Jamaica’s banking industry continues to exhibit dwindling profitability, as the sector reels from the impact of the coronavirus pandemic.
The latest bank to manifest this is the Scotia banking group, which recorded a dip in profits for the January quarter while managing to grow its net income marginally. Net profit was down to $1.75 billion compared with the $1.78 billion posted in 2020.
The bank has emphasised that this profitability out-turn is marginally lower than the prior year quarter, which was before the onset of the pandemic.
Scotia Group Jamaica’s new president and chief executive officer (CEO), Audrey Tugwell Henry, states that this out-turn demonstrates the resilience of the business which continues to see strong, consistent growth in our mortgage portfolio which increased year over year by 14 per cent.
She notes that the commercial banking unit delivered strong results in the first quarter of the year with growth of 13 per cent versus the comparative period last year. Net income of $1.75 billion was marginally lower than the corresponding period by $33 million or 1.9 per cent.
CONTINUED CUSTOMER CONFIDENCE
Core deposits increased by 8.5 per cent year over year, which the Scotia Group boss declared is an indication of continued customer confidence. The asset and liquidity positions remain strong and are well supported by rigorous risk management framework and policies.
Total revenues excluding expected credit losses for the three months ended January 31, 2021 was $11.2 billion, representing an increase of $163 million or 1.5 per cent over the comparative period in 2020. Total revenues continue to be heavily impacted by the pandemic, as evidenced by the ongoing reduction in interest rates offered in the market, leading to a reduction in net interest income coupled with the decline in transaction volumes.
The decline in transaction volumes results from lower net fee and commissions as well as insurance revenues. Net interest income after expected credit losses for the quarter was $5.4 billion, up $93 million or 1.8 per cent when compared to 2020 and was primarily attributable to the reduction in expected credit losses of $465 million, partially offset by reduced yields from the current macro-economic environment.
Other income, defined as all income other than interest income increased by $535 million or 10.9 per cent.
• Net fee and commission income amounted to $1.7 billion and showed a reduction of $339 million or 16.8 per cent. The year over year decline was primarily attributable to lower transaction volumes stemming from the pandemic in conjunction with the continued execution of the group’s digital adoption strategy geared towards educating customers about our various electronic channels, which attract lower fees.
• Insurance revenues decreased by $423 million or 40 per cent to $634 million due to the reduction in premium income stemming from the pandemic as well as lower actuarial reserve releases.
• Despite lower trading volumes as a consequence of the pandemic, net gains on foreign currency activities and financial assets amounted to $2.2 billion, representing an increase of $333 million or 18.3 per cent above prior year given higher revaluation gains.
• Other revenue increased by $963 million (over 100 per cent) when compared to prior year and was attributable to gains realised on the extinguishment of debt facilities.
The banking group recorded an improvement in credit quality with manifested itself through a reduction in expected credit losses for the year of $465 million when compared to 2020. The higher credit losses reflected in prior year was mainly driven by additional provisions recorded on account of the revised assumptions incorporated in the group’s impairment methodology given the pandemic.
The group’s credit quality remains strong and we are well provisioned with accumulated credit losses (ACLs) for both our performing and non-performing loans, ensuring adequate coverage for possible future net write offs. The quality of Scotia’s loan portfolio remains strong and continues to be more favourable than the industry average.
Non-accrual loans (NALs) as at January 31, 2021 totaled $5.7 billion compared to $4.3 billion last year. NALs represent 2.6 per cent of gross loans, up from two per cent last year and represent 1.1 per centof total assets.
The group’s aggregate expected credit losses for loans as at January 31, 2021 was $6.7 billion, representing 117 per cent coverage of total non-performing loans.
OPERATING EXPENSES AND PRODUCTIVITY
Operating expenses amounted to $7.8 billion for the period and reflected an increase of $656 million or 9.2 per cent. This was primarily attributable to an increase in other operating expenses of $804 million, which was partially offset by the reduction in salaries and staff benefit costs of $196 million.
The increase noted in other operating expenses was due to provisions for non-salary related restructuring and other technology expenses. Excluding restructuring and other one-off expenses, operating expenses would be flat compared to Q1/2020
Tugwell Henry emphasised that, “the COVID-19 pandemic and the subsequent global and local containment measures continue to negatively impact our local macroeconomic landscape. Notwithstanding this challenging environment, Scotia Group continues to deliver solid results to shareholders. “
She pointed out that this performance was recognised by acclaimed international publication The Banker, which named Scotiabank as the Bank of the Year in Jamaica for 2020.