As part of the NCB Group’s strategy to diversify and grow revenues through regional expansion, NCB Capital Markets Limited (NCBCM) established an office in Barbados. NCB Capital Markets (Barbados) Limited (NCBCMBL), which was incorporated in May 2015, was granted a securities broker-dealer license by the Financial Services Commission (FSC) in September 2015. Through the employment of the “hub and spoke” model NCBCMBL serves as an investment banking hub for the Eastern Caribbean serving Barbados and the OECS countries, targeting central government, parastatals, as well as medium to large corporates. These services include structuring, arranger services, as well as, private and public placement of debt and equity securities. NCBCMBL is also well advanced to provide wealth management services to high net worth (HNW) individuals and institutional clients through offerings such as structured products, repurchase agreements as well as other investment products. It will also seek to provide asset management services to institutional clients, such as pension funds.
In the FY 2015/2016, NCBCMBL focused on developing the largely ‘greenfield’ operation in the corporate banking ‘space’ while building the frameworks and navigating the regulatory environment for the asset management and wealth management businesses. This process has largely been focused towards further enhancing the framework for securing investment banking/corporate finance business and building operations support infrastructure for the various business lines that necessary to support NCBCMB’s projected growth rate towards 2020. NCBCMBL’s mandate is to build market awareness and derive shareholder value by focusing on growing its asset base while maximising all opportunities in the securities trading, capital markets, wealth and management areas. It is anticipated that NCBCMBL will provide new opportunities to the NCB Group revenue streams.
Towards the end of the year the staff was boosted by the addition of a Trader and a Business Development Manager. This move brings the staff complement to 4 persons in the Barbados operation. In this vein, NCBCMBL aims to create capacity primarily targeting two main areas of activity: (1) Wealth Management and (2) Corporate and Investment Banking. While the inclusion of these team members will boost NCBCMBL’s ability to adequately service their specific target groups, in the areas of asset management and some aspects of individual wealth management NCBCMBL will seek to capitalise on resources and expertise available from NCB to accomplish their objectives and offer our customers a greater value proposition largely derived from collaboration with the wider NCB Group.
NCBCMBL is a ‘greenfield’ operation and returned a net profit of US$10.0M on revenues of US $10.2M largely resulting from net interest income (US$5.6M) derived from products sold to HNW individuals and institutions not domiciled in Barbados.
Aspects of the Barbadian economy have begun to show signs of a rebound in real economic activity. Real GDP grew by 0.8% in 2015, while for the first 6 months of 2016 y-o-y growth was recorded at 1.3%. This uptick is underpinned by an increase in private investment and surge in tourism arrivals, which increased in 2015 by 14%, among the highest in the Caribbean. The natural spinoffs from heightened tourism activity – retail, services and construction – led to an increase in employment by 2% at the end of 2015, while the unemployment rate fell to 11.3%. At the end of March 2016, this rate had fallen even further to 10.7%. With lower import prices primarily on fuel imports, inflation eased with end-period prices falling by 2.5%, compared with an increase of 2.3% in 2014. The external current account position improved significantly, as the trade deficit fell 3.2 percentage points to 6.7% of GDP in 2015 from 2014. On the income side receipts from exports of goods and services rose largely due to higher tourism receipts. Net inflows in the capital and financial account fell, driven by large official debt service payments and lower FDI (as a number of large projects were earmarked to commence later than forecasted). As at June 2016 net international reserves fell by US$21 million to US$442 million, equivalent to 13.6 weeks of imports of goods and services.
The Central Bank of Barbados (CBB) has continued to fund the government through money creation as well as using commercial banks’ excess reserves held at the CBB. Direct intervention by the CBB in the Treasury Bill (TB) auction in the 2015 pushed down interest rates. In its stated policy when the CBB removed the minimum deposit interest rate stipulation in April 2015 an attempt was made to narrow the gap between the US and Barbados 3-month T-Bill rates reduce the Barbados risk premium, through intervention at the Treasury bill auction. However, because of Government’s cash flow needs, the minor rate reductions achieved could not be sustained. This mode of financing is not sustainable and is not expected to continue into the short-to-medium term. In the more recent auctions, the short-term rate rose to an average of about 3.4%, from 2.8% in 2015. There has been a clear shift in appetite as many investors sought to shorten their exposure to Government of Barbados exposure. CBB purchases of T-Bills and debentures accounted for approximately 65% of the increase in financing of the government in 2015.
In 2016, economic growth is projected to rise to 2.1%, reflecting higher private and public investment, mainly in refurbishing and expanding the tourism plant, including the anticipated launch of two large hotel projects, the Chinese-funded Sam Lord’s Castle project and the Hyatt-Centric branded hotel on Bay Street. While growth should continue at around a similar pace in 2017, it is likely to taper off thereafter as the rebound in tourism reaches steady state and private and public investment continues to be weighed by a weak fiscal performance. In the absence of a renewed reform effort, the fiscal outlook falls short of what is needed for sustainability. The International Monetary Fund (IMF) projects that based on the most recent March 2016 budget presentation, the fiscal deficit will reach 6.4% - just short of the 7% of GDP that was recorded for the FY 2015/2016. It is also projected that there will be a primary surplus of 2%. Despite this slight improvement in government finances, central government debt continues to serve as a drag on the economy, and according to IMF estimates baring any intervention government debt will continue to increase, reaching 114.2% in FY2021/22. In light of expected interest rate rises and low credit ratings, debt service costs will rise, further challenging traditional funding sources. This forecast presents NCBCMBL with significant opportunities to provide innovative debt-raising opportunities to the Government and its agencies.
For the 2016/2017 financial year, there is significant opportunity for NCBCMBL to benefit from the ensuing environment. The de-risking by traditional international funding sources throughout the region, the removal of the deposit floor in Barbados and the need for innovative funding solutions for the Government and parastatals all present key opportunities for the growth of the entity.
Key risks however remain in an economic environment that though it is improving it has not yet returned to a firm footing. Also, given the ‘plain vanilla’ types of products that are in the market, the newness of NCBCMBL and its push to provide diversity to the market may lead to the attainment of the targets at a slower pace than originally anticipated. NCBCMB will focus on boosting NCBCMBL’s brand recognition and corporate profile building; streamlining operations and the attendant frameworks; enhanced corporate and investment banking strategies; seeking multiple fund-raising sources and building out the asset and wealth management offerings. From both an investment banking and wealth management perspective, NCBCMB will seek to expand its network throughout the Eastern Caribbean.