LAST week, NCB Group reported a year-end net profit of $11 billion or earnings per share of $4.50, a remarkable performance given the operating environment.

There was further good news for shareholders with the announcement that NCB declared a dividend of 45 cents per share, translating to a payout of $1.1 billion to shareholders on record on December 1, 2010.

The real star performer was the Denis Cohen-led wealth management division NCB Capital Markets turning in a net profit of $2.5 billion — that’s better than Jamaica National Group, PanCaribbean Financial Services, Capital&Credit Group and Sagicor Life Jamaica — not bad for a subsidiary of the NCB Group.

This profit figure of $2.5 billion compares to the prior year’s $1.71 billion, a 45 per cent increase year on year. For the year under review, NCB Capital Markets had a capital base of $10.8 billion at the end of September, representing 13 per cent of total assets. From a regulatory aspect, the minimum requirement for a securities dealer is six per cent in terms of total capital to total assets, and here NCB Capital Markets is at 13 per cent. In terms of its risk-rated assets, its total capital to risk-rated assets ratio stands at 98 per cent as compared to a regulatory minimum of 10 per cent.

NCB Capital Markets’ net interest income came to $3.3 billion, an increase of 50 per cent year over year. Total income was $4.4 billion for the period under review. Cost income ratio was somewhere in the region of 19 per cent with a return on equity of 25 per cent.

All in all, it was a stellar performance by a management team not given to verbosity or histrionics. Dennis Cohen favours a more understated approach and lets the numbers speak for themselves.

Speaking with Caribbean Business Report from the NCB Atrium in Kingston on Wednesday, NCB Group deputy managing director, Dennis Cohen said: “This performance has happened in spite of the challenges that have taken place in the year 2010, in particular the implementation of the Jamaica Debt Exchange (JDX) and the numerous economic and financial challenges both the world and Jamaica has been facing. Put in that context, we are fairly happy with what is more than a commendable performance.”

There were concerns surrounding the level of government paper held by NCB and the impact that the JDX would have on that. It must be said that in this regard the Michael Lee Chin-led institution has been proactive in managing those challenges with NCB capital Markets being better poised post-JDX than it was prior the JDX.

NCB Capital Markets is no longer listed on the Jamaica Stock Exchange and this has seen them taking on a somewhat more subdued persona. So what strategies did NCB Capital Markets employ given the challenges facing it?

Cohen says that it became more internally focused. The JDX meant a repricing of the balance sheet requiring it to respond in a major way. Here it went about redevising its interest rates strategies with the emphasis on repricing its liabilities and doing it in the context of how the market was going to respond.

“The JDX began in February but it was clear that signals were being sent to investors and here the NCB Group, I think, was quite proactive in responding to the signals. By the time it was implemented we had already restructured our balance sheet and were revising our tactical policies.

“We also undertook a reorganisation of the institution, which saw us centralising certain functions and creating synergies across the Group. A few years ago, the subsidiaries were ran a lot more independently and there were benefits in doing so. We recognised that given the new scenario post-JDX, the independent running of our separate business lines would not necessarily be an effective way to deal with this new paradigm. The fact is managing liquidity across the Group at a time when liquidity in the market was going to be suspect, meant that it would be better to look at Group liquidity by managing interest rates a little bit more centrally, than we did before,” explained Cohen.

Earlier this year, NCB underwent a staff rationalisation exercise in an effort to stem rising operating costs. This saw it handing out grants to displaced workers who had entrepreneurial plans. Cohen points out that post-JDX and after the staff cuts, morale has remained high and the staff has performed well, stepping up to the challenge and raising its game. This has been a major contributing factor to the Group’s current performance. Here Cohen singles out the sales team led by Vernon James and the investment arm headed by Steven Gooden.

NCB Capital Markets’ vice president of Investments and Trading found himself in the unenviable position of having to do more with less. It wasn’t so long ago that the NCB Capital Markets had to contend with a $1.23-billion write-down and a substantial fall-off in profits due to the exposure of its foreign portfolio to Lehman Brothers which met its ends in September 2008. So how did Gooden manage to turn around NCB Capital Markets’ investments arm?

“We had to ensure that we had ample levels of liquidity to pull the trigger on certain opportunities. It was primarily about strategising. We had an investment and risk management framework in place that allowed us to be nimble and flexible. We managed our liabilities properly and in anticipation of the declining interest rate environment, we didn’t want to lock in expensive funding. On the asset side, we went a little further out on the curve when we saw that the economy’s fundamentals were improving. That translated to wider spreads in a declining interest rate environment. On the trading side, where fixed income is concerned, our activity doubled compared with the prior year. “

Vice-president, sales and client services at NCB Capital Markets, Vernon James made the point that from a liability cost standpoint, the institution did well in managing its costs.

“We levelled with our clients and allowed them to understand the new environment so that they could manage their expectations in terms of interest rates, and that has done well for us this year. We also saw a strong performance from our retail sales team. We leveraged our branch network, and having the widest distribution of all the dealers augured well for us. We placed greater emphasis on the corporate side of our business and leveraged relationships within the Group to grow our business.

“We took the decision to better manage our cost of funds and that initiative assisted in wider spreads and the increased profits that you see,” said James.

The recent slew of corporate results reflects a contracting economy and paints a picture of companies finding the going tough. So how was NCB Capital Markets able to buck the trend?

Again Cohen says this was due to preparation and balance sheet management. He stresses that while NCB Capital Markets was expanding its operations, others were contracting theirs. The decisions were made early thus allowing us to benefit down the road.

“In going through the post-JDX exercise, while we were trying to manage the risks facing us, there was also a strong emphasis on the opportunities that were presented to us which also allowed the NCB Group to become a lot more unified,” said the CEO of NCB Capital Markets.

Having weathered the global financial crisis and seen interest rates and inflation trending downwards, what is the plan for the next fiscal year? Cohen believes with interest rates being lowered, there will now be a number of opportunities opening up. He has already seen an uptick in NCB Capital Markets’ Corporate Solutions with companies looking to refinance their operations. This allows NCB Capital Markets to not only participate in fund-raising for the customer but to diversify its own portfolio while at the same time providing greater variety for its customers to invest in. “In other words, we can put a client into government paper and corporate paper at the same time. These are the sorts of opportunities we can provide at the same time as meeting our clients every financial needs.

Forthcoming attractions

There are plans afoot to launch a unit trust sometime next year. But while NCB Capital Markets prospers, the local equities market continues to be limpid, character by low volume sales and equally low liquidity. Vernon James declared that a number of companies have made enquires with a view to get NCB Capital Markets to list their businesses on the Jamaica Stock Exchange and is expecting to list a major local company in 2011.

The Junior Stock Exchange has seen a number of listings over the last 12 months, more noteably, Access Financial, Blue Power, Jamaican Teas, and Lasco. Most of those listings were executed by Mayberry Investments who appear to have the corner on the market.

“Some small companies come to us in order to get them listed on the junior exchange because they are clients of NCB. We are currently looking at a few of those but certainly whatever company we bring to the market must be a company we believe worth buying and must offer a good value proposition. That is why we are very selective as to who we bring to the market. As far as we are concerned, those companies have to meet certain performance targets. We have very high standards,” said James.