HIGHLIGHTS

RFHL FY 2022

• Earnings: Diluted Earnings Per Share improved 16.3% from $8.02 to $9.33
• Performance Drivers:
  • Increased Revenues
  • Lower Credit Loss Expense
• Outlook:
  • Normalization of economic activity
• Rating: Maintained at MARKETWEIGHT

FCGFH FY 2022

• Earnings:  Earnings Per Share increased 10.2% from $2.64 to $2.91
• Performance Drivers:
  • Lower Total Net Income
  • Write Back in Impairment Expenses
• Outlook:
  • Further Moderation in Credit Impairment Expenses
• Rating: Maintained at MARKETWEIGHT

This week, we at Bourse review the performance of local Banking Sector giants Republic Financial Holdings Limited (RFHL) and First Citizens Group Financial Holdings Limited (FCGFH) for their fiscal years ended September 30^th, 2022. RFHL reported earnings growth driven by an improvement in Operating Income. FCGFH, meanwhile, reported lower Operating Income which was offset by a reversal of Credit Impairment Losses. What might investors expect in the months ahead? We discuss below.

Republic Financial Holdings Limited (RFHL)

RFHL reported a Diluted Earnings Per Share (EPS) of $9.33 for the fiscal year ended September 30^th 2022 (FY 2022), up 16.3% relative to the $8.02 reported in the prior comparable period.

Net Interest Income increased 4.2% to $4.14B from $3.97B in FY 2021. Other Income rose 7.3% to $1.97B in FY 2022, relative to $1.83B in FY 2021. Operating Income improved by 5.2% to $6.1B. Operating Expenses increased 1.2% from $3.5B in FY 2021 to $3.6B in FY 2022. Operating Profit for the period stood at $2.6B compared to $2.3B in FY 2021, up 11.5%. Credit Loss Expense contracted by 36.7% in the current period. Profit Before Taxation (PBT) stood at $2.3B in FY 2022, 20.1% higher than $1.9B in the prior comparable period. Taxation Expense increased 30.2%, with the effective taxation rate moving from 25.7% in FY 2021 to 27.9% in FY 2022. Overall, Profit Attributable to Equity Holders of the Parent rose by $217.8M or 16.7%.

Revenues Higher

RFHL’s Operating Income continued its upward momentum with a 5.2% increase in FY 2022. Net Interest Income (67.8% of Operating Income) advanced 4.2% from $3.97B to $4.14B, reflecting increasing demand for loans by consumers and supported by a 1.1% ($976.6M) increase in customer deposits. The Group also benefitted from higher interest rates on US denominated investments. Other Income (32.2% of Operating Income) rose 7.3%, helped by a 12.6% increase in Fees and Commission Income as transaction volumes continue to normalize.

PBT Expands

RFHL recorded an expansion in its operations with PBT advancing 20.1% to $2.3B in the period under review. PBT from Trinidad and Tobago, RFHL’s primary operating jurisdiction (46.7% of PBT) advanced 9.2% year-on-year to $1.1B from a previous $999.6M. The Eastern Caribbean, which represents the second largest contributor to PBT (11.9%) increased 64.3% to $277.9M, propelled by growth in its corporate, commercial and mortgage portfolios.

Suriname expanded 93.1% YoY, with PBT moving from $33.0M to $63.7M in the current period. Guyana recorded an increased PBT from $197.4M to $220.8M for the period, up 11.9%. British Virgin Islands (BVI) expanded 98.0% YoY to $79.0M.

Despite growth in these territories, PBT from Ghana declined 8.8% from $152.2M to $138.8M due to increased credit losses on financial assets.

RFHL to merge Cayman Operations

On August 29^th, 2022 the Group announced that its Board of Directors approved the merger of 2 of its subsidiaries, Republic Bank (Cayman) Limited (RBKY) and Cayman National Bank (CNB), subject to regulatory approval. Upon the effective date of the merger, CNB will be the surviving entity and RBKY will no longer be a subsidiary within the Republic Group of Companies. 

Could CIF termination affect RHFL share price?

As the Clico Investment Fund approaches termination, unitholders may begin to assess whether the ‘freeing up’ of RFHL shares will have any material effect on its share price. The CIF currently trades at a price of $27.86, representing an 8.4% discount to its Net Asset Value (NAV) of $30.42. Investors purchasing the CIF and current unitholders will be acquiring the financial assets of the CIF (RFHL shares & govt bonds) below their current worth. With the transfer of shares and bonds scheduled to commence during January 2023, direct ownership of RFHL shares will be moving into the hands of former CIF unitholders. This could potentially cause increased price volatility in the stock, as investors seek to lock in gains from indirectly buying RFHL at a discount to its NAV.   

The Bourse View

At a current price of $135.69 RFHL trades at a trailing P/E of 14.5 times, above the Banking Sector average of 13.6 times. The stock offers investors a trailing dividend yield of 3.3%, above the sector average of 3.2%. RFHL has remained resilient despite inflationary pressures and a ‘weaker’ consumer, growing its total assets and loan portfolio by 1.7% and 2.4% respectively. Moreover, widespread economic recovery across its operating jurisdictions should bode well for the Group’s fortunes going forward. On the basis of geographical diversification of operations, improved earnings and fair valuations, Bourse maintains a MARKETWEIGHT rating on RFHL.

First Citizens Group Financial Holdings Limited (FCGFH)

First Citizens Group Financial Holdings Limited (FCGFH) reported an Earnings Per Share of $2.91 for the financial year ended September 30^th 2022 (FY 2022), up 10.2% relative to $2.64 reported in the prior comparable period.

Net Interest Income stood at $1.49B, 0.6% lower than $1.50B reported in the prior year. Fees and Commissions increased 7.1% to $461.8M and Other Income rose 14.7% to $142.1M. Overall, Total Net Revenue was 0.1% ($2.9M) lower, standing at $2.14B. The Group reported a Credit Impairment Writeback of $17.3M in FY 2022, relative to a Credit Impairment Loss in the prior period of $0.4M. Administrative Expenses decreased 3.7% while Other Operating Expenses increased 4.9%. Share of Profit in Associates and Joint Ventures advanced 28.0% to $26.7M in the current period. Profit Before Taxation (PBT) climbed 2.3% to $922.2M from a previous $902.1M. Taxation Expense fell 19.4% to $189.2M, with the taxation rate moving from 26.0% to 20.5%. Overall, Profit After Taxation increased 9.9% from $667.3M in the prior period to $733.5M.

Segment Performance Mixed

FCGFH grew Profit Before Tax (PBT) by 2.3% YoY. Underpinning this performance was a 31.9% increase in its Retail Banking segment, accounting for 21.1% of PBT before eliminations. Retail Banking moved from $235M in FY 2021 to $309M in FY 2022, supported by a 4.4% increase in loans to customers and a reversal in credit impairment losses. Corporate Banking, the largest contributor to PBT (39.6% before eliminations) fell 8.9% to $581M. Treasury and Investment Banking advanced 20.1% while Trustee & Asset Management declined 6.6%.

Credit Impairment Writeback on Loans

FCGFH Loans to Customers increased 4.4% over the period from $18.1B to $18.9B in FY 2022, indicating an increase in demand for loans. The Group recorded a reversal in its Credit Impairment Losses in the amount of $17.3M, signalling an improvement of their loan portfolio’s estimated credit quality.

The stabilization of economic activity both locally and regionally could lead to an improvement in general credit quality conditions and by extension, the credit quality of the Group’s loan portfolio. Increasing economic activity could, however, be partially offset by higher living costs and any adverse impacts on borrowers’ loan servicing capacity.

The Bourse View

FCGFH is currently priced at $50.05 and trades at a P/E ratio of 18.1 times, above the Banking Sector average of 13.6 times. The Group declared a final dividend of $0.46 per share to be paid on December 29^th, 2022 to shareholders on record by December 14^th, 2022. The stock offers a dividend yield of 3.2%, in line with the sector average. The Group’s reversal of Credit Losses could signal a strengthening of its loan portfolio, which may provide a platform for positive earnings momentum in subsequent periods. Notwithstanding this, investors may place increased attention to the management of Impairment Losses and its related effects on earnings going forward. On the basis of improving performance, elevated valuations and lingering financial market uncertainty, Bourse maintains a MARKETWEIGHT rating on FCGFH.

 

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