High interest rate environment taking its toll

Durrant Pate/ Contributor

The Jamaican and Dominican Republic operations of JMMB Group is hurting from the high interest rate environment, particularly in these two jurisdictions.

This is evident from the sharp decline in profitability for the combined three quarters ended December 31, 2022, where net profit shank from J$8.82 billion in 2021 to of J$4.76 billion for the period under review. Central banks across the world, as a part of their inflation-targeting regime, continued to increase interest rates and reduce market liquidity with JMMB feeling the pain from this move.

According to JMMB, “as experienced across the industry, the high interest rate operating environment continues to impact the performance of the group’s investments business line in Jamaica and Dominican Republic. While the investments business line has been adversely impacted by the macroeconomic environment, the banking business line was the largest revenue contributor, accounting for 52% of net operating revenue, up from 37% in the prior period.”

In terms of geographic contribution, JMMB’s regional diversification strategy continues to yield benefits as Trinidad contributed 23% to operating revenue, up from 15% in the prior period.

Positive forecast for 2023

In its latest quarterly report to shareholders, JMMB notes with much optimism that “the Central Banks in Jamaica and the Dominican Republic have paused their rate hikes, while the US Federal Reserve Bank has continued to signal further rate hikes at, however, a slower pace. Importantly, the Central Bank of Trinidad and Tobago has not increased interest rates throughout the high global inflation period.”

As such, JMMB is expecting to “see improved market conditions over time which could see a gradual easing of monetary policy and thus looks forward to eventual normalized levels of performance especially in its Investments Business Line in the medium term. In the quarter ahead, the group will continue to focus on ‘smart growth’ through diversification of earning streams, expansion into new geographies and new business lines, while improving efficiency to drive growth and profitability.”

The group’s outlook indicates a marginal improvement in the forecast around economic growth in Latin America and the Caribbean as well as globally in 2023. This is coupled with expectations around falling inflation, likely signal that markets will trend towards gradual normalization as central banks ease their monetary policies.

Impact of high interest rate environment

JMMB acknowledges that the continued increase in interest rates to reduce market liquidity “had a particularly negative impact on trading gains. Trading gains fell by 51% to J$3.49 billion, as given rising interest rates, investors continued to de-risk resulting in a reduced demand for emerging market assets. Consequently, asset prices fell and trading activity was reduced.”

This was contrary to the prior period where investor sentiment was high and interest rates were low. Investors, JMMB asserted were therefore in search of yields and there was high demand for emerging market assets.

While trading gains fell, other major revenue lines increased, in particular, fees and commission income. This was facilitated by increased economic activity as all the group’s operating territories are in recovery mode. Notably, the Dominican Republic has recovered to pre-pandemic levels.

Financial performance details

The Jamaican based regional financial group remains profitably during the review period, despite continued adverse market conditions whilst continuing to successfully execute its diversification strategy. This strategy, The JMMB admits has been reaping the benefits of this from strong contributions to growth and profitability outside of Jamaica and its original flagship investments business line.

Sagicor Financial Company Limited also contributed positively to the Group’s profitability with J$2.12 billion in share of profit. Net operating revenue of J$18.90 billion for the nine months ending December 31, 2022, reflects a decline of 14%. The operating environment remains challenging when compared to the prior period. This stems from rising inflation resulting from the war in Ukraine and the attendant increase in geo-political uncertainty, supply chain disruptions as well as other Covid-related factors.

As a safe and solid publicly-held company, firmly rooted in its core values and commitment to clients, shareholders, team members and all stakeholders, JMMB reports that it continues to be adequately capitalized and in compliance with all regulators in its operating territories. In the previous quarter, the group received an upgrade in its Corporate Credit Ratings from Caribbean Information and Credit Rating Services Limited (CariCRIS) to Cari A- on its regional local currency scale.

Additionally, the Group continues to deepen its ongoing strategic partnership with IDB Invest, a member of the Inter-American Development Bank Group, having received additional funding during the period for JMMB Bank Jamaica Limited’s SME solutions suite.