit.
Building on this experience, it seems only a matter of time before traditional banking activities recede in prominence and insurance and related financial services move into their ascendancy. Results for the first six months of the current year, which ended on April 2012, showed Scotiabank achieved only marginally improved results. Net interest income came in at $462 million, reflecting an improvement of 2 per cent over last year’s $452.6 million. On the other hand, other income fell to $172 million from the previous period’s $184 million. Total revenue came in at $634 million, marginally lower than the comparative 2011 figure of $636.7 million. Total non-interest expenses for the current period fell by $9.7 million. This was a reflection of lower loan loss expenses, down by $22.1 million, which were countered by an increase in other expenses of $12.5 million. After allowing for a marginally higher tax provision, after-tax income came in at $268 million, which was 2.4 per cent higher than last year’s $262.3 million.
With earnings per share clocking in at $1.52, the bank maintained its quarterly dividend of $0.32. Since last October, when its share price closed at $50.00, the share has risen steadily and closed recently at $62.06. At this price and using trailing twelve-month earnings of $3.12, this reflects a price earnings ratio of 19.9 times. Based on annual dividends of $1.28, the yield on this share is 2.06 per cent. One may speculate that the bank could decide to increase its dividend payout percentage from the current 41 per cent to say 45 per cent. If this happens, the current dividend would increase from$1.28 to $1.40 and the yield, at the current price, would improve to 2.25 per cent. Another factor that could keep the price of this share on its slow upward path is the expectation that any major increase in loan activity, say within the next six to twelve months, would result in a disproportionately huge improvement in its profit. This is so because of the amount of cost-trimming and streamlining that has been instituted over the last few years. (This comment could also apply to many other local businesses in varying degrees.) When that happens, as it eventually will, share prices, profits and dividends would all improve...