BOURSE SECURITIES LIMITED
5th August, 2019
Local Banks Post Strong Results
This week, we at Bourse review the financial performance two locally domiciled banks listed on the Trinidad and Tobago Stock Exchange – Republic Financial Holdings Limited (RFHL) and First Citizens Bank Limited (FIRST) – for their respective nine month periods ended June 30th 2019. RFHL’s acquisition of Cayman National Corporation and continued diversification efforts would have materialized into strong improvements in profitability. FIRST benefitted from a drastic decline in Impairment Expenses, ultimately driving Net Income higher.
Republic Financial Holding Limited (RFHL)
RFHL reported diluted Earnings per Share (EPS) of $7.59 for the nine-months (9M) ended June 30th 2019, a 23.8% improvement from the $6.13 recorded in the prior comparable period. Accounting for one-off events, adjusted EPS is estimated to be $7.02, up 14.5% YoY.
RFHL’s Net Interest Income grew from $2.53B in 9M 2018 to $2.81B in 9M 2019, a $285.5M or 11.3% increase. Other Income also increased 14.35% to $1,281.8M. As a result, Operating Income for the period stood at $4.09B, up 12.2% YoY. This improvement was, however, tempered by a 12.8% ($256.4M) increase in Operating Expenses which climbed to $2.26B. The Bank benefitted from a one-off write-back of a Post-Retirement Medical Benefit (PRMB) Provision of $438.4M, which bolstered Operating Profits to $2.28B for the period (up 38.0% YoY). Adjusting for the one-off gain, Operating Profits would have been $1.84B (+11.4% YoY). A $9.7M or 6.7% rise in Credit Loss Expense resulted in a Profit Before Tax of $2.12B for the period, a 41.0% improvement over that of 9M 2019. Taxation Expense edged slightly higher at $450.2M for 2019 as compared to $449.1M in 2018 while Effective Tax Rate fell to 21.2% from 29.8% YoY. Performance was also negatively impacted by one-off reversals of Deferred Tax Assets ($345.3M), resulting in Net Profit After Tax for the period of $1.33B, up 25.7% from the $1.06B recorded in 9M 2018. On an adjusted basis, Net Profits attributable to equity holders of the Parent would have been in the order of $1.14B (up 14.7% YoY).
Outlook
RFHL’s Operating Income has seen incremental improvements YoY over the past three comparable periods. For the 9M 2019 period, RFHL’s Operating Income grew 12.2% YoY to total $4.09BM as compared to $2.65B reported in 2018. The strong performance in 2019 was attributable to improvements in profitability across all geographic segments but, most significantly, from their operations in Trinidad and Cayman Islands through the recent acquisition of Cayman National Corporation. Net Interest Income has expanded by an average rate of 7.3% over the past 3 years, bolstered by a strong 2019 performance thus far. Likewise, Other Income has grown at an average rate of 6.3% per year.
The Group’s Total Profit Before Taxes (before eliminations) for 2019 jumped 51.2% to $3.92B from $2.59B. The most significant contributors to this growth were RBL Trinidad and recently acquired Cayman National Corporation (CNC). RBL Trinidad PBT surged 58% ($1.16B) YoY, partly due to adjustments to the terms of its Post-Retirement Medical Benefits plan, which resulted in a one-off write-back of $438.4M before taxes. On the back of the CNC acquisition, the Cayman Islands segment saw PBT more than triple (up $100.4M YoY), significantly adding to the Bank’s overall profit from overseas operations. The Guyana segment also saw considerable improvements in PBT, increasing 37% YoY. Suriname and EC and Ghana’s segments achieved moderate improvements with PBT growth of 12% and 7% respectively while the Barbados segment remained relatively flat, growing just 1% YoY. Overall, PBT arising from overseas operations grew 27.7%, now accounting for 19% of the Group’s overall PBT.
The Bourse View
At a current price of $121.28, RFHL trades at a trailing P/E ratio of 12.6 times, below the Banking sector average of 16.4 times and offers a trailing dividend yield of 3.6%, in line with the Banking sector average of 3.7%. On the basis of continual growth in core Revenue, potential for higher earnings resulting from acquisition activity, attractive valuations and a relatively fair dividend yield, Bourse maintains a BUY rating on RFHL.
First Citizens Bank Limited (FIRST)
First Citizens Bank Limited (FIRST) reported Earnings per Share (EPS) of $2.19 for the 9M period ended 30th June 2019, a 14.66% improvement over the EPS of $1.91 recorded in 9M 2018.
Net Interest Income rose 3.76%, from $1.17B to $1.22B, propelled by a 13.4% ($2.1B) YoY growth in customers’ loans and a 4.3% ($656.5M) year-to-date growth in investments. This, combined with a 2.2% ($10.39M) increase in Other Income resulted in an increase in Total Net Income $1,697.8M from $1,643.4M, a 3.3% improvement. Impairment Expenses Net of Recoveries declined 92.81% from $168.5M in 2018 to $12.1M in 2019. This change bolstered Operating Profit by 16.37% or $112.77M to $801.5M. This growth was tempered by a 12.47% or $98.0M rise YoY in Operating Expense. Nevertheless, Net Profit Before Tax gained 16.22% ($113.83M), climbing to $815.8M. Taxation Expense for the period amounted to $262.7M as compared to $218.3 last year, a 20.35% increase. As a result, the Effective Tax Rate edged slightly higher from 31.1% to 32.2%. Overall, Net Profit After Tax advanced 14.35% or $69.4M YoY to a close of $553.0M for 9M 2019.
Outlook
Profit Before Tax resulting from FIRST’s Retail and Corporate Banking segment has shown consistent growth over the past five years. This year’s figure of $686.4M grew 8.3% from last year’s result of $633.6M. This growth in 2019 was attributable to a 13.4% ($2.1B) growth in customers’ loans and a 4.3% ($0.7B) growth in investments as stated by the Bank’s Chairman. PBT contributions arising from the Treasury & Investment Banking segment increased significantly in 2019, jumping 50.0% YoY to stand at $325.6M. In contrast, the Trustee & Asset Management segment saw an 18.6% YoY reduction in PBT, falling to $69.0M in 2019 from $84.8M last year.
Over the prior three comparable periods (9M 2016- 9M 2018), Provisions for Credit Losses have increased following growth in Loans to Customers. This trend reversed for the 9M 2019 period where the 14.4% growth in Loans to Customers was accompanied by a sharp 92.8% reduction in Provisions for Credit Losses. This drastic change was the result of a 59.1% reduction in Expected Credit Losses (ECL) charge on Loans and Advances, a $107.5M reversal of ECL on other financial assets, but most significantly, a $288.0 million write-back of initial credit loss provisions for the Government of Barbados debt restructuring. The Bank has now recorded an ECL of $281.2M upon acquisition of new restructured debt instruments from the Government of Barbados. Future performance will be dependent on the Bank’s ability to expand its loan portfolio as well as its investment portfolio, while employing strategies to keep expenses in check.
The Bourse View
At a current price of $39.94, FIRST trades a trailing P/E of 13.5 times, below the Banking sector average of 16.4 times but above its 3-year average of 12.9 times. The stock also trades at a market-to-book ratio of 1.4 times, below the Banking sector average of 2.3 times. FIRST offers investors a trailing dividend yield of 4.2%, above the sector average of 3.7%. On the basis of relatively attractive valuations and dividend yield, but tempered by rising operational costs and subdued top line growth, Bourse maintains a NEUTRAL rating on FIRST.
For more information on these and other investment themes, please contact Bourse Securities Limited, at 226-8773 or email us at invest@boursefinancial.com.
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