FirstCaribbean International Bank Limited – Valuation

9 March 2015


FCIB Valuation
FirstCaribbean International Bank Limited and its subsidiaries (FCIB) are registered under the relevant financial and corporate legislations of 17 countries in the Caribbean to carry on banking and other related activities. The Group’s parent company, FirstCaribbean International Bank Limited, is a company incorporated and domiciled in Barbados at Warrens, St. Michael. The ultimate parent company and controlling party is the Canadian Imperial Bank of Commerce (“CIBC”) which holds 91.7% of the Bank’s issued shares and is a bank holding company incorporated in Canada.

FCIB’s corporate structure is shown on the chart below:-
Figure 1 – FCIB Corporate Structure Year End 2014

 

FCIB’s corporate structure shows their extensive coverage to the English and Dutch speaking Caribbean. FCIB’s product offerings are organized into four business segments as follows:-
  • Retail Banking
  • Wholesale Banking formerly Corporate Lending & Investment Banking
  • Wealth Management
  • Administration
On a segmented basis Retail Banking has been the major drag on revenues for 2014 recording a net loss of US$115M.  Positive contributions were derived from Wealth Management & Administration US$28.6M & US$57.3M respectively.Within FCIB the Administration business segment commands the majority of the assets at US$4.8B followed by Wholesale Banking and Retail Banking at US$3.3B and US$2.2B respectively.

FCIB manages a significant Wealth Management business which controls approximately 37% of Total Liabilities of US$3.5B. Group liabilities are also split between Retail and Wholesale Banking US$2.9B and US$2.4B respectively.

FCIB has extensive exposure to the Caribbean and have been negatively affected by the fall off in economic activity the vulnerabilities of Caribbean States following the global financial crisis. For the period 2010 – 2014 FCIB has recorded a total of US$637M in loan loss impairments and a US$206M Impairment charge of Intangible Assets.

As a group FCIB experienced a continuous decline in profitability from a net profit of US$157M in 2010 to net loss of US$151M in 2014.  Impairment charges have significantly affected profitability and as at October 31, 2014 FCIB generated a negative Return on Equity of 10.5%. Despite the negative results FCIB continue to maintain a 20% Tier 1 capital ratio and a dividend yield averaging 3.14% for the period 2010 – 2014.

Utilising Du Pont analysis and RBL as a comparative FCIB has shown a consistent decline in operating margins as well as marginal reductions in asset efficiency. FCIB is also more levered than RBL however; the trend observed was a reduction in leverage over the period 2007 – 2013. See Table 1 below:-

Table 1 – FCIB & RBL Du Pont Analysis 2007 – 2013
FCIB’s valuation would be conducted using Dividend Discount Model (DDM) and relative valuation techniques.Relative Valuation
The relative valuation technique used for FCIB would be Market / Book Value given the negative earnings generated by the firm for 2013 & 2014. Based on the available peers on the Trinidad & Tobago Stock Exchange (TTSE) Republic Bank Limited (RBL) was considered the closest comparative entity given their shared exposure to the Eastern Caribbean and Trinidad markets.

As at February 20, 2014 RBL had a Market to Book Value of 2.33 times.

For the year ended October 31, 2014 FCIB had Net Book Value per Share of US$0.85.

A relative valuation for FCIB applies RBL’s Market to Book Value ratio to its current book value per share for an approximate market value as follows:-

FCIB Share Price = 2.33 * US$0.85 = US$1.98 or TT$12.68.

Based on the relative valuation FCIB is undervalued to its market price of TT$5.03 per share. However, FCIB has shown a consistent decline in profitability and dividend per share payment resulting in it’s out of favor position with investors. At current market values FCIB’s market capitalization is actually below its net book value for a market to book value ratio of 0.96.

Dividend Discount Model
FCIB’s DDM valuation was completed using a medium term holding period. Utilising proprietary FSL information the key determinants of the DDM include:-

  • FCIB’s required rate of return – 22%
  • FCIB’s estimated future dividends
  • FCIB’s long-term growth rate assumption – 1.50%
FCIB Future Dividend Estimate
Due to the economic conditions within FCIB’s major operating markets and the degree of impairments already incurred FCIB has kept dividend payouts consistent at US$0.03 per share for the period 2012 – 2014.It is expected during the holding period FCIB’s dividend payout would remain constant at US$0.03 per share per annum. Beyond this holding period FCIB’s growth rate is expected to normalize at 1.50% annually. The growth rate is assumed based on FCIB’s expected profitability post impairment charges and economic growth prospects within the Caribbean.

FCIB’s intrinsic valuation can be derived as follows:-

Table 2 – FCIB Intrinsic Value Calculation
Period Dividend (US$) Discount Factor (22.21%) Present Value (US$)
1 0.03 0.818 0.02
2 0.03 0.670 0.02
3 0.03 0.548 0.02
Disposal Value 0.15 0.548 0.08
Intrinsic Value 0.14
Based on the above assumptions FCIB’s intrinsic value is US$0.14 per share or TT$0.91.Utilising DDM, FCIB’s intrinsic value of TT$0.91 shows the stock is overvalued at its current market price of TT$5.03 per share.

FSL holds an underweight recommendation for this equity investment.

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