An­tho­ny Wil­son

In the six-month pe­ri­od from Oc­to­ber 1, 2012 to March 31, 2013, the State-owned First Cit­i­zens record­ed an op­er­at­ing prof­it of $383.8 mil­lion, which was a 12 per cent in­crease com­pared with the com­pa­ra­ble pe­ri­od in 2012.

In its unau­dit­ed in­ter­im fi­nan­cial state­ment for the first half of its 2013 fi­nan­cial year, the com­pa­ny, which is due to sell shares to the in­vest­ing pub­lic for the first time next month, record­ed to­tal net in­come of $825.8 mil­lion, which was up by about 8 per cent. Its im­pair­ment for loan loss­es re­duced sharply to $19.9 mil­lion from $56.4 mil­lion but op­er­at­ing ex­pens­es in­creased by 17 per cent to $422 mil­lion from $360.5 mil­lion, which must be part­ly as a re­sult of the sig­nif­i­cant wage in­crease that em­ploy­ees of the bank­ing group re­ceived late last year.

The bal­ance sheet of First Cit­i­zens looks strong with to­tal as­sets grow­ing by about 15 per cent to $36 bil­lion from $31.3 bil­lion as at March 2012. At a time when many pun­dits are pre­dict­ing that the es­ti­mate of 2013 growth by the cur­rent Cen­tral Bank Gov­er­nor seems op­ti­mistic, it is note­wor­thy that the bank's loans to cus­tomers in­creased by 30 per cent to $11.2 bil­lion from $8.6 bil­lion a year ago. It is al­so very in­ter­est­ing that the bank has man­aged to at­tract 16 per cent more in cus­tomers de­posits and oth­er fund­ing in­stru­ments with those ris­ing to $26.6 bil­lion from $22.8 bil­lion.

In fact, every­thing about the com­pa­ny's fi­nan­cials seem rosy–ex­cept for the $36.3 mil­lion de­cline in its af­ter-tax prof­it, which went from $342.8 mil­lion in the first six months of 2012 to $306.4 mil­lion in 2013. That's be­cause the amount of tax­es the bank­ing group paid in the first six months of 2013 was $82.3 mil­lion, which was more than 13 times the $5.8 mil­lion that it paid a year ear­li­er.

The in­crease in the amount of tax­es that First Cit­i­zens pays is due to the fact that last year it de­cid­ed to re-as­sess its tax strat­e­gy in re­la­tion to the pur­suit of the tax ben­e­fits to be de­rived from swap in­stru­ments used to man­age its for­eign ex­change ex­po­sure aris­ing on US dol­lar bonds sold by the bank.

First Cit­i­zens had a tax charge of $267.7 mil­lion for the 2012 fi­nan­cial year com­pared with a $29.6 mil­lion tax cred­it in 2011.

This is what First Cit­i­zens chief fi­nan­cial of­fi­cer Shi­va Man­raj told me when we first re­port­ed the tax de­ci­sion: "We re­assessed the tax strat­e­gy lead­ing to a change in the tax es­ti­mates, in con­sul­ta­tion with our tax ad­vi­sors and af­ter care­ful eval­u­a­tion of all rel­e­vant fac­tors.

"This change in es­ti­mate, amount­ing to an ad­di­tion­al tax charge of $128.3M, was recog­nised in the in­come state­ment for the year end­ed 30 Sep­tem­ber 2012 in ac­cor­dance with the rel­e­vant In­ter­na­tion­al Fi­nan­cial Re­port­ing Stan­dards."

As a re­sult of the change in the strat­e­gy, the bank de­clared an af­ter tax prof­it of $446.4 mil­lion for its 2012 fi­nan­cial year, which was down from the $718.2 mil­lion it re­port­ed in 2011.

While the de­ci­sion by First Cit­i­zens to stop us­ing the tax ef­fi­cient meth­ods that it em­ployed pre­vi­ous­ly may not ap­peal to all in­vestors, it is my view that this de­ci­sion is to the bank's cred­it. This state­ment is be­ing writ­ten as I watch Ap­ple CEO Tim Cook be­ing grilled by mem­bers of a Sen­ate sub-com­mit­tee in the US on al­le­ga­tions that tech­nol­o­gy gi­ant dodged US$9 bil­lion in tax­es last year.

It al­so comes in the con­text of the in­ter­na­tion­al de­bate about whether mul­ti-na­tion­al com­pa­nies like Ap­ple, Google, Star­bucks and Gen­er­al Elec­tric are tak­ing ad­van­tage of cross-bor­der tax loop­holes to lim­it the amount of tax­es they pay to the coun­tries they op­er­ate in and the coun­tries they are head­quar­tered in.

De­pend­ing on the price (and the PE mul­ti­ple) that First Cit­i­zens is of­fered at, it seems like a very in­ter­est­ing ad­di­tion to long-term in­vest­ment port­fo­lios.

But what about CMMB?

In the year end­ed Sep­tem­ber 30, 2008, First Cit­i­zens re­port­ed that its as­sets to­taled $15.8 bil­lion and its cus­tomers' de­posits amount­ed to $9.4 bil­lion. A year lat­er, the bank's as­sets jumped by 75 per cent to $27.8 bil­lion and its de­posits in­creased by 62.6 per cent to $15.3 bil­lion.

The 75 per cent in­crease in as­sets is all the more re­mark­able giv­en the fact that the pe­ri­od Oc­to­ber 2008 to Sep­tem­ber 2009 was the year in which the T&T econ­o­my de­clined by 3.3 per cent.

The ex­tent to which CMMB con­tributed to the sharp growth of the as­sets and de­posits of First Cit­i­zens ought to be re­vealed by the bank ex­ec­u­tives dur­ing their pro­mo­tion of the IPO.

Ac­cord­ing to the 2009 an­nu­al re­port of the bank­ing group, First Cit­i­zens as­sumed con­trol of Caribbean Mon­ey Mar­ket Bro­kers group, ef­fec­tive Feb­ru­ary 2, 2009.

Al­though as­sump­tion of con­trol took place just days af­ter the sign­ing of the Jan­u­ary 30, 2009 Mem­o­ran­dum of Un­der­stand­ing be­tween the Gov­ern­ment and CL Fi­nan­cial, First Cit­i­zens ac­quired 55 per cent of CMMB's eq­ui­ty shares via a share pur­chase agree­ment with CL Fi­nan­cial dat­ed May 22, 2009. Forty-five per cent of CMMB was ac­quired by way of a vest­ing or­der dat­ed June 2009 is­sued by for­mer Fi­nance Min­is­ter Karen Tesheira, which trans­ferred Cli­co In­vest­ment Bank's share­hold­ing in CMMB to the First Cit­i­zens group.

Is there a rea­son why the bank's con­trol of CMMB was back­dat­ed?

CMMB, which some com­men­ta­tors ar­gued was bank­rupt when it was ac­quired by First Cit­i­zens, con­tributed rev­enues of $369.9 mil­lion and net prof­its of $91.9 mil­lion to the State-owned bank­ing group in the eight months from Feb­ru­ary 2 to Sep­tem­ber 30, 2009.

For $369.9 mil­lion in rev­enues and $91.9 mil­lion in net prof­it, First Cit­i­zens paid a to­tal of ex­act­ly $1. To as­sess CMMB's con­tri­bu­tion to the First Cit­i­zens bot­tom­line, the com­pa­ny's prof­it af­ter tax in­creased by $73.7 mil­lion to $537.2 mil­lion at the end of Sep­tem­ber 2009 com­pared with the same pe­ri­od in 2008.

Were it not for CMMB, would First Cit­i­zens have ex­pe­ri­enced a de­cline in prof­its in the 2009 fi­nan­cial year?

For­mer CL Fi­nan­cial ex­ec­u­tive, Michael Car­ballo, in his wit­ness state­ment to the Com­mis­sion of En­quiry in­to the col­lapse of the CL Fi­nan­cial em­pire, said: "In the last quar­ter of 2008, the long-term bonds in­vest­ed in by CMMB de­creased in val­ue in line with the over­all prices of se­cu­ri­ties on the in­ter­na­tion­al mar­kets and from a mark-to-mar­ket per­spec­tive, CMMB would have tem­poraril­i­ty de­clined in val­ue.

"This was of se­ri­ous con­cern to the CMMB board of di­rec­tors, es­pe­cial­ly in light of short-term de­posits such as Caribbean Air­lines that were seek­ing im­me­di­ate re­turn of funds and this cre­at­ed a tight liq­uid­i­ty sit­u­a­tion and con­cern by ear­ly Jan­u­ary 2009.

"Sub­se­quent to the sign­ing of the MoU, I was made aware that First Cit­i­zen's Bank Ltd would be in­ter­est­ed in ac­quir­ing the as­sets of CMMB and meet­ings were held with LEX Caribbean, FCB and Ram Ramesh fol­lowed by the draft­ing of the share pur­chase agree­ment, where­by a pro­vi­sion­al pur­chase price of $1 was set for the pur­chase of CMMB, but sub­ject to a val­u­a­tion to be per­formed.

"I was sub­se­quent­ly in­formed by Al­i­son Lewis (the per­ma­nent sec­re­tary in the Min­istry of Fi­nance) that Michael Toney of MCT and As­so­ciates was ap­point­ed to per­form a val­u­a­tion, and de­spite nu­mer­ous re­quest I was nev­er pro­vid­ed with a copy of the val­u­a­tion and was al­ways con­cerned about the $1 price even­tu­al­ly placed on the as­sets of CMMB.

"I would re­al­ly be in­ter­est­ed in see­ing a cur­rent val­u­a­tion of the as­sets of CMMB that had tem­porar­i­ly fall­en in val­ue fol­low­ing the in­tern­tion­al cri­sis in late 2008."

Like Mr Car­ballo, I too would be very in­ter­est­ed in see­ing the val­u­a­tion of CMMB done by Michael Toney, that up­stand­ing­ly pro­fes­sion­al ac­coun­tant.

If in 2009, when it was ac­quired, CMMB had a val­ue of more than the $1 that First Cit­i­zens paid for it, should that not be ac­count­ed for in the reck­on­ing that is go­ing on now with re­gard to the amount of mon­ey that CL Fi­nan­cial owes the Gov­ern­ment?

One hopes that the val­u­a­tion is not be­ing sur­pressed.

One al­so won­ders why the Sir An­tho­ny Col­man Com­mis­sion in­to the col­lapse of CL Fi­nan­cial ig­nored CMMB and the many is­sues swirling around it.