Overview of Banking, Pension and Asset Management Sectors

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- Performance Metrics Analysis – Commercial Banks

The adjacent charts indicate that the profitability of the two largest players has been declining over the past 5 years. Whereas BNS and NCB enjoyed return on equity (ROE) ratios of 26% and 28% respectively in 2009, these ratios have declined significantly to 17% and 12% respectively for the financial year 2013. A major contributing factor to declining ROEs is the three technical defaults by the Government of Jamaica (GOJ) on its domestic debt instruments, in the space of two years.

Figure 1 ROE of the Top Commercial Banks in Jamaica, 2009-2013

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(Source: BNS and NCB Annual Reports)

There has also been a decrease in the net interest margin, which is calculated as net interest expense as a percentage of average interest-earning assets for the year. This decline indicates that there has been a reduction in the spread between the borrowing and lending interest rates over time. This decline also adversely impacts profitability.

Figure 2 NIM of Top Commercial Banks

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(Source: NCB and BNS Annual Reports)

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- Credit Quality and Capital Adequacy

Following a peak of 8.8% for NPL to gross loans in FY 2011, the commercial banking industry has seen a year-on-year decline in this ratio for the financial years 2012 and 2013. The decline is attributable to a decrease in the value of NPLs as well as an overall year-on-year increase in the stock of loans advanced. At the end of 2013, loans advanced amounted to $362.1 billion (2012: $307.5 billion) and NPLs amounted to $18.6 billion (2012: $20.9 billion).

Figure 3 NPL to Gross Loans for Commercial Banks

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(Source: Bank of Jamaica)

The Bank of Jamaica requires commercial banks to maintain a risk-weighted capital adequacy ratio of 10%, however, because NCB’s status as a systematically important financial institution (SIFI), it must maintain a ratio of 12.5%. As can be seen in the adjacent chart, both of the major banking institutions have over the years, maintained a sufficient capital base to meet the required ratios. However, it should be noted that during the past 3 years, these ratios have moved in a direction towards the minimum requirements.

Figure 4 Capital Adequacies of the Top Commercial Banks

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(Source: BNS and NCB Annual Reports)

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Overview of Securities Industry

The Jamaican securities industry contains several individuals and institutions operating as: Dealers (companies and individuals), Investment Advisors, Mutual Funds and Unit Trust Fund Managers/ Schemes

As at June 30, 2014, there were 46 dealer companies and 1 investment advisor company, registered as securities firms with the FSC. The FSC describes securities firms as companies that are engaged in securities dealings as a principal activity. There are also non-securities firms that do not deal in securities as a principal activity, but must obtain a securities dealer’s license to conduct certain activities related to their business.

The adjacent table identifies the types of firms that are registered as securities firms and the segment of the industry in which they operate.

Table 4 Registered Company Dealers, Source: The FSC

Institution Type

2010

2011

2012

2014

Securities Firms

32

32

32

32

Of which:

Core Securities Dealers

29

29

29

29

Unit Trust Management

3

3

3

3

Non-Securities Firms

15

14

15

11

Total

47

46

47

43

- Key Players in the Securities Industry

Like the banking sector, this sector is dominated by a few key players despite the large number of licensed companies and the approximate J$924.0 billion of funds under management in the entire financial industry. Of the 46 dealer firms, 3 control 50% of total FUM in the financial industry and 66% of the FUM of the securities dealers industry. Despite there being no competitor with over 50% of the market, the difference between the market leader and the second largest firm (by FUM) is approximately J$83.0 billion.

Table 5 Select Ratio of Key securities players, Source: The FSC

Company

Year End

FUM ($B)

Share of Dealer Market

Share of Total FUM

JMMB