Lehman Brothers suing CIBC for $1.3-billion

FirstCaribbean still struggling to hold its own in banking arena

Reports flat earnings for nine-month period

By The Jamaican Observer and Grant Robertson

Canadian Imperial Bank of Commerce (CM-T73.05-0.47-0.64%) is being sued for $1.3-billion (U.S.) by the estate of Lehman Brothers, the investment bank whose stunning collapse touched off the most serious phase of the global financial crisis.

• Lehman execs, auditor blamed for company’s collapse
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The estate that is now sorting through Lehman’s ruins on behalf of creditors claims it is entitled to $1.3-billion from a collateralized debt obligation (CDO) called the Pyrix Transaction. CIBC’s unfunded obligations were written down to zero when Lehman filed for bankruptcy. However, the Lehman estate argues in court documents that Lehman was “massively in the money” and deserved to be compensated.

FirstCaribbean International Bank, the largest indigenous banking entity in the region, continues to struggle to make its presence felt and to pose a real threat to its competitors. Its results over successive quarters continue to be lacklustre and its products have fared little better, failing to strike a chord in the marketplace. A common complaint is that loan applications made in one jurisdiction have to be approved by head office in Barbados, with head office unacquainted with business personages or for that matter the operating environment. Put quite simply, the refrain is that First Caribbean remains detached. In Jamaica alone it has had four managing directors in ten years (Anne Shirley, Raymond Campbell, Milton Brady and Clovis Metcalfe).

First Caribbean International Bank Limited (FCIB) reported an EPS of US$0.08 for the nine months ended July 31, 2010. This represents an unchanged EPS from the corresponding period in 2009.

FCIB’s Interest income declined by 16 per cent year-on-year from US$471.4million to US$395.8 million. Interest expense also fell, declining 26.4 per cent from US$144.6 million to US$106.4 million. As a result FCIB’s net interest income moved from US$326.8 million to US$289.3 million, representing an 11.5 per cent decline at the top-line. The decline in net interest income was attributable to lower average loan and securities volumes and trades. Even with the decline in net interest income, the net interest income margin improved, moving from 69 per cent in 2009 to 73 per cent in 2010.

Operating income grew 32.7 per cent to US$136.1 million, thereby offsetting the decline in its Net interest income. Operating income was up “due to non-recurring higher gains on the sale/repurchase of investment securities /debt mark to market losses and higher fee income”.

FCIB’s operating expenses fell 3.2 per cent to US$233.9 million over the period. On a quarterly basis loan loss expense moved from US$12.1 million to US$21.6 million. At the nine months loan loss expense stood at US$55.3 million, if annualised it would result in a loan provision rate of 1.13 per cent, compared to the FY2009 rate of 0.63 per cent, and a previous high rate of 0.78 per cent in 2001.

Income before tax for FCIB was down 9.7 per cent, moving to US$134.1 million for the year. The Group benefited from lower income tax expenses which fell to US$9.5 million, because of the lower income earned in the higher tax jurisdiction. This resulted in a relatively flat net income of US$124.5 million when compared to the same period in 2009.

A fall in customer deposits

Looking at the balance sheet, total assets fell by 7.2 per cent year-on-year. FCIB’s loan and advances to customers declined by 4.5 per cent to US$6.6 billion. On the liabilities side, total liabilities were down 9 per cent to $US8.3billion as Customer deposits and other borrowing funds fell by eight per cent to $US8.1 billion.

Going forward, growth in interest income may continue to be challenged as lower demand for loans and lower interest rates persist. Continued growth in operating income such as fees and income securities trading will be vital in offsetting the declines that can be faced in its interest income.
In fact, operating expense as a percentage of the Group’s operating income and net interest income improved slightly for the nine months ended July 2010 to 55 per cent.