Profitability of Jamaica-based banks resilient despite 2020 lockdowns

Financial companies featured heavily among the listed companies reporting earnings recently with most continuing to see their earnings deteriorate from the impact of the COVID-19 pandemic.

Victoria Mutual Investments is down 27.5 per cent; Sagicor Group Jamaica is registering a decline of 11.9 per cent and Scotia Group Jamaica is down 1.9 per cent . All are registering weaker revenues.

The weak revenues came in light of lower transaction volumes and higher expenses related to increased spending on technology to support business continuity among other things.

At Victoria Mutual Investments, the financials were impacted by increases in the provision for impairment losses on financial assets (up $215.36 million) and higher operating expenses (up 40.8 per cent). This reflects the company’s investments in human resources and information technology.

These process improvements came behind the weaker earnings. Notwithstanding, the company’s revenue grew by 11.4 per cent, spurred by gains from investment activities.

Scotia’s net profit declined only marginally, signaling the bank’s resilience and the possibility that the impact of the pandemic on earnings was beginning to taper off.

Decline in interest income contributes to earnings reduction

Contributing to the reduction was a 7.2 per cent (or $3.31 billion) decline in interest income due to ongoing reductions in market interest rates. Net fees and commissions (16.8 per cent) were also down as transaction volumes fell in line with weaker economic activity.

Operating expenses also rose (9.2 per cent), driven primarily by non-salary related restructuring measures and other technological expenses. Revenues at Sagicor Group also fell 8.7 per cent, reflecting lower fees and other income, impacted primarily by slowing consumer activity and the decline in corporate financing deals.

In addition, travel-related revenue continued to decline given the significant falloff in tourism, which caused a decline in the valuation of the group’s holdings in this segment. Consequently, the Group reported a 54.0 per cent (or $2.85 billion) reduction in hotel revenue.

Despite the decline in year-on-year net profit results, profitability of Jamaica-based banks was resilient despite the lockdowns in 2020 and estimates a return of return on equity to double digits in the next few years. This was well above those of regional peers, according to international ratings agency Standard & Poor’s (S&P)

In its March 2021 report on the Banking Industry Country Risk Assessment on Jamaica, S&P notes that the banking system’s main funding source, customer deposit, remains large and stable. The stocks of VMIL, Scotia, and Sagicor have all declined year-to-date by 14.32 per cent, 0.31 per cent, and 4.02 per cent, respectively.