NCB’s profit dives
NCB Financial Group Limited (NCBFG) saw its first-quarter net profit attributable to shareholders slide by 68 per cent, from $2.64 billion to $835.79 million, as the banking and insurance conglomerate gears up for stronger headwinds in 2023.
The significant reduction in profitability was attributed to a one-off $3.5-billion actuarial adjustment and additional reserve movements in its subsidiary, Guardian Holdings Limited. NCB Financial Group has a 61.77 per cent stake in the Trinidad-based insurer.
Actuarial adjustments occur when, at the end of a financial year, insurance companies make changes to the estimates they made at the beginning due to certain events occuring such as an increase or decrease in claims or other factors. Insurers make this adjustment ahead of their end-of-year financial audit. GHL’s financial year ends on December 31 compared to its parent NCBFG which is September 30.
“At this time of the year we do deep analysis on our actuarial reserves so this one-off adjustment really pertains to analysis of accumulated pending policies. We don’t expect it to recur in the future quarters and, of course, it was being prudent,” said GHL Chief Executive Officer Ian Chinapoo at NCBFG’s virtual annual general meeting on Friday.
Actuarial reserves relate to future insurance liabilities that a company might be required to pay in the event of a claim. The ‘strengthening’ of these reserves is recorded as an expense on the income statement and an increased reserve for future liabilities while a ‘release’ is recorded as a gain for the company and a reduction in the reserve for future liabilities. As a result, the net results from insurance activities recorded a 71 per cent drop to $2.66 billion compared to the net banking and investment activities which increased nine per cent to $26.99 billion. However, operating profit for the general insurance segment experienced a 151 per cent rise to $2.48 billion compared to the other segments which all recorded year-over-year declines.
Despite the decline in profitability NCBFG’s asset base rose four per cent to $2.11 trillion with its equity attributable to shareholders improving from $163.88 billion to $172.22 billion, which was influenced by a reclassification of specific investment securities to hold to collect.
NCBFG chose not to pay a dividend for the seventh-consecutive quarter, with the last dividend payment of $0.50 being paid in May 2021. Instead of paying out a dividend to shareholders the financial conglomerate decided to transfer $8.1 billion from the monies it has on its books as retained earnings to the retained earnings reserves, pushing that total to $75.27 billion. This reserve forms part of the capital base and regulatory capital for Jamaica’s largest commercial bank.
As a regulated entity by the Bank of Jamaica (BOJ), its Jamaican banking subsidiary is required to hold certain levels of capital on its books to account for potential shocks or unforeseen events. The expected implementation of new capital requirements will require more capital to be held on its books, which means that banks might lend less or charge more interest since there would be less money to be lent.
“If you take a look at our financials over the past couple years you’d have noticed that there’s significant adjustments to our capital because of the impact the interest rates has had on bond prices. Those adjustments in capital, in addition to regulatory changes that are anticipated by Basel III and IFRS [International Financial Reporting Standards] 17 on capital requirements, are still uncertainties. The board has considered it prudent to not pay dividends until we get a grasp as to what the capital requirements are with those uncertainties,” said NCBFG Deputy CEO Dennis Cohen in response to numerous queries about the lack of dividend payments.
Basel III is an internationally agreed set of measures developed by the Basel Committee on Banking Supervision of the Bank for International Settlements. It outlines the designation for tier 1 and tier 2 capital, which forms the basis for capital adequacy and regulatory capital. IFRS 17 will replace IFRS 4, which currently permits a wide range of accounting practices for insurance contracts.
National Commercial Bank Jamaica Limited Chief Financial Officer Malcolm Sadler also explained that the implementation of Basel III will have a significant impact on the local banking system due to the Pillar 1 weighting in relation to minimum capital requirements. Sadler added that there is a working group with the Jamaica Banking Association and dialogue with the Bank of Jamaica on the implementation of the standard which will impact the industry. NCBFG’s subsidiary Clarien Group has already implemented Basel III.