Fe­lix Pereira

In May 2011, Na­tion­al Com­mer­cial Bank of Ja­maica (NCBJ) first an­nounced its in­ten­tion to list its shares on an in­ter­na­tion­al stock ex­change. Since then, it has been in­volved in the process of prepar­ing and re­vis­ing its reg­is­tra­tion state­ments with the ex­pec­ta­tion of launch­ing its ini­tial pub­lic of­fer­ing (IPO) on the New York Stock Ex­change this month. The most re­cent up­date we have of this process is that a re­vised reg­is­tra­tion state­ment was filed on Jan­u­ary 24, 2013. As de­scribed, the IPO is due to con­sist of three blocks of shares, one of which is op­tion­al.

The pri­ma­ry of­fer, that is, the of­fer of new shares by NCBJ is made up of 12,500,000 Amer­i­can De­pos­i­to­ry Shares (ADS), each of which rep­re­sents 50 shares of NCBJ. This part of the is­sue would in­crease the num­ber of shares out­stand­ing in the com­pa­ny by 625 mil­lion or­di­nary shares.

The sec­ond part of the IPO com­pris­es 3,571,429 ADS. These ADS's rep­re­sent 178,571,450 shares of NCBJ, which are cur­rent­ly owned by en­ti­ties cur­rent­ly con­trolled by the ma­jor share­hold­er, Michael Lee Chin. This part of the trans­ac­tion sim­ply re­duces Mr Lee Chin's (and his com­pa­nies) own­er­ship per­cent­age in NCBJ.

The third por­tion of the IPO is op­tion­al and al­lows the un­der­writ­ers, if the IPO is over­sub­scribed, to is­sue a fur­ther 2,410,714 ADS in the com­pa­ny. This por­tion would in­crease NCBJ's out­stand­ing shares by 120,535,700. As­sum­ing all three as­pects of the IPO are suc­cess­ful, Mr Lee Chin's own­er­ship of NCBJ would fall to 43.6 per cent, from 64 per cent just pri­or to the IPO. (Set­tle­ment and de­liv­ery of the ADS's was sched­uled for Feb­ru­ary 12, 2013.)

Pre­mi­um on share price

The price of the IPO was ex­pect­ed to be at US$14.00 per ADS. At this lev­el, the pri­ma­ry por­tion of the is­sue alone (12.5 mil­lion ADS), would raise a gross fig­ure of US$175 mil­lion and a net sum of US$158 mil­lion. The over­sub­scrip­tion por­tion of 2,410,714 ADS would fur­ther aug­ment the gross take by US$33.75 mil­lion.

How does the price of US$14.00 for the ADS re­late to the share price of NCBJ on both the Trinidad and Ja­maican mar­kets? On the Ja­maican Ex­change, the price on Jan­u­ary 21, 2013 was J$21.90; us­ing the ex­change rate of J$93.0344 to US$1.00, we de­rive a price of US$0.23.

On the lo­cal ex­change, the clos­ing price of TT$1.40 con­verts to US$0.22, us­ing an ex­change rate of TT$6.4085 to US$1.00.

If we use the Ja­maican con­ver­sion as be­ing the more rel­e­vant, the fifty shares that are rep­re­sent­ed by an ADS, re­flects a mar­ket val­ue of US$11.50. Re­lat­ing this fig­ure to the IPO price of US$14.00, we see that this re­flects a pre­mi­um of al­most 22 per cent on its re­cent mar­ket price. The IPO price of the ADS rep­re­sents a small dis­count to the post-IPO net as­set val­ue of US$14.33.

In 2012, NCBJ paid to­tal div­i­dends of J$1.40. When re­lat­ed to its re­cent share price of J$21.40, this trans­lates in­to a div­i­dend yield of 6.54 per cent. Even when we fac­tor in the ex­pect­ed price pre­mi­um of about 22 per cent for the IPO, the div­i­dend yield falls to a very re­spectable 5.4 per cent.

How­ev­er, due to the in­come tax treaty be­tween the USA and Ja­maica, for the Amer­i­can in­vestor, a with­hold­ing tax of 15 per cent on div­i­dends is ap­plic­a­ble to Amer­i­can share­hold­ers. This charge re­duces the div­i­dend yield to 4.6 per cent. Based on the IPO price of US$14.00 per ADS (50 shares) this would still pro­vide an at­trac­tive yield.

How might ex­ist­ing Caribbean share­hold­ers ben­e­fit from the IPO and its sub­se­quent price move­ments? In ad­di­tion to hold­ing a share that has be­come much more mar­ketable, fi­nan­cial in­for­ma­tion on NCBJ's per­for­mance and oth­er re­lat­ed sig­nif­i­cant events would be re­layed to in­vestors much more quick­ly.

Ac­qui­si­tions

As part of the stream­lin­ing process, NCBJ has re­cent­ly been fi­nal­is­ing some ac­qui­si­tions. These in­clude the pur­chase by its sub­sidiary, NCB Cap­i­tal Mar­kets Ltd, of AIC Fi­nance Ltd in Trinidad from AIC Fi­nan­cial Group Ltd for ap­prox­i­mate­ly TT$15 mil­lion.

In a sim­i­lar vein, NCB Cap­i­tal Mar­kets Ltd is al­so fi­nal­is­ing the pur­chase of Ad­van­tage Gen­er­al In­sur­ance Com­pa­ny Ltd in Ja­maica for about J$3,090 mil­lion from both re­lat­ed and un­re­lat­ed par­ties. These two ac­qui­si­tions, when added to NCBJ's ex­ist­ing port­fo­lio of sub­sidiaries, would en­hance the prod­uct of­fer­ings to its grow­ing book of dis­cern­ing cus­tomers.

First quar­ter (2013) pre­lim­i­nary re­view

One piece of in­for­ma­tion that was added to the re­vised IPO fil­ing was a pre­lim­i­nary es­ti­mate of the com­pa­ny's per­for­mance for the three months end­ed De­cem­ber 2012. While this in­for­ma­tion is sub­ject to change, it still pro­vides the read­er with some use­ful in­sight about the bank's most re­cent per­for­mance.

Some of the high­lights from this re­port in­clude an im­prove­ment in net in­ter­est in­come to J$5,900 mil­lion from J$5,340 mil­lion in the same pe­ri­od last year.

Mean­while, net prof­it was al­most sta­t­ic; this mea­sure moved from J$2,769 mil­lion for the three months end­ed De­cem­ber 2011 to J$2,800 mil­lion for the Oc­to­ber to De­cem­ber 2012 pe­ri­od. In a sim­i­lar vein, earn­ings per share im­proved slight­ly to J$1.13 from last pe­ri­od's J$1.12.

As at De­cem­ber 2012, NCBJ's bal­ance sheet changes were gen­er­al­ly health­i­er. Net Loans and ad­vances closed at J$117 bil­lion, an im­prove­ment of 15.6 per cent from De­cem­ber 2011's fig­ure of $101.2 bil­lion. Cus­tomers' de­posits al­so showed growth; this line item, at J$177 bil­lion, was al­most 14 per cent high­er than the J$155.3 bil­lion re­port­ed as at De­cem­ber 2011.

To­tal as­sets as at De­cem­ber 2012 stood at J$397 bil­lion; this rep­re­sent­ed an im­prove­ment of slight­ly over ten per cent from the J$360.5 bil­lion that it record­ed on De­cem­ber 2011.

Out­look for the fu­ture

To its cred­it, NCBJ has dis­con­tin­ued its de­fined ben­e­fits pen­sion plan, ef­fec­tive since 2000. It now of­fers em­ploy­ees hired af­ter that date a de­fined con­tri­bu­tion pen­sion plan, which has a more pre­dictable cost.

In the up­dat­ed prospec­tus, NCBJ makes the fol­low­ing state­ment as to the pur­pose of its IPO: "We in­tend to use the net pro­ceeds from this of­fer­ing for gen­er­al cor­po­rate pur­pos­es, which may in­clude fund­ing or­gan­ic growth through an in­crease in loan vol­ume, port­fo­lio in­vest­ments and oth­er in­come-gen­er­at­ing ac­tiv­i­ties; fi­nanc­ing ex­pan­sion of and im­prove­ments to our in­fra­struc­ture; and pur­su­ing po­ten­tial fu­ture ac­qui­si­tions and oth­er strate­gic in­vest­ments. We are un­able to es­ti­mate the ap­pli­ca­tion of the an­tic­i­pat­ed net pro­ceeds from this of­fer­ing to our an­tic­i­pat­ed us­es of those pro­ceeds as of the date of this prospec­tus."

More like­ly than not, NCBJ will at­tempt to reach out to the Caribbean and, in par­tic­u­lar, Ja­maican di­as­po­ra to find new ways to serve their fi­nan­cial needs. This might in­clude the pur­chase of a small bank that could be re­brand­ed and even­tu­al­ly form the nu­cle­us of its North Amer­i­can ex­pan­sion pro­gramme.

Hav­ing re­ceived in the re­gion of US$50 mil­lion (be­fore ex­pens­es) from the sale of 3,571,429 ADS (or 178.57 mil­lion NCBJ shares), the Lee Chin com­pa­nies can do some re­struc­tur­ing of their own, or even search for new op­por­tu­ni­ties for growth ac­cord­ing to their strate­gies.

In any event, Michael Lee Chin, de­spite hav­ing his share­hold­ing re­duced to less than 44 per cent, re­mains very firm­ly in charge at NCBJ. His hold­ings in NCBJ would now be much more liq­uid and the com­pa­ny has the nec­es­sary funds (for the time be­ing) to con­tin­ue along its pre­scribed growth tra­jec­to­ry.

In­tro­duc­tion and Of­fer

There are sev­er­al ad­van­tages to a com­pa­ny from hav­ing its shares list­ed on a ma­jor in­ter­na­tion­al stock ex­change, such as the New York Stock Ex­change (NYSE). These in­clude:

(1) In­creased vis­i­bil­i­ty for its prod­ucts or ser­vices and, in­ci­den­tal­ly, for its home coun­try

(2) More fre­quent trad­ing of its shares, which leads to fair­er pric­ing

(3) More com­pre­hen­sive in­for­ma­tion and time­ly re­lease of fi­nan­cial re­sults

(4) Af­ter the ini­tial hur­dles are over­come, ac­cess to greater and cheap­er forms of cap­i­tal

(5) Abil­i­ty to ex­pand its ser­vices to the res­i­dents of its new guest coun­try

(6) Pay­ing of div­i­dends in the cur­ren­cy of its guest coun­try.