Friday, 18 November 2022 13:06

Trouble! More financial companies skipping dividends amid capital erosion

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AMIDST the sharp decline in asset prices and erosion of the capital base of financial companies, different listed companies have decided to forego dividend payments to shareholders as they bolster their capital base owing to continued volatility in the financial markets.

NCB Financial Group Limited (NCBFG) did not pay a dividend for almost a year after the novel coronavirus pandemic resulted in the Bank of Jamaica (BOJ) requiring regulated entities including financial holding companies to not pay dividends to shareholders who owned more than one per cent of the entity. NCBFG paid a $0.50 dividend totalling $1.23 billion in May 2021 after the BOJ advised of the restriction.

However, that was the last time shareholders of Jamaica's largest publicly listed company would see any dividends as the financial conglomerate has decided to retain capital within the group due to the continued market-to-market losses on its assets measured by fair value through other comprehensive income (FVOCI). NCBFG's consolidated net profit hit a historic $39.92 billion for its 2022 financial year, but $52.25 billion in FVOCI losses on investment securities saw NCBFG's other comprehensive go to a loss of $7.64 billion.

"I think our focus has been on bolstering our capital base because as I mentioned earlier, we still anticipate strong headwinds in the year ahead of us. While the concept of specie would allow us to pay a benefit without the cash flow going out, the fact is that it still results in a depletion of the capital base which is against our core objectives and decisions we've been making over the past few quarters which is centred around bolstering the capital base in light of the challenges we foresee," said NCBFG Deputy Chief Executive Officer Dennis Cohen at their recently held investor briefing.

Cohen also cited the geopolitical situation with Russia and Ukraine along with the implementation of IFRS (International Financial Reporting Standards) 17 and Basel III in the upcoming new year as reasons behind the prudent decision to not pay a dividend.

NCBFG's consolidated asset base rose eight per cent to $2.08 trillion, but its equity/capital base shrunk seven per cent to $198 billion as its fair value reserve reflected the continued decline in bond prices. In the third quarter, NCBFG's shareholder report stated, "All our regulated entities continue to meet the applicable capital and liquidity regulatory requirements." In the fourth quarter report, that line was absent with only mention of rising local and global interest rates impact on asset prices. NCBFG holds the majority interest in Clarien Group Limited, Guardian Holdings Limited and National Commercial Bank Jamaica Limited.

The boards of JMMB Group Limited (JMMBGL) and Proven Group Limited decided not to declare dividends at their recent meetings based on prudent liquidity management and challenging market conditions. This is the first time JMMBGL has skipped a dividend declaration since May 2020 while this is the second dividend skipped by Proven after its June meeting. The decisions by these firms to withhold dividend payments will strengthen the capital base, but significantly impact dividend investors such as pension funds, unit trusts and even listed funds such as Sagicor Select Funds – Financial. Proven owns 20.01 per cent of JMMBGL.

JMMB Bank (Jamaica) Limited's regulatory capital to risk weighted asset ratio has declined from 13.36 per cent in March to 12.05 per cent as of September. Jamaica Money Market Brokers Limited (JMMB) also saw its regulatory capital ratio decline over the same time period from 16.61 per cent to 15.36 per cent. As a result, JMMB Group injected capital into subsidiaries in October to bolster the capital base of the subsidiaries. JMMB Group injected $2.5 billion and $2.7 billion into JMMB Bank (Jamaica) and JMMB during its 2022 financial year.

"We also took some capital actions for JMMB. We also did take some action in October to bolster the capital of JMMB. So, we expect to see the capital ratios improve for JMMB as a result of these actions and those will be reflected in the next cycle of numbers. Overall, we are keeping a close eye on capital and we're taking action to ensure that we manage through these volatile times," said JMMB Group Chief Risk Officer Dereck Rajack at its investor briefing held on Tuesday.

JMMBGL has recorded $11.31 billion in fair value losses on debt instruments over the six months which has dragged its other comprehensive line to a loss of $8.17 billion. JMMBGL's consolidated net profit had declined by 34 per cent up to September.

The continued capital erosion has been evident across numerous listed companies on the Jamaica Stock Exchange (JSE) primarily involved in the financial sector. Some companies such as Victoria Mutual Investments Limited (VMIL) have injected $600 million into its subsidiary VM Wealth Management Limited to improve its capital base as de-risking is done on its balance sheet. VMIL has even suspended dividend payments as it charts the heightened market volatility. JN Fund Managers Limited also received a capital injection of $1 billion from its parent JN Financial Group Limited on June 20.

Some of Sagicor Group Jamaica Limited's subsidiaries have experienced a sharp reduction in their capital which has led to a reduction in their applicable regulatory capital ratios. Sagicor Investments Jamaica Limited (SIJL) has seen its capital base shrink from 17.7 per cent at the start of the year to 12.50 per cent at the end of September. This is below the Financial Services Commission (FSC) benchmark or early warning level of 14 per cent and just above the minimum regulatory requirement of 10 per cent.

"SIJL is managing its balance sheet appropriately and prudently in the face of volatile fixed income markets in a high interest rate environment, and we are deploying a number of strategies aimed at ensuring that the balance sheet remains robust and liquid. SIJL's liquidity is very strong, and its regulatory capital is above the regulatory requirement," said Sagicor Group Jamaica Chief Executive Officer Christopher Zacca.

This comes against the backdrop of earnings for its investment banking segment dropping 42 per cent to $1.18 billion due to reduced business transactions from the prevailing macroeconomic conditions. The segment's asset base has declined five per cent from $121.67 billion to $115.50 billion.

Barita Investment Limited's regulatory capital to risk weighted assets has also shrunk from 52 per cent in September 2021 to 37.2 per cent in September 2022 as per its unaudited financial statements. While this reduction in capital might appear significant, Barita's leverage ratio is 3.4 times compared to the industry average of 6.4 times in June. The industry average for regulatory capital as per the FSC's June report was 24.6 per cent. Barita's capital base was strengthened over three financial years by $34.5 billion in permanent capital which has allowed it to grow its asset base to $109.80 billion despite its equity base shrinking by 11 per cent to $32.34 billion from $3.53 billion in fair value losses.

Mayberry Investments Jamaica Limited's regulatory capital has marginally declined from 23.39 per cent to 20.8 per cent as of September. Scotia Investments Jamaica Limited has seen its regulatory capital strengthen from 43.63 per cent in October 2021 to 47.24 per cent as of July.

The JSE's regulatory reports showed that a broker/member-dealer was in breach from March to July of its excess net free capital requirement. Three brokers have also slipped from the $300 million to $899 million range to the zero to $299 million range as market volatility has continued to impact the capital base of the brokers. There are 15 member-dealers associated with the JSE.