Scotia Investments pledges growth after five years of lower returns

Scotia Investments Jamaica Limited (SIJL) aims to reverse its current trajectory after five years of declining returns.

Within two to three years, CEO Lissant Mitchell is looking to deliver on three goals: a return to a positive trajectory of return on equity and earnings-per-share growth; a positive operating leverage; and to maintain strong capital ratios for the on-balance sheet business.

He made the disclosure in his note to shareholders in the annual report published for distribution ahead of the company's March 4 annual general meeting.

Return on average equity - the ratio of net profit to average shareholder equity - dropped from 20 per cent in 2011 to 18 per cent in 2012, 17 per cent in 2013, dipped to 14 per cent in 2014 and then to 7.0 per cent in 2015, according to SIJL data in the annual report.

Despite the fall in ROE, total shareholders equity rose to $14.2 billion in 2015 or $370 million more than prior year. "This represented a 2.65 per cent increase influenced primarily by retained earnings," the report explained.

Mitchell's philosophy remains steadfast - increase revenues from fees and rely less on interest income.

It means more product innovation, such as the US Dollar Indexed Fund launched by Mitchell and his team over a week ago.

"Looking ahead for fiscal year 2016, we will continue to build on the strong foundation of our off-balance sheet business strategy that is now unfolding across the industry with the move to a trust-based framework for repurchase agreements," the CEO stated in the report's management discussion and analysis.

"As we go through this new transition period, we will pivot even more towards a greater diversification of revenues from non-interest income generating business lines."

In 2015, the company earned $1.7 billion from net interest income (NII) and $1.5 billion from non-interest income which includes fees, and made $1.02 billion net profit. That compares to NII of $2.3 billion and non-interest income of $1.9 billion in 2014, from which the company made net profit of $1.85 billion.

"Let me digress to reflect on what I wish to refer to as a transition period for your company, which began last financial year. As your company accelerates its transition from a balance sheet business model to focus more on being a market leading asset management and brokerage firm, there is recognition that some key financial metrics will be impacted relative to historical trends," said Mitchell.

"Going forward your company will start evaluating itself against a series of medium-term objectives, as it focuses on enhancing longer term sustainable shareholder value."

The company made higher year over year net profit in one of the five years under review - $2.01 billion in 2012 compared with $1.98 billion in 2011. Comparatively its shareholder equity steadily climbed every year under review from $10.3 billion to the current $14.2 billion.

Scotia Investments maintains a strong capital base to support the risks associated with its diversified businesses. This base it stated contributes to safety for its customers, and fosters investor confidence, while allowing the company to take advantage of growth opportunities that may arise.

The total assets of the company stand at $68.8 billion or five per cent lower than the $72.3 billion reported in 2014. The company says the shrinkage was not unexpected.

"The decline is in line with our thrust to reduce the balance sheet and focus on our asset management business," said Scotia Investments. Its return on average assets however remained flat from 2011 to 2013 at three per cent while dipping to two per cent in 2014 and 2015.

At Scotia Investments' October 2015 year end, the capital adequacy ratio was 47.03 per cent - 50.58 per cent in 2014 -- well in excess of the regulatory requirement of 10 per cent.business@gleanerjm.com