It is impossible to walk around the central business district of Toronto and not be struck by the concrete and glass skyscrapers that house the Canadian headquarters of the three banks–Scotia, CIBC and RBC–that operate in the Caribbean.
That sky-gazing triggered a line of thinking about the sustainability of the Canadian banking presence in the region and led to an enquiry into the fortunes of CIBC–one of the less visible of the Canadian banks (to most Trinidadian eyes, anyway) as it operates one office on Long Circular Road in Maraval that provides wealth management and corporate and investment banking services.
in the central business district where the Canadian capital where headquarters where it was CIBC FirstCaribbean was established in 2002 with the merger of the Caribbean operations of Barclays and CIBC. London-based Barclays and Toronto-based CIBC each held a 43.7 per cent stake in the merged entity, which was first called FirstCaribbean International Bank.
In 2006, CIBC paid Barclays US$1.62 a share, or a total of about US$1.08 billion, to acquire its 43.7 per cent ownership stake in FirstCaribbean.The exit of Barclays from FirstCaribbean International Bank left CIBC with an 87.4 per cent stake in the Barbados-based bank, which the Canadian company increased to about 92 per cent after making a bid for the shares it did not own.
CIBC FirstCaribbean is the largest, regionally-listed bank in the English-and Dutch-speaking Caribbean with over 3,400 staff; 69 branches, 22 banking centres, and seven offices in 17 regional markets.It offers a full range of financial services in corporate banking, retail banking, wealth management, credit cards, treasury sales and trading and investment banking.According to its most recent quarterly report CIBC FirstCaribbean has assets of US$11.7 billion.
In 2006, FirstCaribbean with over 1.5 billion shares in issue had a market capitalisation of US$2.4 billion.In Barbados–where the the financial institution is headquartered, its last traded price was Bds$1.80 (US$0.90 a share) from a June 30 transaction–its market capitalisation is Bds$2.83 billion (which is about US$1.4 billion), based on issued share capital of 1,577,094,570.
In T&T, based on the bank's trading on the local stock exchange where it closed on Friday at $5.01, FirstCaribbean has a market capitalisation of $7.90 billion (US$1.23 billion).That means that in eight years, based on trading on the T&T stock exchange, the market capitalisation of the Caribbean franchise of one of Canada's largest banks has almost been halved.
The market value of CIBC FirstCaribbean has declined because its net income has fallen every year since 2007, the first full year of majority ownership by CIBC. In 2007, the bank reported net income of US$261 million, which included a US$52 million gain on the sale of shares in Visa. In 2013, it reported a net loss of US$27 million.
And the financial position of CIBC FirstCaribbean is worsening with the bank declaring a loss of US$199 million for the six months ending April 30, 2014 and a loss of US$214 million for its second quarter.According to CIBC's second quarter financial results, the losses in its Caribbean operations had a negative impact on the results of the parent company. CIBC reported net income for the quarter of US$306 million, compared with US$862 million for the same quarter last year and US$1.177 billion for the prior quarter.
CIBC's second quarter results were pulled down by C$543 million in charges relating to FirstCaribbean International Bank Limited (CIBC FirstCaribbean). This comprised "a goodwill impairment charge of C$420 million (C$420 million after-tax) and loan losses of C$123 million (C$123 million after-tax), reflecting revised expectations on the extent and timing of the anticipated economic recovery in the Caribbean region."
The financial performance of CIBC FirstCaribbean–which was chaired for many years by T&T citizen Michael Mansoor–means the parent bank's Canadian shareholders have suffered, largely in silence, a negative return on their investment in the Caribbean operations for several years.
And the statement in the parent company's second quarter results, which reflected its "revised expectations on the extent and timing of the anticipated economic recovery in the Caribbean region," and the fact that they took a goodwill impairment charge of US$420 million means that there is an expectation of continuing negative returns on their investment for several years to come.
It is in this context that if CIBC were made a half-way decent offer for its Caribbean franchise that it would, I think, be prepared at least to discuss it seriously.The question, then, becomes what would constitute a half-way decent offer for a company with US$11.7 billion in assets spread across the English and Dutch Caribbean?My own view is that such an offer would be about US$1.1 billion, which would represent 92 per cent of CIBC FirstCaribbean's current market capitalisation of US$1.23 billion in the T&T market.
A selling price of US$1.1 billion would also be close to the bank's book value, which has traditionally been defined as a company's total assets minus intangible assets and liabilities. According to the company's quarterly results as of April 30, 2014, CIBC FirstCaribbean's total asset are US$11.792 billion, its intangible assets are US$219 million and its liabilities are 10,485,783. So, US$11.792-US$10.703=US$1.092 billion, which is a rough estimate of the financial institution's book value.
There is a recent precedent for selling a financially distressed Caribbean banking asset at book value.In January, it was announced that Sagicor Group Jamaica was acquiring RBC Royal Bank (Jamaica) Ltd and RBTT Securities Jamaica Ltd from Royal Bank of Canada at the then book value of the business.
In June, RBC's completed the sale of its Jamaica operations, which had 13 branches and 550 employees, at an estimated loss of C$60-million. This which means that Canada's largest bank was willing to take a one-time loss on the sale rather than continue losing money in Jamaica.If RBC was willing to sell its money-losing Jamaican operations for its book value, is there any reason why anyone should pay more than book value for CIBC's money-losing Caribbean franchise?
For there to be a financial transaction, there must be a willing buyer and a willing seller.The question is: Would CIBC be willing to cut its losses and sell its Caribbean operations or is the Canadian banking giant intent on continuing to bleed its balance sheet as it waits for the Caribbean economies in which it operates to bounce back to economic growth?
On June 20, the Economist Intelligence Unit in an article headlined "Canadian banks suffer reversal of fortune in Caribbean," opined that the outlook for the Caribbean markets in which the Canadian banks operate remains relatively poor. But it added: "Nonetheless, given Canadian banks' generations-old relationship with the Caribbean, they are likely, for the most part, to ride out the economic cycles rather than abandon the region altogether."
That analysis negates the fact that RBC has previously sold its Caribbean operations and that CIBC used to have a vibrant retail banking operation in T&T–which it sold to Republic Bank–both of which happened when the profitability of those operations dipped for some years.
...and should First Citizens be the buyer?
There is little doubt in my mind that the acquisition of CIBC FirstCaribbean by First Citizens would be a good fit for the majority state-owned Port-of-Spain financial institution.Firstly, both banks operate in Barbados, so there may be some competition concerns there. But there is no doubt that First Citizens acquisition of CIBC First Caribbean would be a fairly quick and not too expensive way for the T&T bank to expand its footprint throughout the region.
CIBC First Caribbean operates in the following countries: Anguilla, Antigua, The Bahamas, Barbados, Belize, British Virgin Islands, Cayman Islands, Curacao, Dominica, Grenada, Jamaica, St Eustatius, St Kitts, St Lucia, St Maarten, St Vincent, Turks& Caicos and T&T.
Secondly, at between US$1.1 and US$1.4 billion, the acquisition of CIBC FirstCaribbean would be quite easy for First Citizens–and its majority shareholder, the Government of T&T–to finance either by the direct sale of the State's remaining 80 per cent stake or by way of a First Citizens rights issue and a US-dollar bond issue.
What do readers think?Should First Citizens buy if CIBC is willing to sell?
�2 Send your opinions to anthony.wilson@guardian.co.tt