Fe­lix Pereira

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...