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As filed with the Securities and Exchange Commission on May 21, 2012

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

NATIONAL COMMERCIAL BANK

JAMAICA LIMITED

(Exact Name of Registrant as specified in its charter)

Not Applicable

(Translation of Registrant’s Name Into English)

 

Jamaica   6029   Not Applicable

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

32 Trafalgar Road

Kingston 10, Jamaica, W.I.

(866) 622-3477

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

CT Corporation System,

111 Eighth Avenue, 13 th Floor

New York, New York 10011

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

 

Carlos E. Méndez-Peñate, Esq.

Kenneth G. Alberstadt, Esq.

Akerman Senterfitt LLP

335 Madison Avenue, 26th Floor

New York, New York 10017

Telephone: (212) 880-3800

Fax: (212) 880-8965

 

Glenn M. Reiter, Esq.

Simpson Thacher & Bartlett LLP

425 Lexington Avenue

New York, New York 10017

Telephone: (212) 455-2000

Fax: (212) 455-2502

 

 

Approximate date of commencement of proposed sale to the public:  As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.      ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.     ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.     ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.     ¨

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of

securities to be registered

 

Proposed maximum

aggregate offering

price(1)(2)

 

Amount of

registration

fee

Ordinary shares, no par value(3)

  $225,000,000   $25,785

 

 

 

(1)   Includes ordinary shares represented by American Depositary Shares (“ADSs”), which the underwriters may purchase solely to cover over-allotments, if any.
(2)   Estimated solely for the purpose of computing the amount of the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended.
(3)   A separate registration statement on Form F-6 will be filed for the registration of ADSs issuable upon the deposit of the ordinary shares registered hereby. Each ADS represents                  ordinary shares.

 

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to completion, dated May 21, 2012

Prospectus

                     American depositary shares

 

 

LOGO

National Commercial Bank Jamaica Limited

(incorporated in Jamaica)

Representing             ordinary shares

This is the initial public offering of our American depositary shares, or “ADSs,” each of which represents         of our ordinary shares, no par value. The ADSs will be evidenced by American depositary receipts, or “ADRs.” Of the ADSs to be sold in the offering, we are selling         ADSs and the selling         shareholders are selling         ADSs. We will not receive any of the proceeds from the ADSs being sold by the selling shareholders. We expect the initial public offering price will be between US$         and US$         per ADS.

Our ordinary shares are listed on the Jamaica Stock Exchange, or “JSE,” and the Trinidad and Tobago Stock Exchange, or “TTSE,” under the symbol “NCBJ.” On May 18, 2012, the closing price of our ordinary shares on the JSE was J$23.69 per ordinary share, which is equivalent to US$0.27 per ordinary share, based upon an exchange rate of J$87.6425 to US$1.00 on that date. On May 18, 2012, the closing price of our ordinary shares on the TTSE was TT$1.93 per ordinary share, which is equivalent to US$0.30 per ordinary share, based upon an exchange rate of TT$6.3891 to US$1.00 on that date. We have been authorized to list the ADSs on The New York Stock Exchange under the symbol “NCJ.”

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

         Per ADS      Total

Initial public offering price

     US$              US$        

Underwriting discount(1)

     US$              US$        

Proceeds to us (before expenses)

     US$              US$        

Proceeds to the selling shareholders (before expenses)

     US$              US$        
(1)   We have agreed to reimburse the underwriters for some of the expenses they incur in connection with this offering. See “Underwriting” beginning on page 304 of this prospectus.

We have granted the underwriters an option for a period of 30 days to purchase from us up to additional ADSs to cover over-allotments, if any.

Investing in the ADSs involves a high degree of risk.

See “ Risk factors ” beginning on page 21 of this prospectus for certain factors you should consider before investing in the ADSs.

Delivery of the ADSs will be made on or about                     , 2012.

 

Global Coordinator and Joint Bookrunner       Joint Bookrunner
J.P.Morgan       Macquarie Capital

 

 

 

Co-managers
Canaccord Genuity       CIBC

                    , 2012


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LOGO

 

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None of we, the selling shareholders and the underwriters have authorized anyone to provide any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. None of we, the selling shareholders and the underwriters are making an offer to sell the ADSs in any jurisdiction where the offer or sale is not permitted. This offering is being made in the United States and elsewhere solely on the basis of the information contained in this prospectus. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus, regardless of the time of delivery of this prospectus or any sale of the ADSs. Our business, financial condition, results of operations and prospects may have changed since the date on the front cover of this prospectus.

Table of contents

 

     Page  

Presentation of financial and other information

     ii   

Summary

     1   

Risk factors

     21   

Forward-looking statements

     46   

Use of proceeds

     48   

Market information

     49   

Capitalization

     52   

Dilution

     53   

Exchange rates

     54   

Selected financial and operating data

     55   

Operating and financial review and prospects

     62   

Selected statistical information

     146   

The Jamaican financial services industry

     166   

Business

     180   

Regulation and supervision

     227   

Management

     247   

Principal and selling shareholders

     264   

Related party transactions

     267   

Dividends

     271   

Description of capital stock

     273   

Description of American depositary shares

     280   

Taxation

     293   

Underwriting

     304   

Expenses of this offering

     310   

Legal matters

     311   

Experts

     311   

Enforcement of civil liabilities

     311   

Where you can find more information

     313   

Index to financial statements

     F-1   

 

 

 

 

In this prospectus, unless otherwise indicated, the following terms have the specified meanings:

 

 

“NCB,” the “NCB Group,” “we,” “us,” “our” and “our company” mean National Commercial Bank Jamaica Limited and its consolidated subsidiaries;

 

 

the “Bank” means National Commercial Bank Jamaica Limited and not any of its subsidiaries; and

 

 

“Jamaican government debt securities” means securities issued or guaranteed by the Jamaican government.

 

 

This prospectus is being used in connection with the offering of ordinary shares in the form of ADSs in the United States and other countries outside Jamaica.

This offering of ADSs is being made in the United States and elsewhere outside Jamaica and Trinidad and Tobago solely on the basis of the information contained in this prospectus.

No offer or sale of ADSs may be made to the public in Jamaica except pursuant to a prospectus completed in accordance with the requirements of Jamaican laws and regulations and duly registered with the relevant authorities. It is not intended that this prospectus be registered with any authority in Jamaica.

No offer or sale of ADSs may be made to the public in Trinidad and Tobago except pursuant to a prospectus completed in accordance with the requirements of the Trinidad and Tobago laws and regulations and duly registered with the relevant authorities. It is not intended that this prospectus be registered with any authority in Trinidad and Tobago.

 

 

 

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Presentation of financial and other information

In this prospectus, references to “J$” are to Jamaican dollars, references to “TT$” are to Trinidad and Tobago dollars, and references to “U.S. dollars” and “US$” are to United States dollars.

Solely for the convenience of the reader, we have translated certain Jamaican dollar amounts in this prospectus into U.S. dollars at a rate equal (unless otherwise indicated) to J$87.1154 per US$1.00, which is the average of the buying and selling J$/US$ exchange rates reported by the Bank of Jamaica for March 31, 2012. These translations should not be construed as a representation that any such amounts have been, would have been or could be converted at this or any other exchange rate. For information concerning Jamaican dollar/U.S. dollar exchange rates as reported by the Bank of Jamaica since October 1, 2006, see “Exchange rates.”

In addition, solely for the convenience of the reader, we have translated certain Trinidad and Tobago dollar amounts in this prospectus into U.S. dollars at a rate equal (unless otherwise indicated) to TT$6.4169 per US$1.00, which is the average of the buying and selling TT$/US$ exchange rates reported by the Central Bank of Trinidad and Tobago for March 31, 2012. These translations should not be construed as a representation that any such amounts have been, would have been or could be converted at this or any other exchange rate.

Financial statements

We have included in this prospectus our consolidated financial statements, which are presented in Jamaican dollars.

Our fiscal year ends on September 30 of each calendar year. We prepare and issue audited financial statements at and for the fiscal year ended September 30 of each calendar year and unaudited financial statements at, and for each of the three, six and nine months ended, December 31, March 31 and June 30, respectively, of each calendar year. In this prospectus, references to, for example, “fiscal year 2011” are to the fiscal year ended September 30, 2011.

We prepare our consolidated financial statements in accordance with International Financial Reporting Standards, or “IFRS,” as issued by the International Auditing Standards Board, or the “IASB,” which differ in certain significant respects from generally accepted accounting principles in the United States, or “U.S. GAAP.”

The summary and selected financial data at September 30, 2011, 2010, 2009, 2008 and 2007 and for the fiscal years ended September 30, 2011, 2010, 2009, 2008 and 2007 included in this prospectus have been derived from our consolidated financial statements audited by PricewaterhouseCoopers.

Market share, industry and economic information

In this prospectus, we present statements about our competitive position and market share in, and the market size of, the commercial banking and financial services industry in Jamaica, and about the Jamaican economy and participants in the Jamaican economy. We have made these statements on the basis of statistics and other information from third-party sources including, among others, the Bank of Jamaica (the Central Bank of Jamaica), that we believe are reliable. December 31, 2011 is the most recent date for which certain Bank of Jamaica data are available regarding our competitive position and market share in, and the market size of, the commercial

 

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banking and financial services industry in Jamaica, and about the Jamaican economy and participants in the Jamaican economy.

Rounding and table formats

We have made rounding adjustments to some of the tables included in this prospectus. Accordingly, totals in certain tables in this prospectus may differ from the sum of the individual items in these tables due to rounding.

 

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Summary

This summary highlights information contained in this prospectus, but may not contain all of the information that may be important to you in making your investment decision. You should read the entire prospectus carefully, including the risk factors and the financial statements.

Our company

We are Jamaica’s largest and most profitable banking and financial services group, based on consolidated total assets at September 30, 2011 and net profit for fiscal year 2011. We provide individual consumers, small- and medium-sized enterprises, or “SMEs,” large corporations and government institutions with banking, wealth management, insurance and pension fund management products and services. We provide a wide range of financial products and services to our customers, including loan and investment products, deposits, remittance services, electronic banking, payment services, credit cards, structured finance, trade finance, foreign exchange, wealth management, insurance, pension fund management, annuities, and trust and registrar services. For our fiscal year ended September 30, 2011 and the six months ended March 31, 2012, we had return on average shareholders’ equity of 23.86% and 15.55%, respectively, and, as of December 31, 2011, we had a 29.1% share of the Jamaican banking and financial services market regulated by the Bank of Jamaica, as measured by consolidated total assets.

We operate our business through seven segments (of which the Retail & SME, Payment Services, Corporate Banking and Treasury & Correspondent Banking segments are our commercial banking segments):

 

 

Retail & SME:     We offer a broad range of banking products and services to Jamaica’s consumer and SME market and Jamaican government agencies. We provide these products and services through 38 full service branches, four agencies and 173 automated teller machines, or “ATMs,” across Jamaica. We had the largest commercial bank branch network in Jamaica at March 31, 2012. Our ATMs accounted for 35.0% and 34.7% of all ATM transactions in Jamaica for fiscal year 2011 and the six months ended March 31, 2012, respectively. We were the first bank in Jamaica to offer dedicated business bankers and specialized product bundles to SMEs, which provide SMEs with tailored products and services and special pricing on certain loans and deposits.

We, through our Retail & SME segment, issue debit cards to our consumer customers. Our debit cards represented 31.7% of debit cards in circulation in Jamaica at March 31, 2012. While the issuance of debit cards is a significant component of our Retail & SME segment from an operational and marketing perspective, no revenue is generated upon issuance of these cards and the fees generated from their use is recorded in our Payment Services segment.

Our Retail & SME segment also includes our remittance business, which allows our customers to send and receive money from London through our subsidiary, NCB Remittance Services (UK) Limited, and worldwide through our contractual relationship with MoneyGram International, Inc.

Our Retail & SME segment accounted for 9.3% and 6.4% of our total segment operating profit for fiscal year 2011 and the six months ended March 31, 2012, respectively.

 

 

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Payment Services:     We, through our Payment Services segment, issue Visa ® , MasterCard ® and our proprietary Keycard credit cards to our consumer, SME and corporate customers. We also issue our proprietary Keycard Cash prepaid card to our consumer customers as well as our SME and corporate customers for use by their employees. Our Payment Services segment includes both our credit card issuing business and fees that we collect for transactions in which merchants using our card-processing point of sale, or “POS,” machines accept for payment any credit or debit card issued by us and other banks, which we refer to as our “acquiring business.” Credit cards issued by us represented 39.6% of credit cards in circulation in Jamaica at March 31, 2012. At that date, over 9,000 of our POS machines were installed in stores and other locations across Jamaica, representing 66.7% of all POS machines in Jamaica. Our POS machines processed 76.9% and 77.6% of total credit card merchant transactions in Jamaica, representing 64.7% and 61.3% of the total Jamaican dollar amount of credit card merchant transactions, for fiscal year 2011 and the six months ended March 31, 2012, respectively. Our POS machines also processed 72.2% and 70.7% of total debit card merchant transactions in Jamaica, representing 77.1% and 77.3% of the total Jamaican dollar amount of debit card merchant transactions, for fiscal year 2011 and the six months ended March 31, 2012, respectively. Our Payment Services segment accounted for 10.2% and 13.7% of our total segment operating profit for fiscal year 2011 and the six months ended March 31, 2012, respectively.

 

 

Corporate Banking:     We, through our Corporate Banking segment, offer large corporations and Jamaican government agencies loans, structured financings and foreign exchange transactions in addition to other banking products and services. We believe that we are the leader in originating loans to large corporations and government enterprises in Jamaica. Our Corporate Banking segment accounted for 12.6% of our total segment operating profit for fiscal year 2011 and losses of 0.9% in relation to our total segment operating profit for the six months ended March 31, 2012, respectively.

 

 

Treasury & Correspondent Banking:     We conduct foreign exchange transactions and manage our liquidity and investments through our Treasury & Correspondent Banking segment. A dedicated financial institutions relationship team manages relationships with local financial institutions and correspondent banks. Our investments consist principally of Jamaican government debt securities. As an institution licensed to carry on banking business in Jamaica, we are able to transact in debt securities directly with the Jamaican government and the Bank of Jamaica in the primary and secondary markets. Our Treasury & Correspondent Banking segment accounted for 26.3% and 30.1% of our total segment operating profit for fiscal year 2011 and the six months ended March 31, 2012, respectively.

 

 

Wealth Management:     We, through our wholly-owned subsidiary, NCB Capital Markets Limited, offer repurchase agreements, brokerage services, mutual fund products and portfolio management services to individual investors. We also offer these products and services, as well as certain corporate finance services, to our corporate customers. Repurchase agreements are a form of financing under which we sell Jamaican government debt securities to our customers and then reacquire those securities for a higher price at a later date, typically one to 12 months after the original sale. Our corporate customers accounted for 41.8% and 41.5% of the repurchase agreement balances of our Wealth Management segment for fiscal year 2011 and the six months ended March 31, 2012, respectively. Net interest income earned from funding provided by repurchase agreements accounted for a substantial portion of our Wealth

 

 

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Management segment’s total segment operating profit for fiscal year 2011 and the six months ended March 31, 2012. This segment also includes our offshore banking subsidiary, NCB (Cayman) Limited, which principally provides offshore banking services to our Jamaican customers. Our Wealth Management segment accounted for 28.2% and 32.5% of our total segment operating profit for fiscal year 2011 and the six months ended March 31, 2012, respectively.

 

 

Insurance & Pension Fund Management:     We, through our wholly-owned subsidiary, NCB Insurance Company Limited, offer a broad range of products and services including bancassurance (a product that combines investment and life insurance features), pension fund administration and investment management services, annuities and group life insurance. The bancassurance, group life insurance and certain other products and services are sold by separately licensed employees at our bank branches to an estimated 91,000 customers at March 31, 2012. At December 31, 2010 (the most recent date for which comparative market data are available), we managed J$46,500.2 million in pension fund assets, representing a 17.9% market share of all pension fund assets under management in the country. At March 31, 2012, we managed J$51,004 million in pension fund assets. We provide investment advisory services to pension funds managed by us, although the fund trustees retain ultimate discretion over all investment decisions. Our Insurance & Pension Fund Management segment accounted for 14.4% and 22.0% of our total segment operating profit for fiscal year 2011 and the six months ended March 31, 2012, respectively.

 

 

Other:     We, through our Other segment, which includes our subsidiaries N.C.B. Jamaica (Nominees) Limited, Mutual Security Insurance Brokers Limited and West Indies Trust Company Limited, offer registrar and transfer agent, insurance brokerage and trustee services, respectively. This segment also includes our subsidiary DataCap Processing Limited, which provides security services to certain of our key employees. In addition, our Other segment includes the operations of our centralized ATM network. Our Other segment accounted for losses of 0.6% and 1.7% in relation to our total segment operating profit for fiscal year 2011 and the six months ended March 31, 2012, respectively.

At March 31, 2012, we had J$369,827 million (US$4,245 million) in total assets, J$103,130 million (US$1,184 million) in net loans, J$209,652 million (US$2,407 million) in investment securities, J$161,986 million (US$1,859 million) in customer deposits and J$62,370 million (US$716 million) in shareholders’ equity. We had net profit of J$13,034 million (US$150 million) and J$4,773 million (US$55 million) for fiscal year 2011 and the six months ended March 31, 2012, respectively. Our return on average shareholders’ equity was 23.86% and 15.55% and our return on average total assets was 3.81% and 2.65% for fiscal year 2011 and the six months ended March 31, 2012, respectively.

We have received numerous international and local awards and recognitions. In 2011, The Banker ranked us third in return on capital and 14 th in return on assets among the 267 largest banks worldwide by institutions with Tier I capital of under US$255 million. In a related ranking of banks in Latin America and the Caribbean in 2011, The Banker ranked us first based on both of these metrics. In 2011, we were named “Best Bank in Jamaica” by Global Banking and Finance , and we also received the Euromoney Award for Excellence: “Best Bank in Jamaica.” In 2008, 2009, 2010 and 2011, The Banker named us “Bank of the Year, Jamaica.” World Finance magazine named us the “Best Banking Group in Jamaica” for 2010, “Most Innovative Bank” for

 

 

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2009 and 2010 and “Best Pension Fund Manager in the Caribbean” for 2009 and 2010. We also received a number of Best Practices Awards from the JSE, including the Governor General’s Award for Overall Excellence, Best Annual Report, Corporate Disclosure and Investor Relations and the Stockbrokerage Website Award in 2009. We were also the recipient of the most recent Private Sector of Jamaica/JSE Awards for Corporate Governance for 2009 and 2010.

We are controlled by our chairman, Mr. Michael Lee-Chin (our “controlling shareholder”), who beneficially owned, directly and indirectly, approximately 63.9% of our ordinary shares at April 30, 2012. Mr. Lee-Chin will beneficially own approximately         % of our ordinary shares on a pro forma basis at April 30, 2012 after giving effect to this offering (assuming that the underwriters exercise their over-allotment option in full). As of May 9, 2012, approximately 1,083.4 million, or 68.7%, of the ordinary shares beneficially owned by Mr. Lee-Chin have been pledged as security for loans from different lenders to Mr. Lee-Chin and his affiliates. Mr. Lee-Chin has advised us that he and his affiliates are in full compliance with the terms and conditions of these loans. Mr. Lee-Chin may, or may be required to, make additional pledges of ordinary shares beneficially owned by him in the future. Mr. Lee-Chin is a dual Canadian and Jamaican citizen, and has been our chairman since purchasing a majority beneficial interest in the Bank through AIC (Barbados) Limited, which he controls, in 2002. Mr. Lee-Chin has a broad range of other business interests, including financial services, real estate, telecommunications, media, healthcare and power generation.

The Jamaican market

Substantially all of our operations are conducted in Jamaica, which is the fifth largest country in the Caribbean, based on real gross domestic product, or “GDP,” of J$737,804 million for the 12 months ended December 31, 2011 and the fifth largest country in the Caribbean based on population of approximately 2.7 million people at January 2012. Jamaica has a free market economy that includes primarily private sector businesses and a limited number of state-owned enterprises. The Jamaican financial services industry has been largely privatized. Major sectors of the economy include wholesale and retail trade; government services; transport, storage and communication; finance and insurance services; real estate renting; manufacturing; construction; hotels and restaurants; agriculture, forestry and fishing; electricity and water supply; and mining and quarrying.

The Jamaican economy has, in recent years, been affected by, among other factors, the global economic and financial crisis, a high ratio of public debt to real GDP, low tax revenues, and crime and civil unrest in the country. Jamaica’s real GDP was J$737,804 million for the 12 months ended December 31, 2011 (US$8,469 million) compared to J$756,133 million for the 12 months ended December 31, 2006. Real GDP improved by 1.5% for the 12 months ended December 31, 2011 as compared with a 1.4% decline for the 12 months ended December 31, 2010. Jamaica recorded its first year-over-year growth in GDP of 1.6% for the quarter ended March 31, 2011 compared to the quarter ended March 31, 2010, representing the first quarter in which there had been an increase as compared to the similar quarter in the previous year since the quarter ended September 30, 2007.

 

 

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In 2010, Jamaica’s macroeconomic environment was affected by consummation of the Jamaica Debt Exchange, or “JDX,” which was designed to alleviate the debt service burden on the Jamaican government and foster a lower interest rate environment. Under the JDX, the Jamaican government exchanged approximately J$695.6 billion (US$7,985 million) of domestic debt for an equivalent principal amount of debt securities with lower interest rates and longer maturities. The Jamaican government was required to effect the JDX and take other actions, including adopting a tax policy package yielding approximately 2% of GDP, as a condition to the signing of a 27-month Stand-By Arrangement with the International Monetary Fund, or “IMF,” in February 2010. The Stand-By Arrangement outlined a medium-term reform program aimed at enhancing fiscal and debt sustainability and enabled access by the Jamaican government to funding from multilateral financial institutions. The Stand-By Arrangement is currently suspended as a result of, among other matters, delays in the implementation of agreed upon measures, and the recently-elected government has initiated formal talks with the IMF with a view towards entering into a new agreement.

Jamaica’s long-term foreign currency credit ratings were downgraded by Standard & Poor’s Financial Services LLC, or “S&P,” Moody’s Investor Services LLC, or “Moody’s,” and Fitch, Inc., or “Fitch,” between August 2009 and January 2010 to selective default categories CCC, Caa 1 and CCC, respectively, but were subsequently upgraded in the first quarter of 2010, following consummation of the JDX. Jamaica’s current long-term foreign currency credit ratings by the respective agencies are as follows: B- by S&P; B3 by Moody’s; and B- by Fitch. On October 31, 2011, S&P revised the outlook on Jamaica to negative from stable but affirmed its B- long-term foreign currency credit rating.

The Jamaican financial system has continued to develop in terms of participants and stability and increasingly interacts with global financial markets. At December 31, 2011, there were 13 supervised deposit-taking institutions, consisting of seven commercial banks (one of which is a branch of a U.S. bank and three of which are subsidiaries of other non-Jamaican banks), two merchant banks and four building societies ( i.e., thrift institutions) in Jamaica. At that date, there were also 51 securities dealers and five life insurance companies. These institutions are regulated by the Bank of Jamaica, which primarily supervises deposit-taking institutions, and the Financial Services Commission, which supervises most non-deposit-taking financial institutions, including insurance companies and securities brokers. The Ministry of Finance, in conjunction with the Bank of Jamaica and the Financial Services Commission, formulates policies concerning specified aspects of the operations of financial institutions. The Bank of Jamaica, together with the Ministry of Finance, is responsible for the execution of monetary policy and the regulation of the Jamaican economy. Companies whose securities are publicly traded, including our company, are also subject to regulation by the JSE.

The Jamaican commercial banking industry has grown substantially in the past decade. Total assets (including acceptances, guarantees and letters of credit, which are off-balance sheet items) in the commercial banking sector were J$613,658 million (US$7,044 million) at December 31, 2011 compared to J$239,819 million at December 31, 2001, representing a 10-year compound annual growth rate, or “CAGR,” of 9.9%. Total loans (net of provisions) in the commercial banking sector were J$258,613 million (US$2,969 million) at December 31, 2011 compared to J$44,576 million at December 31, 2001, representing a 10-year CAGR of 19.2%. Total deposits in the commercial banking sector were J$400,120 million (US$4,593 million) at December 31, 2011 compared to J$158,918 million at December 31, 2001, representing a 10-year CAGR of 9.7%.

 

 

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Foreign currency-denominated loans made up 40.7% of total loans at December 31, 2011, compared to 35.8% at December 31, 2001, and foreign currency-denominated deposits made up 37.0% of total deposits at December 31, 2011, compared to 28.1% at December 31, 2001.

Our competitive strengths

We believe that the following competitive strengths position us for continued growth and future profitability:

 

 

Market leadership:     We are Jamaica’s largest and most profitable financial services group, based on consolidated total assets at September 30, 2011 and net profit for fiscal year 2011. With 38 full service branches and four agencies, we had the largest commercial bank branch network in Jamaica at December 31, 2011. Our ATMs accounted for 34.7% of all ATM transactions in Jamaica for the six months ended March 31, 2012. At March 31, 2012, we had over 9,000 POS machines, representing 66.7% of all POS machines in Jamaica. Our POS machines processed 74.4% and 74.1% of total credit and debit card merchant transactions in Jamaica for fiscal year 2011 and the six months ended March 31, 2012, respectively. We believe that our market leadership position contributes to our strong brand recognition in Jamaica and helps us to preserve and expand our customer base.

The following table presents our market shares in the Jamaican commercial banking industry (as determined in accordance with Bank of Jamaica regulations and excluding certain lending operations).

 

       At December 31,      At September 30,  
Market share data    2011      2011      2010      2009      2008  

 

  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Market share (based on assets)

     38.9%         40.0%         39.3%         37.5%         39.6%   

Market share (based on deposits)

     37.6%         39.1%         36.7%         34.7%         36.2%   

Market share (based on net loans)

     38.9%         36.9%         34.6%         34.6%         35.3%   

 

  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  Source:   Bank of Jamaica

 

 

Solid track record of financial performance and growth:     We have grown substantially in terms of profit, assets and shareholders’ equity for each of the five years ended September 30, 2011, principally due to organic growth. For the six months ended March 31, 2012, despite a reduction in profits when compared with the six months ended March 31, 2011, the growth in assets and shareholders’ equity continued. For fiscal year 2006, we had net profit of J$5,487 million compared to net profit of J$13,034 million for fiscal year 2011, representing a five-year CAGR of 18.9%. We had total assets of J$223,139 million at September 30, 2006 compared to total assets of J$358,767 million at September 30, 2011, representing a five-year CAGR of 10.0%. We had total shareholders’ equity of J$24,590 million at September 30, 2006 compared to total shareholders’ equity of J$61,126 million at September 30, 2011, representing a five-year CAGR of 20.0%. We achieved continued positive growth even during the recent global economic and financial crisis.

 

 

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The following table presents selected financial metrics for the periods indicated.

 

       At and for fiscal
year ended
September 30,
2011
     At and for fiscal
year ended
September 30,
2006
     CAGR  

 

  

 

 

    

 

 

    

 

 

 

Loans and advances, net of provision for credit losses (J$ in thousands)

     91,728,138      

 
42,219,840         16.8%   

Investment securities (J$ in thousands)

     204,748,127         123,765,437         10.6%   

Customer deposits (J$ in thousands)

     155,800,401         99,026,503         9.5%   

Repurchase agreements (J$ in thousands)

     84,075,103         50,344,707         10.8%   

Liabilities under annuity and insurance contracts (J$ in thousands)

     23,564,275      

 
12,010,182         14.4%   

Shareholders’ equity (J$ in thousands)

     61,126,392         24,589,987         20.0%   

Credit card receivables (J$ in thousands)

     7,445,455         3,655,962         15.3%   

Earnings per share (J$)

     5.30         2.23      

Book value per share (J$)

     24.83         9.99      

Dividends per share (J$)

     1.36         0.71      

Shareholders’ equity as a percentage of total assets

     17.04%         11.02%      

Return on average total assets(1)

     3.81%         2.70%      

Return on average shareholders’ equity(1)

     23.86%         22.92%      

Efficiency ratio(1)

     52.36%         59.88%      

Loans and advances, net of provision for credit losses, as a percentage of customer deposits

     58.88%      

 
42.63%      

Loans and advances, net of provision for credit losses, as a percentage of total assets

     25.57%      

 
18.92%      

 

  

 

 

    

 

 

    

 

 

 

 

(1)   For definitions of “return on average total assets,” “return on average shareholders’ equity” and “efficiency ratio,” see the footnotes to the tables set forth under “—Summary financial and operating data.”

 

 

Innovation:     We offer a broad range of financial products and services that we continually seek to expand to respond to the needs of our customers. For example, in 1981, we were the first bank in Jamaica to launch a local credit card, and, today, our Keycard credit card remains the only proprietary credit card offered in Jamaica and accounted for 24.0% of our total acquiring volumes and 18.4% of the total acquiring volumes in Jamaica for fiscal year 2011 and 20.2% of our total acquiring volumes and 15.6% of the total acquiring volumes in Jamaica for the six months ended March 31, 2012. Our proprietary credit card has also helped us maintain leadership in our card acquiring business because merchants must maintain an NCB POS machine in order to process Keycard transactions. We were the first bank in Jamaica to introduce drive-through ATMs in 2002 and payroll-backed loans in 2003. In 2004, our subsidiary, NCB Insurance Company Limited, became the first insurance company in Jamaica to offer a long-term tax-advantaged life insurance policy specially designed for families to save for higher education costs. In 2005, we were the first to launch mobile credit top-up services, which allow mobile telephone customers to add minutes to their prepaid mobile telephone

 

 

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accounts at our ATM and POS machines. We remain the only bank in Jamaica to offer a loan product, also introduced in 2005, that allows merchants to borrow against future POS receivables. We were also the first bank in Jamaica to introduce handheld POS terminals in 2006 and online loan applications in 2008. In May 2010, we introduced a loan product that allows customers to borrow based on the equity in their motor vehicles.

 

 

Local decision-making:     We make all major decisions locally in Jamaica. We are not required to consult an international parent company, as is the case with many of our competitors. We believe that local decision-making contributes to customer loyalty, as we have insight into local circumstances and conditions and often are able to provide faster credit decisions than many of our peers.

 

 

Customer-focused staff:     We strive to provide prompt, friendly and knowledgeable service, which we believe helps us to achieve a high level of customer satisfaction and loyalty. We invest in our staff to enable them to acquire expertise and knowledge in their respective areas of responsibility. In fiscal year 2011, our staff members spent an average of 18 hours in training courses. These training courses are conducted in person at our Corporate Learning Campus, which delivered 223 instructor-led courses during fiscal year 2011, as well as online through our eCampus portal, which offered over 160 courses during the same fiscal year.

 

 

Experienced team of executive officers:     Our executive officers have broad experience in the Jamaican financial services industry. Patrick Hylton, our Group Managing Director (chief executive officer), is a former president of the Jamaica Bankers Association and former managing director of Financial Sector Adjustment Company Limited, which was established in 1997 by the Jamaican government to restore stability in the financial sector. Our team of executive officers has an average of more than 18 years of experience in the financial services industry. We believe that the experience of our executive officers has allowed us to deliver high-quality and innovative products and services to our customers, which has positioned us to capitalize on future growth opportunities.

While we believe the above competitive strengths position us for continued growth and future profitability, our future business, results of operations and financial condition will be materially affected by economic, social and political conditions in Jamaica and the financial condition of the Jamaican government. Our debt securities portfolio primarily consists of Jamaican government debt securities, such that a significant decline in the market value of those debt securities, or any inability of the Jamaican government to service those debt securities, could require us to record impairment losses or to experience increased realized or unrealized losses. Accordingly, our competitive strengths described above should be considered in conjunction with the risks described under “Risk factors” beginning on page 21.

Our business strategy

Our vision is to capitalize on our competitive strengths and continue to be the premier Jamaican financial institution delivering superior products and services to satisfy the needs of our customers while developing our human resources and building better communities. We intend to focus on continuous improvement of our business model to meet new opportunities within the

 

 

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banking and financial services sector in Jamaica and, over the long-term, in the Caribbean. The key elements of our strategy include the following:

 

 

Pursuit of growth opportunities:     We plan to increase our revenues and market shares while managing our costs. By leveraging our extensive branch and payment services network, along with our leading market share in the debit and credit card industry, we are well-positioned to achieve growth in areas such as loans to the consumer and SME market. We are also seeking to improve our sales capabilities through enhanced productivity of our employees, better use of customer analytics and marketing campaign management methodologies to drive cross-selling, an increased number and value of products per customer, or “wallet share penetration,” and the leveraging of electronic channels, external partnerships and our customer care center. We believe that there are specific opportunities to increase sales of our loan and credit card products, which have low penetration within our customer base compared to the Latin American and Caribbean averages (based on a 2008 Latin America and Caribbean benchmarking study of retail banks conducted by a leading international consulting firm). We are also expanding our operations through strategic investments in Jamaica and may in the future pursue acquisitions and investment opportunities in both Jamaica and the broader Caribbean region. For example, in August 2011, we acquired 29.3% of Jamaica Money Market Brokers Limited, the largest investment brokerage house in Jamaica, measured by assets under management, for approximately J$2,221 million, including certain fees and costs.

 

 

Efficiency and productivity initiatives:     Our technology refresh program is designed to improve service availability and reliability of our information technology systems. We will be moving to a new, higher performance data center, which we expect will provide increased security and versatility and substantially reduce downtime beginning in 2012. We are seeking to improve our efficiency and functionality in key areas such as treasury management, card acquiring and issuing and anti-money laundering compliance through new applications and processes.

 

 

Continued focus on risk management:     We continually review our risk management policies and procedures in order to enhance our capabilities in identifying, reporting and managing the risks faced in our business, including credit, interest rate, foreign exchange and liquidity risks. We plan to continue to focus on stringent underwriting standards for lending and other transactions. In addition, for our lending business, we have recently engaged a leading international consulting firm to assist us in the design and implementation of improvements to our credit policies and procedures, including our credit-scoring methodologies.

 

 

Further development of human resources:     We plan to continue to seek a high level of employee engagement and foster an innovative culture. We are seeking to further build employee capabilities, with a view toward maintaining our leadership position in the Jamaican financial services market and as an institution that is a leading place in which to work. We are currently implementing initiatives to strengthen performance management and assessment; integrate workforce analytics to monitor employee satisfaction and effectiveness; and support the professional development of our employees.

 

 

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Our organizational structure

The following chart identifies the principal shareholders of our company and our principal subsidiaries at April 30, 2012 and immediately following this offering. Except as otherwise noted below, all of our subsidiaries are wholly-owned and incorporated or organized in Jamaica.

 

LOGO

 

 

(1)   Includes shares held directly by Mr. Lee-Chin and indirectly by Mr. Lee-Chin through certain family trusts and the following entities: AIC Barbados Limited, AIC Global Holdings Inc., Portland (Barbados) Limited, Advantage General Insurance Limited, AIC Finance Limited and AIC Financial Group.

 

(2)   Incorporated in the United Kingdom.

 

(3)   Incorporated in the Cayman Islands.

 

(4)   During fiscal year 2011, the boards of directors of NCB Capital Markets Limited and NCB (Cayman) Limited approved the transfer of all of the outstanding shares of NCB Capital Markets (Cayman) Limited to NCB Capital Markets Limited. This transfer is expected to occur during the third quarter of fiscal year 2012.

 

(5)   Charitable organization that receives funding from us. One of our directors is chairman of the board of the N.C.B. Foundation and some of our executive officers serve as directors and executive officers of the N.C.B. Foundation.

 

 

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Recent developments

The Bank of Jamaica requires all commercial banks in Jamaica, including us, to effect a conversion to a holding company structure in order to facilitate comprehensive supervision of their businesses. We have been informed by Portland Holdings Inc., the ultimate parent company through which Mr. Lee-Chin is the beneficial owner of a majority of our outstanding ordinary shares, that the specific timing for this holding company conversion has not yet been determined. We expect that, following this holding company conversion, holders of our ordinary shares will exchange their shares for shares in the new holding company. There will not be any Jamaican tax implications for holders of our ordinary shares in connection with this conversion. However, holders of our ADSs should consult their tax advisors with respect to the tax laws of their home jurisdictions.

Risk factors

We face risks and uncertainties that may affect our business and future financial performance, including, among others, the following: economic, social and political conditions in Jamaica and downgrades of Jamaica’s credit rating; vulnerability of the Jamaican economy to external shocks; governmental and regulatory actions and developments affecting us; natural disasters; crime and civil unrest; declines in the quality of our loan portfolio and other assets; declines in the value of Jamaican government debt securities held by us; credit and counterparty risks; default by one or more of our largest borrowers; changes in interest and exchange rates and other market risks; liquidity risks and increases in funding costs; adequacy of risk management procedures and systems; inability to realize collateral, including real estate collateral; prepayment of our loan portfolios; declines in the value of securities managed by us; downgrades in our credit ratings; failure to comply with regulatory requirements; changes in banking laws and regulations; increased capital requirements under the new Basel Capital Accord; changes in the cost of providing pension benefits to our employees; exposure of one of our subsidiaries to a material tax exposure; inability to manage our growth successfully; failures of information technology and other systems; failure to detect money laundering and other illegal or improper activities; competition; and loss of key executive officers. One or more of these matters could negatively affect our business, results of operations and financial condition as well as our ability to successfully implement our strategy. See “Risk factors” beginning on page 21.

Potential investors that are U.S. taxpayers should be aware that the Bank and, possibly, one or more of its subsidiaries likely will be considered a “passive foreign investment company,” or “PFIC.” For more information related to our PFIC status, see “Taxation—U.S. federal income tax considerations—PFIC rules” and “Risk factors—Risks relating to our ordinary shares and the ADSs—The Bank and, possibly, one or more of its subsidiaries are likely to be considered a PFIC, which could result in adverse U.S. tax consequences for U.S. investors.”

 

 

Our principal executive offices are located at 32 Trafalgar Road, Kingston 10, Jamaica, W.I. Our main telephone number is +1 (888) 622-3477 (in Jamaica); +1 (866) 622-3477 (from the United States, Canada and the English-speaking Caribbean); +0 (800) 032-2973 (from the United Kingdom).

Our corporate website is www.jncb.com . Information contained on, or accessible through, our website is not incorporated by reference in, and shall not be considered part of, this prospectus.

 

 

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Summary of the offering

 

Issuer

National Commercial Bank Jamaica Limited

 

Selling shareholders

AIC (Barbados) Limited

 

  AIC Global Holdings Inc.

 

ADSs

Each ADS represents              ordinary shares. The ADSs will be evidenced by ADRs.

 

ADSs offered by us

             ADSs

 

ADSs offered by the selling shareholders

             ADSs

 

Share capital to be outstanding after this offering

Our share capital consists of ordinary shares. Immediately after the completion of this offering, our share capital will consist of ordinary shares.

 

Offering price

We expect the offering price will be between US$         and US$         per ADS.

 

Over-allotment option

The selling shareholders have granted the underwriters an option for a period of 30 days to purchase from them up to         additional ADSs to cover over-allotments, if any.

 

Use of proceeds

We expect to receive net proceeds from the sale of ordinary shares in the form of ADSs being offered by us in this offering, after deducting the underwriting discount and other estimated expenses, of approximately US$         million. We intend to use the net proceeds from this offering for general corporate purposes, which may include funding organic growth through an increase in loan volumes, portfolio investments and other income-generating activities; financing expansion of and improvements to our infrastructure; and pursuing potential acquisitions and other strategic investments. See “Use of proceeds.”

 

  We will not receive any of the net proceeds from the sale of ordinary shares in the form of ADSs being offered by the selling shareholders.

 

Dividends

Our Board of Directors intends to declare, at its discretion and subject to applicable Jamaican law, dividends to holders of our ordinary shares. Under our current dividend policy, our Board of Directors may declare dividends subject to a maximum of 50% of the ordinary realized profit of the Bank after transfers to required reserves. The Bank of Jamaica currently requires us to obtain its non-objection and sign-off prior to the payment of dividends. The full amount of dividends received by the Bank from our subsidiaries is also paid out in

 

 

12


Table of Contents
 

the form of dividends to holders of our ordinary shares after transfers to reserves. Currently, three of our subsidiaries (NCB Capital Markets Limited, NCB Insurance Company Limited and West Indies Trust Company Limited) pay dividends to the Bank. In the event that dividend payments are less than the maximum amount permitted by the policy in any one year, our Board of Directors may increase future dividend payments proportionately. Finally, our Board of Directors, in its discretion, may distribute to holders of our ordinary shares an amount equal to realized gains arising from non-recurring transactions, after transfers to required reserves. See “Dividends.”

 

  The holders of ADSs will be entitled to receive dividends to the same extent as the holders of our ordinary shares, subject to deduction of any fees and charges of the ADR depositary. See “Dividends,” “Description of American depositary shares” and “Expenses of this offering.”

 

Voting rights

Holders of our ordinary shares are entitled to one vote per share. Holders of ADSs may instruct the ADR depositary how to vote the ordinary shares underlying their ADSs under the circumstances described in the deposit agreement. See “Description of American depositary shares—Voting rights.”

 

Limitation on deposit of ordinary shares represented by ADSs

If any deposit of ordinary shares with the ADR depositary or its custodian in Jamaica under the deposit agreement would cause the ordinary shares on deposit to exceed 50% of our share capital, the ADR depositary may reject the deposit unless we provide proof to the ADR depositary that certain mandatory tender offer rules would not apply to the ADR Depositary or its custodian under Jamaican law.

 

Taxation

Dividends declared by us and distributed to a non-resident holder in respect of ordinary shares or ADSs are generally subject to Jamaican withholding tax, currently at the rate of 33.3% for corporations and 25% for individuals on the amount of the distribution (in the case of cash dividends), or on the non-resident holder’s proportional share of the value of the distribution (in the case of non-cash dividends). See “Taxation—Jamaican tax considerations.”

 

  Potential investors that are U.S. taxpayers should be aware that the Bank and, possibly, one or more of its subsidiaries likely will be considered a PFIC. For more information on tax considerations related to our PFIC status, see “Taxation—U.S. federal income tax considerations—PFIC rules” and “Risk factors—Risks relating to our ordinary shares and the ADSs—The Bank and, possibly, one or more of its subsidiaries are likely to be considered a PFIC, which could result in adverse U.S. tax consequences for U.S. investors.”

 

 

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Table of Contents

Proposed New York Stock Exchange symbol

We have been authorized to list the ADSs on The New York Stock Exchange under the symbol “NCJ.”

 

Lock-up agreements

We, our controlling shareholder, the selling shareholders, other affiliates of our controlling shareholder and our directors and executive officers will enter into lock-up agreements with the underwriters of this offering under which neither we nor they may, for a period of 180 days after the date of this prospectus, directly or indirectly sell, dispose of or hedge, or file or cause to be filed a registration statement with the SEC under the Securities Act relating to any of our ordinary shares, including in the form of ADSs, or any securities convertible into or exercisable or exchangeable for any of our ordinary shares, including in the form of ADSs, without the prior written consent of J.P. Morgan Securities LLC, on behalf of the underwriters; provided, however, that this restriction will not apply to pledges of up to an aggregate of 1,387 million ordinary shares (including ordinary shares that are currently pledged) beneficially owned by our controlling shareholder to lenders which have outstanding loans to our controlling shareholder and his affiliates.

 

ADR depositary

JPMorgan Chase Bank, N.A.

 

Certain relationships and related party transactions

See “Related party transactions” for a discussion of business relationships between us and related parties and “Underwriting” for information regarding relationships between us and the underwriters.

 

Risk factors

You should carefully read the information set forth under “Risk factors” and the other information set forth in this prospectus before investing in the ADSs.

 

 

Expected timetable for the offering (subject to change):

 

Commencement of marketing of this offering

         , 2012   

Announcement of offer price

         , 2012   

Allocation of ADSs

         , 2012   

Settlement and delivery of ADSs

         , 2012   

Unless otherwise indicated, all information contained in this prospectus assumes:

 

 

no exercise of the underwriters’ option to purchase up to             additional ADSs to cover over-allotments of ADSs, if any; and

 

 

the ADSs to be sold in this offering will be sold at US$            , which is the midpoint of the range set forth on the cover page of this prospectus.

 

 

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Table of Contents

Summary financial and operating data

The following tables set forth summary financial and operating data at and for the fiscal years ended September 30, 2011, 2010 and 2009, at March 31, 2012 and for the six months ended March 31, 2012 and 2011. The summary financial data set forth below at September 30, 2011 and 2010 and for each of the fiscal years ended September 30, 2011, 2010 and 2009 have been derived from, and should be read together with, our audited consolidated financial statements and the accompanying notes included in this prospectus. The summary financial data at March 31, 2012 and for the six months ended March 31, 2012 and 2011 have been derived from, and should be read together with, our unaudited consolidated financial statements and the accompanying notes included in this prospectus.

The results of operations for the periods presented below are not necessarily indicative of the results to be expected for any future period. In particular, the results for the six months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the full fiscal year ending September 30, 2012. The summary historical financial and operating data should be read together with “Presentation of financial and other information,” “Selected financial and operating data,” “Operating and financial review and prospects,” “Selected statistical information” and our audited consolidated financial statements and the accompanying notes included in this prospectus.

Statement of income data

 

      For the six months ended March 31,     For fiscal year ended September 30,  
    2012(*)     2012     2011     2011(*)     2011     2010     2009  

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    (US$ in
thousands)
    (J$ in thousands)     (US$ in
thousands)
    (J$ in thousands)  

Operating income

             

Interest income

  US$ 172,804      J$ 15,053,857      J$ 15,128,317      US$ 346,574      J$ 30,191,938      J$ 33,304,294      J$ 35,460,698   

Interest expense

    (49,534     (4,315,169     (4,747,654     (103,783     (9,041,078     (12,654,651     (16,580,724
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

    123,270        10,738,688        10,380,663        242,791        21,150,860        20,649,643        18,879,974   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fee and commission income

    46,848        4,081,195        3,632,071        86,068        7,497,876        6,900,930        6,105,593   

Fee and commission expense

    (6,486     (564,987     (524,389     (12,379     (1,078,430     (945,145     (1,015,757
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net fee and commission income

    40,363        3,516,208        3,107,682        73,689        6,419,446        5,955,785        5,089,836   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gain on foreign currency and investment activities

    27,951        2,434,947        1,923,355        46,323        4,035,443        1,962,633        2,654,504   

Dividend income

    428        37,259        8,847        136        11,830        77,331        95,923   

Premium income(1)

    11,724        1,021,362        1,673,317        33,541        2,921,919        493,057        371,778   

Other operating income

    467        40,649        64,739        1,523        132,698        284,906        180,307   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    40,569        3,534,217        3,670,258        81,523        7,101,890        2,817,927        3,302,512   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating income

    204,202        17,789,113        17,158,603        398,003        34,672,196        29,423,355        27,272,322   

(footnotes on following pages)

 

 

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      For the six months ended March 31,     For fiscal year ended September 30,  
    2012 (*)     2012     2011     2011 (*)     2011     2010     2009  
      (US$ in
thousands)
    (J$ in thousands)     (US$ in
thousands)
    (J$ in thousands)  

Operating expenses

             

Staff costs

    61,216        5,332,835        4,542,910        106,068        9,240,116        9,252,662        7,989,772   

Provision for credit losses(2)

    17,526        1,526,795        415,947        8,826        768,881        947,962        1,027,634   

Depreciation and amortization

    4,233        368,761        282,986        6,659        580,132        528,333        593,538   

Impairment losses on securities(3)

    3,604        314,000               3,008        262,003        27,520          

Other operating expenses

    49,792        4,337,693        4,320,442        95,658        8,333,326        5,379,478        4,489,652   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    136,372        11,880,084        9,562,285        220,219        19,184,458        16,135,955        14,100,596   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

    67,830        5,909,029        7,596,318        177,784        15,487,738        13,287,400        13,171,726   

Gain on acquisition of associates(4)

                         11,668        1,016,505                 

Share of profit/(loss) of associates(5)

    3,716        323,729        161,758        2,697        234,979        200,713        (38,091
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit before taxation

    71,546        6,232,758        7,758,076        192,150        16,739,222        13,488,113        13,133,635   

Taxation

    (16,759     (1,460,004     (1,633,494     (42,527     (3,704,793     (2,413,315     (2,885,450

Net profit

  US$  54,787      J$  4,772,754      J$  6,124,582      US$  149,623      J$  13,034,429      J$  11,074,798      J$  10,248,185   

 

(footnotes on following pages)

 

 

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Statement of financial position data

 

      At March 31,     At September 30,  
    2012(*)     2012     2011(*)     2011     2010     2009  

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    (US$ in
thousands)
    (J$ in thousands)     (US$ in
thousands)
    (J$ in thousands)  

Assets

           

Cash in hand and balances at Bank of Jamaica

  US$ 244,486      J$ 21,298,524      US$ 237,908      J$ 20,725,491      J$ 19,472,761      J$ 24,668,011   

Due from other banks

    205,938        17,940,402        284,824        24,812,575        17,048,849        14,405,493   

Derivative financial instruments

    242        21,084                      12,864        52,191   

Investment securities at fair value through profit or loss

    11,874        1,034,377        20,494        1,785,352        698,711        752,578   

Reverse repurchase agreements(6)

    20,225        1,761,875        19,485        1,697,472        1,143,581        8,185,227   

Loans and advances, net of provision for credit losses(7)

    1,183,831        103,129,915        1,052,950        91,728,138        85,995,102        88,178,270   

Investment securities classified at fair value and at amortized cost

    2,394,730        208,617,883        2,329,815        202,962,775        199,434,273        166,966,379   

Investment in associates

    66,807        5,819,893        67,121        5,847,258        2,320,723        2,133,994   

Investment property

    143        12,500        138        12,000        12,000        13,000   

Intangible asset—computer software

    11,347        988,480        10,307        897,862        359,980        246,781   

Property, plant and equipment

    52,442        4,568,493        49,622        4,322,866        4,114,155        4,011,495   

Retirement benefit asset

                                       11,632   

Deferred income tax assets

    300        26,130        301        26,191        119,794        803,279   

Income tax recoverable

    15,977        1,391,836        16,103        1,402,777        1,855,938        1,705,001   

Customers’ liability—letters of credit and undertaking

    3,699        322,249        4,151        361,606        291,106        399,983   

Other assets

    33,216        2,893,604        25,080        2,184,878        2,090,174        2,563,163   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

    4,245,257        369,827,245        4,118,299        358,767,241        334,970,011        315,096,477   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

           

Due to other banks

    103,720        9,035,590        73,491        6,402,201        3,708,232        6,556,209   

Customer deposits

    1,859,443        161,986,131        1,788,437        155,800,401        144,283,158        130,331,351   

Promissory notes and certificates of participation

                  2,714        236,434        223,154        194,492   

Repurchase agreements

    1,037,771        90,405,867        965,100        84,075,103        85,292,763        77,374,431   

Obligations under securitization arrangements(8)

    126,734        11,040,453        165,047        14,378,119        20,456,162        27,157,180   

Derivative financial instruments

    63        5,513                      25,930        126,848   

Other borrowed funds

    40,543        3,531,885        60,508        5,271,146        6,575,623        7,815,552   

Income tax payable

    236        20,524        145        12,591        3,095        10,803   

Deferred income tax liabilities

    18,161        1,582,119        27,408        2,387,682        104,332        213,080   

Liabilities under annuity and insurance contracts

    281,231        24,499,521        270,495        23,564,275        20,405,624        19,114,764   

Provision for litigation

    222        19,300        149        13,000        13,300        28,506   

Retirement benefit obligations

    7,411        645,641        6,686        582,491        445,873        421,641   

Liability—letters of credit and undertaking

    3,699        322,249        4,151        361,606        291,106        399,983   

Other liabilities

    50,072        4,362,056        52,296        4,555,800        4,333,726        4,335,691   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    3,529,305        307,456,849        3,416,627        297,640,849        286,162,078        274,080,531   

Shareholders’ equity

           

Share capital

    74,220        6,465,731        74,220        6,465,731        6,465,731        6,465,731   

Shares held by NCB Employee Share Scheme

    (39     (3,388     (39     (3,388     (3,388     (3,388

Fair value and capital reserves(9)

    38,900        3,388,767        59,307        5,166,594        1,457,864        64,277   

Loan loss reserve(10)

    53,545        4,664,603        56,507        4,922,610        1,135,012        744,159   

Banking reserve fund(11)

    72,629        6,327,078        69,329        6,039,667        5,200,206        4,362,102   

Retained earnings reserve(12)

    160,863        14,013,657        130,583        11,375,761        8,875,761        8,875,761   

Retained earnings

    315,833        27,513,948        311,764        27,159,417        25,676,747        20,507,304   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

    715,951        62,370,396        701,671        61,126,392        48,807,933        41,015,946   

Total equity and liabilities

  US$  4,245,257      J$  369,827,245      US$  4,118,299      J$  358,767,241      J$  334,970,011      J$  315,096,477   

 

(footnotes on following pages)

 

 

 

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Other financial and operating data

 

      At and for the six
months ended March 31,
    At and for fiscal year ended
September 30,
 
    2012     2011     2011      2010      2009  

 

 

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 
                (Percentages, except where noted)  

Profitability and performance ratios:

           

Net interest margin(13)

    6.23       6.33        6.41         6.74         6.62   

Return on average shareholders’ equity(14)

    15.55        23.64        23.86         25.17         27.02   

Return on average total assets(15)

    2.65        3.62        3.81         3.49         3.45   

Non-interest income to operating income(16)

    39.63        39.50        39.00         29.82         30.77   

Efficiency ratio(17)

    56.44        53.30        52.36         51.53         47.93   

Capital ratios:

           

Risk-based capital adequacy ratio (Bank only)(18)

    14.44        15.27        15.18         16.30         14.61   

Shareholders’ equity to total assets (period end)

    16.86        15.81        17.04         14.57         13.02   

Average shareholders’ equity excluding intangible asset—computer software as a percentage of average total assets excluding intangible asset—computer software

    17.08       15.32       16.00         13.88         12.79   

Asset quality ratios:

           

Non-performing loans as a percentage of gross loans and advances(19)(20)

    7.08        7.30        7.16         3.45         2.61   

Non-performing loans as a percentage of total assets(19)(20)

    2.04        1.91        1.88         0.90         0.74   

Non-performing loans as a percentage of shareholders’ equity(19)(20)

    12.09        12.08        11.02         6.21         5.71   

Total provision for credit losses as a percentage of non-performing loans(19)(20)

    114.27        115.98        115.91         136.29         147.26   

Total provision for credit losses as a percentage of gross loans and advances(19)(20)

    8.09        8.46        8.29         4.70         3.84   

“Sub-standard,” “Doubtful” and “Loss” rated loans as a percentage of gross loans and advances(21)

    15.54        17.96        17.69         19.39         7.92   

“Sub-standard,” “Doubtful” and “Loss” rated loans as a percentage of total assets(21)

    4.47        4.70        4.64         5.09         2.26   

“Sub-standard,” “Doubtful” and “Loss” rated loans as a percentage of shareholders’ equity(21)

    26.52        29.72        27.23         34.93         17.35   

Liquidity and other ratios:

           

Loans and advances, net of provision for credit losses, as a percentage of total assets

    27.89        25.47        25.57         25.67         27.98   

Investment securities as a percentage of total assets

    56.69        59.75        57.07         59.75         53.23   

Loans and advances, net of provision for credit losses, as a percentage of customer deposits

    63.67        61.88        58.88         59.60         67.66   

Liquid assets as a percentage of customer deposits(22)

    33.56        39.73        40.91         41.92         34.47   

Per share data:

           

Earnings per share(23)

  J$ 1.93      J$ 2.49      J$ 5.30       J$ 4.50       J$ 4.16   

Dividends paid per share

  J$ 0.72      J$ 0.90      J$ 1.36       J$ 1.90       J$ 0.88   

Book value per share

  J$ 25.34      J$ 22.27      J$ 24.83       J$ 19.83       J$ 16.66   

Operating data:

           

Number of branches

    38        38        38         38         38   

Number of ATMs

    173        171        170         170         164   

Number of POSs

    9,937        8,890        9,168         9,072         9,184   

Number of employees(24)

    2,572        2,419        2,462         2,386         2,536   

(footnotes on following pages)

 

 

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(*)   We have translated U.S. dollar amounts from Jamaican dollars at the exchange rate of J$87.1154 per US$1.00, which is the average of the buying and selling J$/US$ exchange rates reported by the Bank of Jamaica for March 31, 2012.

 

(1)   Premium income for fiscal year 2011 reflected a substantial increase in the volume of annuities sold by our insurance and pension fund management business as a result of our success in winning bid tenders, which were unusual in size and scope, initiated by pension funds in liquidation for which we did not previously provide asset management services. As a result, the annuity income earned in fiscal year 2011 is not necessarily indicative of future results for this portion of NCB Insurance Company Limited.

 

(2)   The increase in provision for credit losses for the six months ended March 31, 2012 was due mainly to the loan losses recorded on loans to a group of related borrowers constituting our fourth largest credit exposure at March 31, 2012, which became non-performing in March 2011 and which have been deemed impaired based on the most recently available valuation of the collateral underlying those loans as of February 29, 2012.

 

(3)   The increase in impairment losses on securities for the six months ended March 31, 2012 reflects corporate bonds held in our available-for-sale portfolio, which were assessed for impairment and resulted in the recognition of J$314 million in impairment losses based on the most recently available valuation of the collateral underlying those corporate bonds as of February 29, 2012. The corporate bonds were issued by a group of related borrowers constituting our fourth largest credit exposure at March 31, 2012.

 

(4)   During fiscal year 2011, we accounted for our 29.30% equity interest in Jamaica Money Market Brokers Limited (investment brokerage firm) and 25.17% equity interest in Kingston Properties Limited (owners of real estate properties) as associated companies. The gain on acquisition of associates represents the excess of our share of the identifiable net assets of these associated companies (J$3,335 million), as determined from the published financial statements of these companies at June 30, 2011, over the cost of the acquisition (J$2,319 million).

 

(5)   Share of profit/(loss) of associates reflects our proportionate share of the earnings of our associated companies. Share of profit/(loss) of associate for each fiscal quarter reflects the financial results of our associated companies for the previous fiscal quarter due to timing of receipt of financial information from such companies and the materiality of our associated companies’ operations in relation to our operations. Associated companies are companies in which we hold a significant, but non-controlling equity interest. Our associated companies as of the date of this prospectus are Kingston Wharves Limited (a wharf operation and stevedoring company); Dyoll Group Limited (a diversified holding company that is currently in liquidation and with respect to which we do not expect to incur any further profits or losses); Jamaica Money Market Brokers Limited; and Kingston Properties Limited. No profit or loss is reflected in this line item for our interest in Jamaica Money Market Brokers Limited or Kingston Properties Limited for fiscal year 2011; instead it is reflected in gain on acquisition of associates, as described in note (4) to this table.

 

(6)   Represents collateralized lending (primarily collateralized by Jamaican government debt securities) to counterparties and related accrued interest receivable.

 

(7)   Reflects gross loans and advances, net of provision for credit losses as determined under IFRS plus interest receivable. The amount by which provision for credit losses under Bank of Jamaica regulatory requirements exceeds provision for credit losses determined under IFRS is recorded as a transfer to non-distributable loan loss reserve on our statement of changes in shareholders’ equity.

 

(8)   Represents obligations under a US$225 million credit card receivables facility (repaid and terminated subsequent to March 31, 2012) and two securitizations of diversified payment rights under existing and future U.S. dollar payment advances, payment orders and remittances aggregating US$150 million.

 

(9)   Fair value reserve increases or decreases as a consequence of increases or decreases, respectively, in the market value of our available-for-sale investment securities. Capital reserve increases or decreases as a consequence of increases or decreases, respectively, in the exchange gains and losses on translation of the net assets of subsidiaries organized outside of Jamaica and changes in our share of the reserves of associated companies.

 

(10)   Loan loss reserve represents the provision established with respect to non-performing loans under Bank of Jamaica regulations, reduced by the provision established with respect to such loans under IFRS. The main contributor to the increase in loan loss reserve at September 30, 2011 as compared to September 30, 2010 were loans to a group of related borrowers constituting our fourth largest credit exposure at March 31, 2012, which became non-performing in March 2011. Based on our typical practice, we transferred capital that is equivalent to the gross value of that loan to loan loss reserve at the time the loans became non-performing. See “Selected statistical information—Nonaccrual, past due and restructured loans” and “Business—Credit risk management.”

 

(11)   A banking reserve fund is maintained in accordance with the Jamaican Banking Act, which requires that a minimum of 15% of the Bank’s net profits, as defined by the Jamaican Banking Act, be transferred to the reserve fund until the amount of the fund is equal to 50% of the paid-up capital of the Bank and thereafter, 10% of the net profits be transferred to the reserve fund until the amount of the fund is equal to the paid-up capital of the Bank.

 

(12)   The Jamaican Banking Act permits the transfer of any portion of the Bank’s net profit to a retained earnings reserve. This reserve constitutes a part of the capital base for the purpose of determining the maximum level of deposit liabilities and lending to customers. The deposit liabilities of the Bank and other indebtedness for borrowed money, together with all interest accrued, should not exceed 25 times its capital base.

 

(13)   Net interest margin is calculated as annualized net interest income (excluding dividends on equity securities) divided by total average interest-earning assets.

 

 

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(14)   Return on average shareholders’ equity is calculated as net profit (annualized for the interim periods presented) divided by average shareholders’ equity. Average shareholders’ equity is derived from the average balance sheets. See “Selected statistical information.”

 

(15)   Return on average total assets is calculated as net profit (annualized for the interim periods presented) divided by average total assets. Average total assets is derived from the average balance sheets. See “Selected statistical information.”

 

(16)   Non-interest income to operating income is calculated as the total of net fee and commission income, gain on foreign currency and investment activities, dividend income, premium income and other operating income, divided by total operating income.

 

(17)   Efficiency ratio is calculated as the sum of staff costs, depreciation and other operating expenses divided by total operating income.

 

(18)   Risk-based capital adequacy ratio (Bank only) is calculated as qualifying capital divided by total risk weighted assets. Qualifying capital is the sum of Tier 1 and Tier 2 capital less prescribed deductions for investment in associated companies and subsidiaries, intangible assets and any accumulated losses in subsidiaries. See “Regulation and supervision.”

 

(19)   Non-performing loans as a percentage of gross loans and advances is calculated as total non-performing loans divided by gross loans and advances. Non-performing loans are loans as to which there have been no payments of principal or interest for 90 days or more.

 

(20)   Non-performing loans to gross loans and advances, non-performing loans as a percentage of total assets, non-performing loans as a percentage of shareholders’ equity, total provision for credit losses as a percentage of non-performing loans and total provision for credit losses as a percentage of gross loans and advances for fiscal year 2011 were impacted by loans to a group of related borrowers constituting our fourth largest credit exposure at March 31, 2012, which became non-performing in March 2011 and which have been deemed impaired based on the most recently available valuation as of February 29, 2012.

 

(21)   “Sub-standard,” “doubtful” and “loss” loans are defined under Bank of Jamaica regulations. See “Business—Credit risk management.”

 

(22)   Liquid assets consist of cash in hand and balances at Bank of Jamaica, investment securities with maturities of less than nine months, any assets specially designated as liquid by the Bank of Jamaica and due from other banks.

 

(23)   Earnings per share is calculated as net profit divided by weighted average shares outstanding for the relevant fiscal period or year. See note 15 to our audited consolidated financial statements.

 

(24)   Includes permanent, contract, part-time and temporary employees.

 

 

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Risk factors

Our business, financial condition and results of operations could be materially and adversely affected if any of the risks described below occurs. As a result, the market price of the ADSs could decline, and you could lose all or part of your investment. We may face additional risks and uncertainties that are not currently known to us, or that we currently deem immaterial, which may also impair our business. You should carefully consider all of the risk factors set forth below before making an investment decision regarding the ADSs.

Risks relating to Jamaica

Economic, social and political conditions in Jamaica and downgrades of Jamaica’s credit rating may have an adverse effect on our business, results of operations and financial condition.

NCB and most of its subsidiaries are organized in Jamaica, and substantially all of our operations, properties and customers are in Jamaica. As a consequence, our business, results of operations and financial condition are materially affected by economic, social and political conditions in the country.

The Jamaican economy has, in recent years, been affected by, among other factors, the global economic and financial crisis, a high ratio of public debt to GDP and low tax revenues. Jamaica’s GDP amounted to J$737,804 million for the 12 months ended December 31, 2011 compared to J$756,133 million for the 12 months ended December 31, 2006. GDP improved by 1.5% for the 12 months ended December 31, 2011 as compared with a 1.4% decline for the 12 months ended December 31, 2010. The country recorded its first year-over-year growth in GDP of 1.6% for the quarter ended March 31, 2011 compared to the quarter ended March 31, 2010, representing the first quarter in which there had been an increase as compared to the similar quarter in the previous year since the quarter ended September 30, 2007. Jamaica recorded growth in GDP of 1.6% for the quarter ended December 31, 2011 compared to the quarter ended December 31, 2010 and 0.7% for the quarter ended September 30, 2011 compared to the quarter ended September 30, 2010.

In 2010, Jamaica’s macroeconomic environment was significantly shaped by the implementation of the JDX, which was designed to alleviate the debt service burden on the Jamaican government and foster a lower interest rate environment. Under the JDX, the Jamaican government exchanged approximately J$695.6 billion of domestic debt for an equivalent principal amount of debt securities with lower interest rates and longer maturities. The Jamaican government was required to effect the JDX and take other actions, including adopting a tax policy package yielding approximately 2% of GDP, as a condition to the signing of a 27-month Stand-By Arrangement with the IMF in February 2010. The Stand-By Arrangement outlined a medium-term reform program aimed at enhancing fiscal and debt sustainability and enabled access by the Jamaican government to significant funding from multilateral financial institutions. As part of this arrangement, the Jamaican government is expected to meet specified financial and monetary benchmarks to reduce deficit spending, including, among other things, a target ceiling increase in Jamaican government direct debt of no more than J$1,000 million above the debt level in 2010, as well as structural benchmarks for implementing organizational and fiscal reform, such as by adopting a fiscal responsibility framework legislation, adopting a tax administration reform action plan, completing an action plan to establish a central treasury management system, divesting equity holdings in Air Jamaica Limited and Clarendon Alumina Production Limited, reforming tax incentives, freezing government wage and salary increases and

 

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introducing laws to improve the regulation and supervision of financial institutions. The Stand-By Arrangement has been suspended as a result of, among other matters, delays in the implementation of agreed upon measures, and the recently-elected government has initiated formal talks with the IMF with a view towards entering into a new agreement. The Jamaican government has yet to implement either tax or pension reforms or the divestment of Clarendon Alumina Production Limited. In late August 2011, the Jamaican government approved a 7% retroactive raise of public employees’ salaries.

Jamaica’s long-term foreign currency credit ratings were downgraded by S&P, Moody’s and Fitch between August 2009 and January 2010 to selective default categories CCC, Caa 1 and CCC, respectively, but were subsequently upgraded in the first quarter of 2010 following the JDX. Jamaica’s current long-term foreign currency credit ratings by the respective agencies are as follows: B- by S&P; B3 by Moody’s; and B- by Fitch. On October 31, 2011, S&P revised its outlook on Jamaica to negative from stable but affirmed its B- long-term foreign currency credit rating. If the long-term impact of the JDX and other measures required to be implemented by the Jamaican government under the Stand-By Arrangement are not effective in alleviating Jamaica’s debt service difficulties or are not successfully implemented, those difficulties could recur and have a material adverse effect on the economic activity of the country and our business, results of operations and financial condition.

Jamaica continues to be subject to significant economic, political and other uncertainties, including changes in fiscal, monetary and trade policies that could affect the overall business environment in Jamaica. Economic and political developments in Jamaica may negatively affect our business, results of operations and financial condition.

The Jamaican economy remains vulnerable to external shocks which could adversely affect our business, results of operations and financial condition.

A significant decline in economic growth of any of Jamaica’s major trading partners—in particular, the United States, the United Kingdom and Canada—could have a material adverse effect on Jamaica’s balance of trade and economic growth. In addition, a “contagion” effect, under which an entire region or class of investments becomes less attractive to, or subject to outflows of funds by international investors could negatively affect Jamaica. Slow or negligible economic growth in Jamaica, the Caribbean or elsewhere may result in asset quality deterioration and a decrease in market prices and liquidity for the ADSs.

The recent global economic and financial crisis has had negative effects on the Jamaican economy. During 2009, the economies of the United States and some European countries contracted, which, in turn, impacted the Jamaican economy. More recently, there have been periods of uncertainty regarding the potential for recession in the United States, the United Kingdom and certain other European countries, which may adversely impact the Jamaican economy.

The effect on consumer confidence of any actual or perceived deterioration in the United States, United Kingdom, Canadian or Jamaican economies may have a material adverse effect on our business, results of operations and financial condition.

Jamaican government policies and actions and judicial decisions in Jamaica could negatively affect the local economy and, as a result, our business, results of operations and financial condition.

Our business, results of operations and financial condition may be adversely affected by changes in Jamaican governmental policies and actions and judicial decisions involving a broad range of matters, including interest rates, exchange rates, inflation rates, taxation, banking, pension fund

 

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regulations, insurance regulations and other political or economic developments affecting Jamaica. For example, although it has not elected to do so in recent years, the Bank of Jamaica has the power to impose limits on the rate of interest and fees that banks may charge or pay to their customers. A significant percentage of our revenues and operating cash flow is generated from loans and fees, and a significant source of our funding is deposits. Therefore, any such limitation could have a material adverse effect on our business, results of operations and financial condition. In addition, changes in tax-related laws and regulations, and interpretations thereof, can affect tax burdens by increasing tax rates and fees, creating new taxes, limiting tax deductions, and eliminating tax-based incentives and non-taxed income.

The Jamaican government has historically exercised substantial influence over the economy, and its policies are likely to continue to have a significant effect on Jamaican companies, including us. In addition, in general elections held in Jamaica in December 2011, the People’s National Party defeated the incumbent Jamaica Labour Party, which had been in power for the past four years, ushering in a new prime minister, Portia Simpson Miller. Any change in Jamaican government policies resulting from the newly-elected government could result in the imposition of new laws, regulations or Jamaican government actions that could adversely affect the general business climate in Jamaica and, accordingly, our business. Future governmental policies and actions or judicial decisions could adversely impact our business, results of operations or financial condition.

Natural disasters in Jamaica could disrupt our businesses and adversely affect our results of operations and financial condition.

We are exposed to natural disasters in Jamaica, such as hurricanes, tropical storms and earthquakes. In the event of a natural disaster, our customers and the demand for our financial products and services could be adversely affected. In addition, our disaster recovery plans may prove to be ineffective, which could have a material adverse impact on our ability to conduct our businesses, particularly if such an occurrence affects computer-based data processing, transmission, storage and retrieval systems or destroys customer or other data. In addition, if a significant number of our employees and executive officers were unavailable because of a natural disaster, our ability to conduct our businesses could be compromised. Accordingly, natural disasters or similar events could have a material adverse effect on our business, results of operations and financial condition.

Crime and civil unrest in Jamaica may have an adverse effect on our business, results of operations and financial condition.

Jamaica has experienced high rates of violent crime in recent years, particularly in the parishes of Kingston, St. Andrew, St. James and St. Catherine. Continuing high rates of crime, as well as occasional incidents of civil unrest, such as that occurring in connection with the extradition to the United States of an alleged Jamaican gang leader in May to June 2010, could negatively affect our business and financial performance as well as delay or prevent new business opportunities for us. In addition, insurance premiums charged for some or all of the applicable coverage currently maintained by us could increase dramatically, and some or all of the applicable coverage could cease to be commercially available or prove to be inadequate to cover losses resulting from criminal activity. Criminal activity could also have adverse impact on the reputation of the country, our customers and potential customers, limiting opportunities for our growth within and outside of Jamaica. Any increased violence could result in decreased business

 

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activity and increased security costs. For all of these reasons, continuing high rates of violent crime could result in increased security and other costs and liabilities and decreased revenues for us, and adversely affect our business, results of operations and financial condition.

Risks relating to our business

A decline in the quality of our loan portfolio and other assets may have an adverse impact on our business, results of operations and financial condition.

Changes in the financial condition or credit profiles of our banking customers and increases in inflation or interest rates could have a negative effect on the quality of our loan portfolio, causing us to increase provision for credit losses and resulting in reduced profitability. In particular, the level of non-performing loans and/or impaired loans may increase in the future as a result of factors beyond our control, such as economic conditions and political events affecting Jamaica generally or specific sectors of the Jamaican economy.

A substantial number of our customers are low- to middle-income individuals and SMEs, and these customers are more likely to be adversely affected by downturns in the Jamaican economy than large corporations and high-income individuals. For example, unemployment affects the ability of individuals to qualify for, and repay, consumer loans. Consequently, we may experience higher than typical levels of non-performing loans, which could result in increased provision for credit losses due to defaults by, or deterioration in the credit profiles of, individual borrowers. Non-performing loans and provision for credit losses may increase materially in the future and adversely affect our business, results of operations and financial condition.

Existing provision for credit losses may not be adequate to cover any increases in non-performing or impaired loans or deterioration in the credit quality of our loan portfolio. As a result, we may be required to increase provision for credit losses, which may adversely affect our business, results of operations and financial condition. See”—Default by one or more of our largest borrowers could adversely affect our business, results of operations and financial condition.”

Declines in the value of our substantial Jamaican government debt securities portfolio or Jamaica’s inability to service those securities, or declines in the value of other securities in our investment portfolio, could have an adverse effect on our business, results of operations and financial condition.

Our debt securities portfolio primarily consists of Jamaican government debt securities. At March 31, 2012, our Jamaican dollar-denominated and U.S. dollar-denominated Jamaican government debt securities were valued at J$129,155.8 million (US$1,482.6 million) and US$725.1 million (J$63,163.3 million), respectively, and together represented 93.6% of our consolidated debt securities portfolio and 52.0% of our total assets. In addition, at March 31, 2012, our euro-denominated Jamaican government debt securities were valued at J$2,323.3 million (US$26.7 million) and represented 1.1% of our consolidated debt securities portfolio and 0.6% of our total assets. Jamaican government debt securities currently are rated B- by S&P, B3 by Moody’s and B- by Fitch. On October 31, 2011, S&P revised the outlook on Jamaica to negative from stable but affirmed its B- long-term foreign currency credit rating. A significant decline in the ratings or value of Jamaican government debt securities, or any inability of the Jamaican government to service these securities, could require us to record impairment losses and to experience increased unrealized losses and, depending on the magnitude of such declines, could cause us to become insolvent. Any significant decline in the value of our Jamaican government debt securities portfolio would materially and adversely affect our business, results of operations and financial condition.

 

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Sustained or material declines in the market price for other debt securities we hold could similarly result in impairment or losses as well as realized and unrealized losses on those debt securities. In addition, losses in the Jamaican equity markets could result in losses from impairment or sale of the equity securities that we hold. Market and other factors could affect the value of the equity interests we hold in our associated companies and the amounts realized upon disposition of those equity interests. Any significant decline in the market prices or values of the instruments we hold could materially adversely affect our business, results of operations and financial condition.

We are subject to credit and counterparty risks.

Our commercial banking, insurance and wealth management operations are exposed to credit and counterparty risks arising through the extension of loans, letters of credit and financial guarantees and the entry into reverse repurchase agreements pursuant to which we make short-term loans collateralized by Jamaican government securities. At March 31, 2012, our total credit exposures consisted of J$350,092 million (US$4,019 million) in balance sheet assets and J$26,697 million (US$306 million) in off-balance sheet assets. We also face the risk of securities trades or currency transactions that we execute failing to settle at the required time due to non-delivery by the counterparty or systems failure by clearing agents, exchanges, clearing houses or other financial intermediaries. Any inability or failure of a customer or counterparty to honor their contractual obligations to us could materially and adversely affect our business, results of operations and financial condition.

On October 31, 2011, S&P revised its outlook on Jamaica to negative from stable but affirmed its B- long-term foreign currency credit rating. On November 1, 2011, S&P revised its outlook on us to negative from stable but affirmed its B- long-term and C short-term counterparty credit rating on us. Our counterparty relationships may be affected by changes in our credit ratings or the credit ratings of the Jamaican government. At March 31, 2012, the Bank had outstanding borrowings of J$7,013 million (US$81 million) under repurchase agreements with two global banking institutions under the terms of which a downgrade in the credit ratings of the Jamaican government that precipitates a fall in the value of Jamaican government debt securities pledged by the Bank pursuant to those repurchase agreements could trigger margin calls that would be required to be settled in cash. In addition, we also have a US$15 million structured loan from one of these global banking institutions that could be subject to a margin call if there is a decline in the value of Jamaican government debt securities. We have in the past, and may in the future, be party to agreements that impose increased costs on us or subject us to default remedies based on a downgrade of our credit ratings. Any resulting increased costs or default remedies could materially and adversely affect our business, results of operations and financial condition.

Default by one or more of our largest borrowers could adversely affect our business, results of operations and financial condition.

The aggregate outstanding loans to the Bank’s 10 largest borrowers (consolidating affiliated entities) totaled J$31,606 million at March 31, 2012 and represented 29.8% of the Bank’s consolidated total loan portfolio at that date. Six of the 10 borrowers’ loans, totaling J$20,937 million outstanding and representing 19.7% of the Bank’s consolidated total loan portfolio at March 31, 2012, were collateralized by real estate mortgages and, to a lesser extent, by debt service accounts. The loan to value ratio of the collateralized loans ranged from 140.7% to 47.5%. Defaults on loans by one or more of these borrowers may have a material adverse effect on our business, results of operations and financial condition. For example, in

 

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March 2011, J$2,995 million (US$35 million) in loans (representing approximately 3.2% of the Bank’s total loans and advances and the Bank’s fourth largest credit exposure at both March 31, 2011 and March 31, 2012) became non-performing. As a consequence, in accordance with Bank of Jamaica guidelines, we reversed the interest that was accrued at the date on which the loans became non-performing and are prohibited from recognizing any interest on the loans in our income statement so long as the loans remain in non-performing status. In addition, based on our typical practice, at the date the loans became non-performing, we transferred capital equal to the gross loan value to a non-distributable loan loss reserve. The effect of the loans becoming non-performing was to increase our ratio of non-performing loans to gross loans and reduce the amount available for dividends. These loans were not deemed impaired at the time they became non-performing because the collateral supporting the loans was deemed sufficient to support full repayment. Based on a valuation of the collateral supporting the loans as of February 29, 2012, these loans were deemed to be impaired, resulting in our recording of a provision for credit loss of J$1,032 million during the three months ended March 31, 2012.

We may suffer significant losses from this or other defaults on large credit positions, particularly if we are unable to recover sufficient amounts with respect to any collateral or guarantees supporting the credit. Increases in non-performing loans, impaired loans and/or impairment losses on securities and deterioration in the level of loan losses, the ratio of non-performing loans to gross loans and the ratio of provision for credit losses to gross loans could have an adverse impact on our income, funding arrangements and credit rating which could adversely affect our business, results of operations and financial condition.

We are subject to fluctuations in interest rates and foreign exchange rates, which may materially and adversely affect our business, results of operations and financial condition.

Changes in short-term interest rates may affect interest margins and, therefore, net interest income, which comprises the majority of our income. Increases in interest rates may reduce the volume of loans originated by our banking operations. Sustained high interest rates may discourage customers from borrowing and may also result in increased delinquencies in outstanding loans and deterioration in the quality of assets. Increases in interest rates may also reduce the value of our assets, including the financial assets of our banking operations, the assets managed by our asset management operations and the investments of our proprietary trading operations. We hold a substantial portfolio of loans and debt securities that have both fixed and floating interest rates. In addition, we may incur costs (which, in turn, will impact our results of operations) if we implement strategies to reduce future interest rate exposure. Increases in interest rates may reduce gains or require us to record losses on sales of our loans or securities.

We face exposure to fluctuations in foreign exchange rates arising from holding financial assets in currencies other than those in which financial liabilities are expected to settle. The types of instruments exposed to foreign exchange rate risk include, for example, foreign currency-denominated loans and investment securities and foreign currency-denominated debt. At March 31, 2012, we had a positive net U.S. dollar exposure of approximately US46 million (J$4,050 million), a negative net pound sterling exposure of approximately £24 million (J$3,379 million) and a positive net Canadian dollar exposure of approximately Cdn$2 million (J$214 million).

 

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Our operations are subject to liquidity risk, which may result in increases to funding costs or a lack of liquidity.

Our principal sources of funding for our operations are savings accounts, time deposits and checking accounts, which together represented approximately 52.7% of our consolidated total liabilities at March 31, 2012 and repurchase agreements and liabilities under annuity and insurance contracts, which represented approximately 29.4% and 8.0%, respectively, of our consolidated total liabilities at the same date. Because our banking operations rely primarily on short-term deposits and repurchase transactions for funding, a sudden or unexpected shortage of funds in the Jamaican banking system or a decrease in deposit levels may prevent us from meeting our obligations or obtaining necessary funding without incurring higher costs or selling assets at prices below prevailing market values. In addition, interest rate changes or disruptions in the capital markets may make the terms of borrowings and deposits less favorable which could materially and adversely affect our business, results of operations and financial condition.

Our risk management procedures may not be effective, which may, in turn, expose us to material losses that adversely affect our business, results of operations and financial condition.

The legislative framework for credit bureaus in Jamaica has only recently been established. We anticipate that the first credit bureau in Jamaica will become operational during 2012. We review the creditworthiness of individual borrowers or counterparties using an internal credit rating system. As this review process involves detailed analyses of the borrower’s or counterparty’s credit risk, taking into account quantitative and qualitative factors, it necessarily is subject to human error and may fail to predict future risk exposures. These risk exposures could, for example, arise from factors we did not anticipate or correctly evaluate in our models and in our analyses. In addition, our personnel may fail to detect risks before they occur, or may not effectively implement our risk management procedures, which may increase our exposure to credit risk. Furthermore, we often rely on information furnished to us by borrowers and counterparties, including financial statements and other financial information. While we take all actions we deem necessary to ensure the accuracy of the information provided to us, it may not be accurate or we may not successfully identify all of the information needed to fully assess the risk which may expose us to increased credit and counterparty risk.

We seek to control financial risk by, among other things, establishing limits relating to our credit, market and liquidity exposures, including, for example, limits on our credit exposure to any one borrower or counterparty. However, such limits may not adequately limit our risk exposures because they are not adequately designed or because of error in their administration. Any failure by us to effectively implement and consistently follow our risk management procedures may result in higher risk exposures for our operations, which could materially and adversely affect our business, results of operations and financial condition.

We may be unable to realize collateral or collect on guarantees securing loans, which may adversely affect our business, results of operations and financial condition.

We grant loans that are secured by collateral, including real estate, plant and equipment, marketable securities and other assets that are generally located in Jamaica. Certain of those loans are required to be secured in accordance with the specific requirements of Bank of Jamaica regulations. The value of such collateral may significantly fluctuate or decline due to factors beyond our control, including economic and political conditions in Jamaica. At March 31, 2012, approximately 73.6% of the Bank’s gross loans and advances were secured in whole or in part. An economic slowdown may lead to a downturn in the Jamaican real estate market and other

 

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asset markets, which may, in turn, result in declines in the value of real estate or other assets securing loans we have made to levels below the principal balances of those loans. Typically, a loan would become non-performing before we would regard it as exhibiting signs of impairment. Once collateral for a non-performing loan is to be disposed of, a valuation of the collateral is usually sought from independent appraisers in preparation for disposal of the collateral. That valuation is used to assess the extent of any impairment. If it is necessary to assess impairment before an updated valuation is received, an earlier valuation would be used in that assessment. While the loan remains non-performing, the valuation is updated periodically, as steps to dispose of the collateral continue. For corporate loans that are determined in management’s judgment, on a case-by-case basis, to be material, a more frequent appraisal may be sought. The Bank does not apply any in-house adjustments to the valuations received by independent appraisers, including for purposes of determining allowances for loan losses. A decline in the value of the collateral securing loans we have made may result in reduced recoveries from collateral realization which, in turn, may have an adverse impact on our business, results of operations and financial condition.

We also make loans on the basis of guarantees from persons affiliated or associated with borrowers. To the extent that guarantors encounter financial difficulties due to economic conditions, personal or business circumstances or otherwise, our ability to enforce those guarantees may be impaired.

We may face difficulties in enforcing our rights as secured creditors against borrowers and guarantors, and may face difficulties in realizing the value of collateral. In particular, timing delays and procedural problems, as well as debtor-protective judicial interpretations of the law, may make it difficult to realize on collateral or against guarantees or enforce judgments in our favor, which could materially and adversely affect our business, results of operations and financial condition.

We may be unable to realize value from real estate collateral securing non-performing loans or impaired loans, which may have an adverse effect on our business, financial condition and results of operations.

A significant portion of our loan portfolio is secured by real property. During the ordinary course of our business, we may seek to realize value from real estate collateral securing those loans. The amount that we, as a mortgagee, may be able to realize from the real estate collateral after a default depends upon factors outside of our control, including the following:

 

 

general or local economic conditions;

 

 

demand for the property;

 

 

timing of the sale;

 

 

values of real estate in comparable locations;

 

 

interest rates;

 

 

operating and other expenses of the mortgaged properties, such as outstanding property taxes, repair and maintenance costs, insurance and security;

 

 

zoning, planning and other governmental regulations affecting the use of property; and

 

 

hurricanes or other natural disasters.

If we are unable to realize value from the real estate collateral securing non-performing or impaired loans, we may be required to recognize additional provision for credit losses and our business, results of operations and financial condition may be adversely affected.

 

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Proceedings against our customers under Jamaican insolvency law may limit our ability to collect monetary obligations.

We may experience difficulty enforcing our rights under loans made to customers who initiate insolvency proceedings under Jamaican law or against whom such proceedings are initiated. While such proceedings are pending, we may not take certain actions to collect amounts owed with respect to unsecured loans made by us (principally credit card loans and “payroll loans” that are expected to be repaid from regular salary deductions) until court approval has been received; however, we cannot assure you that collection will be allowed with respect to an unsecured loan under such circumstances. If a decline in general economic conditions or other factors cause an increase in the incidence of insolvency proceedings, we may not be able to enforce our rights to collect amounts owed to us and our business, financial condition and results of operations could be materially and adversely affected.

Loans made by us and certain investment securities held by us may be prepaid, which may result in reinvestment of assets on less profitable terms.

Our loans and certain of our investment securities are subject to prepayment risk, which results from the ability of a borrower or issuer to pay a loan or redeem a security prior to maturity. Generally, in a declining interest rate environment, prepayment activity increases with the effect of reducing weighted average lives of interest earning assets and adversely affecting results. This likelihood has been increased by recent legislative changes that substantially reduce the cost of re-registering liens on real estate when borrowers seek to refinance their loans. Prepayment risk also has an adverse impact on credit card obligations, since prepayments could shorten the weighted average life of our portfolios, which may result in a mismatch in funding or in reinvestment at lower yields. Significant prepayments in our loan, credit card and investment portfolios in the future could have an adverse effect on our income since proceeds from the repayment of loans may be reinvested in instruments with lower interest rates.

Our pension fund management business is subject to risks relating to declines in the value of securities portfolios managed by us.

We face risks in our pension fund management business relating to the performance of the pension trusts we advise. We are generally paid a fee based on assets under management and, accordingly, a decline in the value of the securities portfolios that we manage will cause a decline in our revenues. Jamaican government debt securities constitute a large portion of the debt securities in pension funds whose assets are managed by NCB Insurance Company Limited, and our pension fund management business is therefore particularly exposed to declines in the values of those securities. Some pension fund trustees benchmark investment returns, and, if we are unable to consistently produce returns in excess of that benchmark, we may lose pension fund clients and our assets under management may decrease. Any customer loss could adversely impact our pension fund management business.

NCB Insurance Company Limited has retained an exclusive agent to manage the real estate portfolios of the pension funds. However, NCB Insurance Company Limited remains responsible for some of the actions of that agent and, accordingly, may be adversely affected by any activities of that agent in managing the portfolios if such activities are deemed to be improper or if the agent is deemed to have been improperly engaged by us.

 

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We may be required to increase our reserves for future insurance policyholder benefits and claims, which could adversely affect our business, results of operations and financial condition.

NCB Insurance Limited holds amounts as reserves for future insurance and annuity contract holder benefits and claims. The amount of the reserves is based on certain assumptions regarding yields, expense levels, mortality of the contract holders and duration of the insurance policies. If any assumptions turn out to be incorrect and we conclude that those reserves, together with future premiums and financial surplus, are insufficient to cover future insurance policyholder benefits and claims, we would be required to increase our reserves and incur income statement charges for the period in which we make the determination, which could adversely affect our business, results of operations and financial condition.

The profitability of our insurance operations may decline if mortality, morbidity or persistency rates differ significantly from our pricing expectations.

We set prices for many of our insurance and annuity products based upon expected claims and payment patterns, using assumptions for mortality rates, or likelihood of death, morbidity (illness) and persistency rates (a measure of the percentage of our insurance contracts that remain in force during a specified period without lapsing or being replaced by policies of other insurers). In addition to the potential effect of natural or man-made disasters, significant changes in mortality, morbidity or persistency could emerge gradually over time, due to changes in the natural environment, the health habits of the insured population, treatment patterns for disease or disability or other factors. The pricing of our insurance and annuity products is also based in part upon expected persistency of these products. Strong deviations in actual experience from our pricing assumptions could have an adverse effect on the profitability of our insurance and annuity products. Some of our insurance products do not permit us to increase premiums or adjust other charges and credits or limit those adjustments during the life of the policy or contract.

Downgrades in our credit ratings would increase the cost of, or impair access to, funding.

On November 1, 2011, S&P revised its outlook on us to negative from stable but affirmed its B- long-term and C short-term counterparty credit rating on us. S&P indicated that its rating on us is constrained by those on Jamaica. As discussed above, on October 31, 2011, S&P revised its outlook on Jamaica to negative from stable but affirmed its B- long-term foreign currency credit rating. Among the considerations cited by S&P were that the Stand-By Arrangement with the IMF had been suspended and as of November 1, 2011, the IMF had not completed its last four reviews because of delays in the implementation of agreed-upon measures.

Our credit ratings are an important component of our ability to obtain funding. Our ability to compete successfully for deposits depends on various factors, including our financial stability as reflected by our credit ratings. A downgrade in our credit ratings may adversely affect the perception of our financial stability and our ability to raise deposits and the cost of existing funding. Adverse changes in credit ratings would also increase our cost of raising funds in the capital markets or borrowing funds. In addition, lenders and counterparties in derivative transactions are sensitive to ratings downgrades and, accordingly, if any of our credit ratings is downgraded, we may have difficulty in entering into transactions with lenders and counterparties that we depend on to operate our business. Any downgrade of our credit ratings could materially and adversely affect our business, results of operations and financial condition.

 

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Noncompliance with regulatory requirements may result in penalties and restrictions that could materially and adversely affect our business, results of operations and financial condition.

Our operations are subject to extensive regulation and supervision by Jamaican banking, insurance and securities authorities. We are also required to comply with the requirements of the JSE, the Trinidad and Tobago Securities and Exchange Commission, or “TTSEC,” and the TTSE. Failure to comply with applicable regulations, including regulations relating to the maintenance of capital reserves and liquidity positions, could subject us to penalty interest rates on borrowings from the Bank of Jamaica or other sanctions, such as the imposition by the Bank of Jamaica of directions to prevent further violations, the assumption of the management of the Bank by the Bank of Jamaica, the suspension or revocation of our banking license, or the delisting or suspension of our listing with the JSE or TTSE. In the event we encounter significant financial problems, are in danger of insolvency or become insolvent, or are otherwise not deemed to be viable, the banking authorities would have broad powers to intervene in our management and operations, including by suspending or removing management and, in extreme circumstances, putting all or a portion of our businesses under temporary management or taking control of our business operations, which could adversely affect our business, results of operations and financial condition.

Changes in laws and regulations in Jamaica could adversely affect our business, results of operations and financial performance.

Jamaican banking and financial services laws and regulations are subject to ongoing review and revision, including changes in response to global regulatory trends and, more recently, the global economic and financial crisis. In the wake of this crisis, the Jamaican government has been actively considering new banking and financial sector laws and regulations, and reviewing and revising existing laws and regulations, including in relation to capital adequacy requirements.

The Jamaican Financial Services Commission has recently approved changes to the regulatory requirements for securities dealers in Jamaica, which have resulted in increased capital requirements for participants in the industry, including our subsidiary NCB Capital Markets Limited. Some of the changes to the regulatory requirements have been implemented while others, including some of which are still in draft form, are expected to be phased-in beginning in June 2012. These changes, coupled with the current low interest rate environment, may force securities dealers (such as NCB Capital Markets Limited) to shift their retail client funds from reverse repurchase agreements to off-balance sheet vehicles. Although the off-balance sheet model exposes a securities dealer to less market risk and potentially less overhead costs, it is more dependent on fee income and less dependent on income being generated based on margins, and is potentially less profitable than the reverse repurchase agreement model that is currently popular. If the proposed changes were to take effect immediately, the pace and extent to which NCB Capital Markets Limited shifts from the reverse repurchase model to the off-balance sheet model could affect its financial position.

The Jamaican government may implement additional reforms impacting the financial system, such as measures intended to achieve greater stability of or more effective supervision over financial institutions, although we cannot predict the nature or timing of such future measures, if any. The adoption of new laws or regulations, or changes in the interpretations or enforcement of existing laws or regulations may have an adverse impact on our business, results of operations and financial condition.

 

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We may face increased capital requirements under the new Basel Capital Accord.

Jamaican banks are required by the Jamaican Banking Act to maintain regulatory capital of at least 10% of risk-weighted assets and paid-in capital and reserves of at least 6% of total assets. However, the Bank of Jamaica currently requires us to maintain a risk-weighted capital adequacy ratio of 12.5% due to, among other factors, our status as a systemically important financial institution in Jamaica. At March 31, 2012, the ratio of our qualifying capital to risk-weighted assets was 14.44% and the ratio of our paid-in capital and reserves to total assets was 10.97%. Certain developments could affect our ability to continue to satisfy the current capital adequacy requirements applicable to us, including the following:

 

 

the increase of risk-weighted assets as a result of the expansion of our business or regulatory changes;

 

 

the failure to increase our capital correspondingly to reflect increases in risk-weighted assets;

 

 

declines in the value of our investment portfolio;

 

 

changes in accounting rules;

 

 

changes in provisioning guidelines that are charged directly against our equity or net income; and

 

 

changes in the guidelines regarding the calculation of the capital adequacy ratios of banks in Jamaica.

Starting in 2012, Jamaican banks will most likely be required to adopt the guidelines set forth under the Basel II and III capital requirements as directed by the Bank of Jamaica. These guidelines could result in a different level of minimum capital required to be maintained by us than under current Bank of Jamaica regulations. We cannot assure you that the adoption of the Basel II and III capital requirements will not have a material impact on our ability to meet the required capitalization ratio.

We may also be required to raise additional capital in the future in order to maintain our capital adequacy ratios above the minimum required levels. Our ability to raise additional capital may be limited by numerous factors, including, among others, our future financial condition, results of operations and cash flows; any necessary government regulatory approvals; our credit ratings; general market conditions for capital raising activities by commercial banks and other financial institutions; and domestic and international economic, political and other conditions.

If we require additional capital in the future, we cannot assure you that we will be able to obtain such capital on favorable terms, in a timely manner or at all. Furthermore, the Bank of Jamaica may increase the minimum capital adequacy requirements applicable to us. Accordingly, although we currently meet the applicable capital adequacy requirements, we may face difficulties in meeting these requirements in the future. If we fail to meet the capital adequacy requirements, we may be required to take corrective actions. These measures could materially and adversely affect our business, financial condition and results of operations, including our ability to grow our loan portfolio and declare dividends.

Increases in Jamaica Deposit Insurance Corporation premiums could have a material adverse effect on our future earnings.

The Jamaica Deposit Insurance Corporation, or “JDIC,” insures deposits in the amount of up to J$600,000 per account at institutions regulated and supervised by the Bank of Jamaica, including

 

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the Bank. The JDIC charges the insured institutions premiums annually to maintain adequate funding for the Deposit Insurance Fund, and these premiums are calculated as a percentage of insurable deposits. For the 12 months ending March 31, 2013, the premium charged to the Bank is J$187 million plus applicable general consumption ( i.e., sales) tax, or 0.15% of insurable deposits at December 31, 2011. Given the size of our deposit portfolio, any increase by the JDIC in this premium could have a material adverse effect on our business, financial condition and results of operations.

The cost of providing pension benefits to employees could be significantly impacted by changes in legislation, changes to the level of benefits, actuarial assumptions and methods, changing demographics and changes in investment performance.

We maintain two pension schemes, one of which provides defined benefits to our employees. The scheme has, since 2000, been closed to new participants. The report on the actuarial valuation of that pension scheme at June 30, 2011 (the most recent date for which information is available) disclosed a funding surplus (on the actuarial bases used for the valuation) of approximately J$5,387 million. However, the actual funded status of our pension scheme and our contribution requirements are dependent on many factors, including regulatory developments and changes to legislation, changes to the level of benefits provided by the scheme, actuarial assumptions and methods used, changes in scheme demographics and experience, and changes in the economic conditions, such as the return on fund assets and changes in interest rates and other factors, which could occur at any time. Any such change could result in underfunding of our pension scheme and significantly increase our contribution requirements, which in turn could have a material adverse effect on our business, financial condition and results of operations.

In addition, changes in investment performance or in the portfolio mix of invested assets could result in significant increases and decreases in the valuation of scheme assets, particularly equity securities, and a significant decrease in valuation could lead to underfunding of our pension scheme, which in turn could necessitate higher contributions to our pension scheme and have a material adverse effect on our business, financial condition and results of operations. We are particularly vulnerable to such volatility in valuation because a high proportion of our pension scheme assets consist of Jamaican government debt securities, equity securities and real estate assets, all of which fluctuate in value.

Failure to protect personal information could adversely affect us.

We manage and hold confidential personal information of customers in the ordinary course of our business. Although we have procedures and controls to safeguard personal information in our possession, unauthorized disclosures of such information could subject us to legal actions and sanctions under the Jamaican Banking Act as well as damages, or damage our reputation in Jamaica. For example, if an officer of the Bank were to disclose the identity of any of our customers to the general public in violation of the Jamaican Banking Act, the Bank of Jamaica could, depending upon what it determines to be in the best interests of the banking industry and the depositors of the Bank, impose a “direction” to prevent further violations, assume control over the management of the Bank or suspend or revoke our banking license, in addition to any civil or criminal claims that may be asserted against us. Similar exposures may arise in respect of our Cayman Islands operations under the Cayman Islands Confidential Relationships Law.

 

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One of our subsidiaries is exposed to material tax assessments that may be determined adversely to us.

The Tax Administration Jamaica, or the “TAJ,” a Jamaican tax authority, has asserted tax assessments of approximately J$2,715 million in the aggregate against NCB Capital Markets Limited for the 2003 through 2007 tax years as follows:

 

 

The TAJ has asserted that approximately J$1,171 million which NCB Capital Markets Limited reported as a capital gain in connection with its acquisition of assets from N.C.B. (Investments) Limited should have been reported as a revenue receipt for fiscal year 2003, and that as a result, NCB Capital Markets Limited owes approximately J$390 million of additional income taxes.

 

 

The TAJ has asserted that realized gains of approximately J$2,366 million transferrable from NCB Capital Markets Limited’s fair value reserve in fiscal years 2003, 2006 and 2007 should be brought into charge and that, as a consequence, NCB Capital Markets Limited owes approximately J$789 million of additional income taxes.

 

 

The TAJ has asserted that NCB Capital Markets Limited earned approximately J$2,798 million more in interest income in fiscal years 2004 through 2007 than disclosed in its audited financial statements. This assertion is based on differences between interest income reported on quarterly withholding tax forms that were filed with the TAJ and the interest income disclosed in the audited financial statements. As a consequence, the TAJ alleges that NCB Capital Markets Limited owes approximately J$933 million in additional income taxes.

 

 

The TAJ has asserted that J$586 million arising from the recovery of a loan to one of NCB Capital Markets Limited’s customers is a revenue receipt instead of a capital gain as reflected in NCB Capital Market Limited’s tax return, and that, as a consequence, NCB Capital Markets Limited owes approximately J$195 million of additional income taxes.

In addition, the TAJ has not allowed approximately J$400 million in tax credits arising from taxes withheld from interest earned by NCB Capital Markets Limited and which was claimed in fiscal year 2007 as an offset against corporation taxes payable.

On February 18, 2009, we delivered a letter to the TAJ objecting to these assessments. Following our objection and after further discussions with the TAJ, by letter dated October 9, 2009, the TAJ confirmed its intention to reverse approximately J$1,704 million of the original assessments. In a letter dated October 22, 2010, the TAJ reversed its position, indicating that it would continue to consider all previously assessed amounts outstanding until the commissioner of the TAJ has issued a decision concerning our objections. Discussions with the TAJ are ongoing. Based on advice from our professional advisors as to the likely outcome of this matter, we have not reserved any amount in respect of these assessments. If these assessments are ultimately determined to be owed by us and cannot be successfully defended or reduced to a lower amount, the resulting liability would have a material adverse effect on our business, results of operations and financial condition.

We may also face additional tax assessments in the future due to, among other things, changes in the interpretation of tax laws or regulations by tax authorities.

 

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Acquisitions and strategic partnerships may not perform in accordance with expectations, may fail to receive required regulatory approvals or may disrupt our operations and adversely affect our financial performance.

We may from time to time pursue strategic acquisitions and alliances inside and possibly outside Jamaica. Strategic acquisitions and alliances could expose us to risks with which we have limited or no experience. In addition, potential acquisitions in Jamaica and elsewhere may be subject to regulatory approval. We may be unsuccessful in obtaining any such approval, particularly in view of our significant market share in the Jamaican banking industry.

We must necessarily base any assessment of potential acquisitions and alliances on assumptions with respect to operations, profitability and other matters that may subsequently prove to be incorrect. Future acquisitions and alliances, as well as other investments, may not produce anticipated synergies or perform in accordance with our expectations and could adversely affect our operations and profitability. In addition, new demands on our existing organization and personnel resulting from the integration of new acquisitions could disrupt our operations and adversely affect our financial performance.

We may not be able to manage our growth successfully.

We have been expanding the scope of our operations in recent years, and we expect that this expansion will continue. As we continue to grow our existing business and expand our product offerings and move into new businesses, we must improve our operational, technical and managerial knowledge and compliance systems in order to effectively manage our larger operations and new products and businesses. Our future growth will also depend on our access to financing, which we may be unable to access on commercially acceptable terms or at all. The failure to integrate, monitor and manage expanded operations could have a material and adverse effect on our reputation and financial results.

We are subject to reputational and general operational risks.

Our business is dependent on maintaining a reputation for prudent financial management and ethical conduct. Negative publicity, whether accurate or not, regarding our business practices, actions or inactions, may cause a decline in our deposits or customer base. Credit, market, operational, insurance, regulatory and legal risks must be managed effectively in order to safeguard our reputation. Our Board of Directors and executive officers seek to maintain high standards of ethical practice and to ensure that we comply with applicable policies, legislation and regulations. Nevertheless, it is possible that negative publicity or other reputational damage will occur, which in turn could adversely impact our brand, operations and profitability.

Our business depends on our ability to process large numbers of transactions efficiently and accurately. Operational risks and losses can result from fraud, employee error, failure to properly document transactions or to obtain proper internal authorization, failure to comply with regulatory requirements, breaches of conduct of business rules, equipment failures, natural disasters or the failure of external systems, among others. Our procedures may not be effective in guarding against each of the operational risks we face.

 

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Failure of our information technology systems could materially and adversely affect our operations, including the effectiveness of our risk management and internal control processes and, consequently, adversely affect our business, results of operations and financial condition.

We are highly dependent on the effectiveness of our information technology systems to accurately process a high volume of transactions; collect and process accurately, on a timely basis, a large amount of financial and other information; operate our websites; respond to customer inquiries on a timely basis; and maintain cost-efficient operations. Any material disruption or slowdown of our information technology systems, including as a result of system failures, viruses or computer “hackers,” could cause critical data to be lost or to be delivered with delays or errors, or could cause our customers to have difficulty completing transactions. Such incidents could reduce demand for our services and products and could materially and adversely affect our business, results of operations and financial condition.

In addition, our ability to remain competitive will depend in part on our ability to upgrade information technology applications and infrastructure and to address any deficiencies on a timely and cost-effective basis. In 2010, we commenced an information technology transformation initiative with the goal of adopting world class standards, and leveraging technology to improve efficiency and our ability to meet changing customer needs. We expect that this transformation initiative will continue through fiscal year 2014. As we continue to expand our business, we need to improve our information technology infrastructure, including maintaining and upgrading our software and hardware systems and our back-office operations. Furthermore, a partial or complete failure of any of our information technology systems or of our information technology upgrades could materially and adversely affect our decision-making process, risk management and internal control systems as well as our ability to respond on a timely basis to changing market conditions. Any failure to effectively maintain or upgrade our information technology infrastructure in a timely manner could materially and adversely affect our business, results of operations and financial condition.

Our policies and procedures may not be able to detect money laundering and other illegal or improper activities fully or on a timely basis, which could expose us to fines and other liabilities.

We are required to comply with Jamaican, United Kingdom and Cayman Islands anti-money laundering and anti-terrorism and other related laws and regulations. These laws and regulations require us, among other things, to adopt and enforce “know your customer” policies and procedures and to report suspicious or large cash transactions to the applicable regulatory authorities. While we have adopted policies and procedures aimed at detecting and preventing the use of our network for money-laundering activities and by terrorists and terrorist-related organizations generally, such procedures have in some cases only been recently adopted and, in limited instances, we have failed to comply with certain transaction reporting procedures. Our policies and procedures may not completely eliminate instances where they may be used by other parties to engage in money laundering and other illegal or improper activities. In particular, our automated detection program, which is intended to minimize our exposure to business risks from potential money laundering activities and enhance reporting to requisite regulatory bodies, is in the process of being implemented but has not yet been fully tested and may not perform the functions for which it has been designed or may do so inadequately. To the extent that we fail to fully comply with applicable laws and regulations, the relevant Jamaican government authorities to which we report have the power and authority to impose fines and other penalties. In addition, our businesses and reputation could suffer if customers use our banking facilities for money laundering or illegal or improper purposes.

 

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Competition in the Jamaican banking and financial industry could adversely affect our market position.

We operate in a competitive market. Our principal competitors in our deposit-taking and lending businesses are other commercial banks as well as, to a lesser extent, credit unions, building societies and merchant banks. Certain of our competitors, including The Bank of Nova Scotia Jamaica Limited and RBC Royal Bank (Jamaica) Limited, are subsidiaries of large multinational financial services institutions and, accordingly, have access to greater institutional infrastructure and resources, including in some cases access to lower-cost U.S. dollar funding.

We also face significant competition in our wealth management business. We compete with a number of registered securities dealers as well as other financial services companies, some of whom have more diverse products and services offerings than us, such as proprietary mutual funds, flexible investment accounts and online investment tools. One effect of the changes to the regulatory regime of securities dealers as contemplated by the Stand-By Arrangement with the IMF could be the consolidation of the wealth management sector, and the financial institutions resulting from such consolidation may, by virtue of their increased size and business scope, provide significantly greater competition for us.

Our insurance business faces competition from four other licensed insurance companies, which we compete with in specific areas of the insurance market. Some of the institutions that we compete with have longer operating histories, which may afford them better brand recognition for certain products and services, such as bancassurance, pension fund management and annuities, all of which could make them more attractive to customers.

Our payment services segment competes with other commercial banks for card acquiring business. The profitability of our card acquiring business may decline as a result of increased interest rate competition, pressure to lower the fee rates applicable to our credit cards (particularly merchant fee rates) and higher marketing expenses. Intense and increasing competition can make it more difficult for us to secure customers with the credit quality and on credit terms necessary to achieve our business objectives in a commercially acceptable manner.

Our ability to compete effectively depends on numerous factors, including our ability to price our credit products effectively, which is correlated to our cost of funds; our ability to anticipate and fulfill the needs of new and current financial services customers through the development of innovative services and products; and our ability to offer adequate services and strengthen our customer base through cross-selling. Our businesses will be adversely affected if we are unable to retain current customers and attract new ones. In addition, our efforts to offer new services and products may not succeed if product or market opportunities develop more slowly than expected, if we do not take advantage of market opportunities quickly enough to prevent our competitors from obtaining a marketing or other competitive advantage or if the profitability of these opportunities is undermined by competitive pressures.

We depend on our executive officers and other skilled personnel, and the loss of their services would have a material adverse effect on our business, results of operations and financial condition.

We are highly dependent on Mr. Patrick Hylton, our Group Managing Director (chief executive officer), and our other executive officers, all of whom possess considerable experience and expertise and have strong relationships with customers and participants of the Jamaican business community. Our executive officers have an average tenure of more than 18 years in the financial

 

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services industry. Accordingly, our success will depend on the continued service of our executive officers and other skilled personnel, who are not obligated to remain employed with us and some of whom are approaching retirement age. The loss of the services of any of these executive officers and skilled personnel could have an adverse effect on our business, results of operations and financial condition. In addition, our future success will depend on our continued ability to attract, retain and motivate skilled employees and executive officers. If we are unable to attract skilled professions, fail to integrate them into our organization or fail to retain them after we have invested resources in their training, our ability to compete and our operations will be affected.

We are controlled by our chairman, Mr. Lee-Chin, whose interests could differ from the interests of shareholders.

At April 30, 2012, Mr. Lee-Chin beneficially owned, directly and indirectly, 63.9% of our ordinary shares and, accordingly, controlled our company. After this offering, Mr. Lee-Chin will beneficially own     % of our ordinary shares, assuming that the underwriters’ over-allotment option is exercised in full, and, accordingly, will continue to control a substantial portion of the voting stock of our company. Circumstances may occur in which our controlling shareholder may have an interest in pursuing transactions that, in his judgment, enhance our value, even if ADS holders disagree. As a controlling shareholder, Mr. Lee-Chin has, and will have, the power to:

 

 

subject to regulatory approval by the Bank of Jamaica, elect a majority of our directors and, through such persons, appoint our executive officers, set our management policies and exercise overall control over our company and subsidiaries;

 

 

agree to sell or otherwise transfer his controlling stake in our company; and

 

 

determine the outcome of substantially all actions requiring shareholder approval, including, among other things, acquisitions and dispositions of assets and corporate reorganizations.

In addition, the concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our shareholders of an opportunity to receive a premium for the ADSs as part of a sale of our company and might ultimately affect the market price of the ADSs.

Finally, as of May 9, 2012, approximately 1,083.4 million, or 68.7%, of the ordinary shares beneficially owned by Mr. Lee-Chin have been pledged as security for loans from different lenders to Mr. Lee-Chin and his affiliates. These loans mature at various dates between June 2012 and March 2017. Mr. Lee-Chin may, or may be required to, make additional pledges of ordinary shares beneficially owned by him in the future.

We have historically engaged, and may continue to engage, in transactions with companies controlled by our indirect and direct parent companies and our controlling shareholder.

We have historically engaged in transactions with companies controlled by our indirect and direct parent companies and our controlling shareholder, including our engagement of AIC Global Holdings Inc. as a consultant under a consultancy agreement, the leasing of some of our facilities from AIC (Jamaica) Limited and the offering to customers of NCB Capital Markets Limited, in the ordinary course of business, of a series of funds previously owned by AIC Global Holdings Inc. In the future, we may engage in additional business or financial transactions with our controlling shareholder and other shareholders that may create conflicts of interest between our company and these shareholders. Commercial and financial transactions between us and our controlling shareholder or other shareholders could create the potential for, or could result in, conflicts of

 

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interests between us and our controlling shareholder. To the extent that the price we pay for any assets acquired from our controlling shareholder exceeds the market value of such assets or is not as productive a use of our cash as other uses, your investment in us could be adversely affected.

Risks relating to our ordinary shares and the ADSs

The Bank and, possibly, one or more of its subsidiaries are likely to be considered a PFIC, which could result in adverse U.S. tax consequences for U.S. investors.

Based on the projected composition of our income and assets, including our significant portfolio of investment securities, we believe that the Bank and, possibly, one or more of its subsidiaries are likely to be classified as a PFIC for U.S. federal income tax purposes for the current taxable year and we may be classified as a PFIC for subsequent taxable years. Such characterization could result in adverse U.S. tax consequences to you if you are a U.S. holder of our ordinary shares or the ADSs. For example, if we are a PFIC, U.S. holders of our ordinary shares or ADSs may become subject to increased tax liabilities under U.S. tax laws and regulations and will become subject to annual reporting requirements. The determination of whether or not we are a PFIC is made on an annual basis and will depend on the composition of our income and assets from time to time. Specifically, for any taxable year we will be classified as a PFIC for U.S. tax purposes if either (i) 75% or more of our gross income in that taxable year is passive income or (ii) the average percentage of our assets by value in a taxable year which produce or are held for the production of passive income is at least 50%. For this purpose, cash and securities held for investment generally are considered passive assets. The calculation of the value of our assets will be based, in part, on the then market value of our shares, which is subject to change. In addition, the composition of our income and assets will be affected by how, and how quickly, we spend the cash we raise in this offering. See “Taxation—U.S. federal income tax considerations—PFIC rules.”

Certain elections may sometimes be used to reduce the adverse impact of the PFIC rules for holders of ordinary shares or ADSs (referred to as “QEF elections” and “mark-to-market” elections), but these elections may accelerate the recognition of taxable income and may result in the recognition of ordinary income. The PFIC rules are extremely complex, and prospective investors are urged to consult their own tax advisors regarding the potential consequences to them of the Bank and/or one or more of its subsidiaries being classified as a PFIC, including the availability and advisability of making a QEF election or a mark-to-market election.

Holders of the ADSs may experience losses due to increased volatility in the U.S. capital markets.

The U.S. capital markets have recently experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance or results of operations of those companies. These broad market fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, as well as volatility in international capital markets, may cause the market price of shares of the ADSs to decline.

In addition, on August 5, 2011, S&P lowered the long-term sovereign credit rating of U.S. government debt obligations from AAA to AA+. On August 8, 2011, S&P also downgraded the long-term credit ratings of U.S. government-sponsored enterprises. These actions initially have had an adverse effect on capital markets in the United States and elsewhere, contributing to volatility and decreases in prices of many securities trading on the U.S. national exchanges. Other rating agencies may, in the short or long-term, also lower the sovereign credit rating of the

 

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United States or of other sovereigns. Any volatility in the capital markets in the United States or elsewhere, whether resulting from a downgrade of the sovereign credit rating of U.S. debt obligations or otherwise, may have an adverse effect on the price of the ADSs.

Exchange rate volatility may adversely affect the market price of the ADSs and the dividends payable to ADS holders.

From time to time, there have been significant fluctuations in the exchange rate between the Jamaican dollar and the U.S. dollar. Unforeseen events in international markets, fluctuations in interest rates, changes in capital flows, political developments or inflation rates may cause exchange rate instability that could, in turn, depress the value of the Jamaican dollar, thereby decreasing the U.S. dollar value of the ADSs and any dividends or distributions paid on the ordinary shares underlying the ADSs.

Holders of the ADSs may not receive dividend payments.

Under the terms of our deposit agreement with the depositary for the ADSs, the ADR depositary will convert any cash dividend or other cash distribution we pay on the ordinary shares underlying the ADSs into U.S. dollars, if it can do so on a reasonable basis and can transfer the U.S. dollars to the United States. If this conversion is not possible or if any government approval becomes necessary and cannot be obtained, the deposit agreement allows the ADR depositary to distribute the foreign currency only to those ADS holders to whom it is permissible to do so. If the exchange rate fluctuates significantly during a time when the ADR depositary cannot convert the foreign currency or distribute a payment to you, you may lose some or all of the value of the dividend distribution.

You may be unable to exercise voting rights with respect to the ordinary shares underlying your ADSs at our shareholders’ meetings.

As a holder of ADSs being held by the ADR depositary in your name (and not the ordinary shares underlying your ADSs), we will not treat you as one of our shareholders and you will not be able to exercise shareholder rights. The ADR depositary will be the holder of the ordinary shares underlying your ADSs and ADS holders will be able to exercise voting rights with respect to the ordinary shares represented by the ADSs only in accordance with the deposit agreement relating to the ADSs. There are no provisions under Jamaican law or under our articles of incorporation that limit the exercise by ADS holders of their voting rights through the ADR depositary with respect to the underlying ordinary shares, except as described below under “—You may not have the same voting rights as the holders of our ordinary shares and must act through the ADR depositary to exercise your rights.” However, there are practical limitations on the ability of ADS holders to exercise their voting rights due to the additional procedural steps involved in communicating with these holders. For example, holders of our ordinary shares will receive notice of shareholders’ meetings through the post and through publication of a notice in a Jamaican newspaper of general circulation and the bulletin of the JSE, and will be able to exercise their voting rights by either attending the meeting in person or voting by proxy. ADS holders, by comparison, will not receive notice directly from us. Instead, in accordance with the deposit agreement, we will provide the notice to the ADR depositary. If we ask it to do so, the ADR depositary will mail to holders of ADSs the notice of the meeting and a statement as to the manner in which voting instructions may be given by holders. To exercise their voting rights, ADS holders must then instruct the ADR depositary as to voting the ordinary shares represented by their ADSs. Due to these procedural steps involving the ADR depositary, the process for exercising

 

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voting rights may take longer for ADS holders than for holders of ordinary shares. The ordinary shares represented by ADSs for which the ADR depositary fails to receive timely voting instructions may not be voted at all.

You may not have the same voting rights as the holders of our ordinary shares and must act through the ADR depositary to exercise your rights.

As a holder of ADSs, you may only exercise voting rights with respect to the ordinary shares underlying your ADSs in accordance with the deposit agreement. Under the deposit agreement, you must vote by giving voting instructions to the ADR depositary. Upon receipt of your voting instructions, the depositary will vote the underlying ordinary shares in accordance with these instructions if it is able to do so in accordance with Jamaican law and our articles of incorporation. Otherwise, you will not be able to exercise your right to vote unless you withdraw the ordinary shares underlying your ADSs.

Our articles of incorporation provide that all voting must be conducted by show of hands unless a poll ( i.e. , written ballot) is demanded before or at the time the results of the show of hands vote are declared, in which case voting must be conducted by poll. A poll may only be demanded by our chairman, at least three shareholders present in person or by proxy at the meeting, by one or more shareholders present in person or by proxy representing at least 10% of the total voting rights of all shareholders having the right to vote at the meeting, or by any one or more shareholders holding ordinary shares representing at least 10% of our total paid up share capital. When voting is conducted by show of hands, only the shareholders present in person at the meeting are entitled to vote and each of these shareholders may only cast one vote regardless of the total number of ordinary shares beneficially owned by him or her. When voting is conducted by poll, each shareholder present in person or by proxy is entitled to one vote for each ordinary share held by that shareholder.

Under the terms of the deposit agreement, if any vote taken by holders of ordinary shares is by show of hands, the ADR depositary will not vote the deposited securities and will not demand or join in any demand for a poll. If the vote is by poll, the custodian, on behalf of the depositary, will attempt to vote the deposited securities in accordance with the voting instructions it timely receives from ADS holders. In the event of poll voting, deposit securities for which no instructions have been received will not be voted.

ADS holders may be subject to additional risks related to holding ADSs rather than ordinary shares.

ADS holders do not hold ordinary shares directly and thus are subject to, among others, the following additional risks:

 

 

as an ADS holder, we will not treat you as one of our shareholders and you will not be able to exercise shareholder rights, except through the ADR depositary as permitted by the deposit agreement;

 

 

distributions on the ordinary shares represented by your ADSs will be paid to the ADR depositary, and before the ADR depositary makes a distribution to you on behalf of your ADSs, any withholding taxes that must be paid will be deducted. Additionally, if the exchange rate fluctuates during a time when the ADR depositary cannot convert the foreign currency, you may lose some or all of the value of the distribution;

 

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we and the ADR depositary may amend or terminate the deposit agreement without the ADS holders’ consent in a manner that could prejudice ADS holders; and

 

 

the ADR depositary may take other actions inconsistent with the best interests of ADS holders.

The deposit of additional ordinary shares with the ADR depositary or its custodian in Jamaica may be limited, which may adversely affect the value of your investment.

Under the terms of the deposit agreement, holders of ordinary shares may deposit those ordinary shares with the ADR depositary or its custodian in Jamaica and obtain ADSs, and holders of ADSs may surrender ADSs to the ADR depositary and receive ordinary shares. However, you will not be able to deposit ordinary shares with the ADR depositary or its custodian in Jamaica if your deposit would cause the ordinary shares deposited under the deposit agreement to exceed 50% of our outstanding voting capital stock. Immediately after this offering, we expect that the ordinary shares deposited under the deposit agreement to be equal to approximately         % of our outstanding voting stock.

Developments and the perception of risk in other countries, especially in the United States and in emerging market countries, may adversely affect our access to financing and the market price of the ADSs.

The market value of securities of Caribbean issuers is affected by economic and market conditions in the United States as well as other Caribbean, Latin American and emerging market countries. Although economic conditions in those countries may differ significantly from economic conditions in Jamaica, investors’ reactions to developments in these other countries may have an adverse effect on the market value of the ADSs. Crises in other emerging market countries may diminish investor interest in securities of Caribbean issuers, including the ADSs. This could adversely affect the market price of the ADSs, restrict our access to the capital markets and compromise our ability to finance our operations in the future on favorable terms, or at all.

You may not be able to sell your ADSs at the time or the price you desire because an active or liquid market may not develop.

Prior to this offering, there has not been a public market for the ADSs. We have been authorized to list the ADSs on the New York Stock Exchange. A liquid market may not develop for the ADSs, which may reduce the price at which the ADSs may be sold. Also, the liquidity and the market for the ADSs may be affected by a number of factors, including variations in interest rates, the deterioration and volatility of the markets for similar securities and any changes in our liquidity, financial condition, creditworthiness, results of operations and profitability.

The relative volatility and illiquidity of the Jamaican securities markets may substantially limit your ability to sell the ordinary shares underlying the ADSs at the price and time you desire.

Our ordinary shares are listed for trading on the JSE and the TTSE, with approximately 95% of our trading volume prior to this offering being attributable to the JSE. Investing in securities that trade in emerging markets, such as Jamaica and Trinidad and Tobago, often involves greater risk than investing in securities of issuers in the United States, and such investments are generally considered to be more speculative in nature. The Jamaican and Trinidad and Tobago securities markets are substantially smaller, less liquid, more concentrated and can be more volatile than major securities markets in the United States. There is also significantly greater concentration in

 

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the Jamaican securities markets than in major securities markets in the United States. At March 31, 2012, total market capitalization amounted to J$611,423 million and the 10 largest companies in terms of market capitalization (which included us) represented approximately 81.4% of the aggregate market capitalization of the JSE. Accordingly, although you are entitled to withdraw the ordinary shares underlying the ADSs from the ADR depositary at any time, your ability to sell such shares at a price and time you desire may be substantially limited.

You will experience immediate and substantial dilution in the book value of the ADSs you purchase in this offering.

Because the initial offering price of the ADSs being sold in this offering will be higher than the net tangible book value per ADS, you will experience immediate and substantial dilution in the book value of these ADSs. Net tangible book value represents the amount of our tangible assets on a pro forma basis, minus our pro forma total liabilities. As a result, at the initial public offering price of US$         per ADS, the midpoint of the price range per ADS set forth on the cover page of this prospectus (whether or not the underwriters exercise all or any portion of their over-allotment option), we currently expect that you will incur immediate dilution of US$         per ADS you purchase in this offering. See “Dilution.”

Actual or anticipated sales of the ADSs after this offering could cause the price of the ADSs to decrease.

After the offering, our controlling shareholder will continue to hold a large number of shares. We, our controlling shareholder, the selling shareholders, other affiliates of our controlling shareholder and our directors and executive officers have agreed with the underwriters, subject to certain exceptions, not to offer, sell, contract to sell or otherwise dispose of our shares of capital stock or ADSs or securities convertible into or exercisable or exchangeable for shares of capital stock or ADSs during the 180-day period following the date of this prospectus. This restriction will not apply to pledges of up to an aggregate of 1,387 million ordinary shares (including ordinary shares that are currently pledged) beneficially owned by our controlling shareholder to lenders which have outstanding loans to our controlling shareholder and his affiliates. After these lock-up agreements expire, we, our controlling shareholder, the selling shareholders, other affiliates of our controlling shareholder and our directors and executive officers will be able to sell our securities in the public market. Furthermore, if remedies are exercised by lenders to our controlling shareholder with respect to shares pledged to those lenders as security, substantial sales could occur during or after the lock-up period. The market price of the ADSs could drop significantly if we, our controlling shareholder or any selling shareholder, director or officer sell ordinary shares or ADSs or the market anticipates that such sales are likely to be made.

Our status as a foreign private issuer allows us to follow alternate standards to the corporate governance standards of the New York Stock Exchange, which may limit the protections afforded to investors.

We are a “foreign private issuer” for purposes of SEC rules and within the meaning of the New York Stock Exchange corporate governance standards. Under these rules and standards, a foreign private issuer may elect to comply with the practices of its home country and not to comply with certain corporate governance requirements applicable to U.S. companies with securities listed on the New York Stock Exchange. We currently follow Jamaican practices concerning corporate governance and intend to continue to do so. Accordingly, you will not have the same protections afforded to shareholders of companies that are subject to all New York Stock Exchange corporate governance

 

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requirements. For example, New York Stock Exchange-listed companies that are not foreign private issuers are required to have a board of directors a majority of the members of which satisfy New York Stock Exchange listing standards for independence. Although the Bank’s audit committee members will be required to meet independence standards established by SEC rules, its independent directors will otherwise be subject to applicable Jamaican standards for independence, which are less stringent.

We have not yet completed our evaluation of our internal control over financial reporting in compliance with Section 404 of the Sarbanes-Oxley Act.

We will be required to comply with the internal control evaluation and certification requirements of Section 404 of the Sarbanes-Oxley Act by the end of fiscal year 2012. Our preliminary assessment is that our current system of internal controls requires enhancements in order to be compliant with Section 404, and while we intend to achieve compliance within the time required, we may not be able to meet the Section 404 requirements in a timely manner. If it is determined that we are not in compliance with Section 404, we will be required to implement new internal control procedures and re-evaluate our financial reporting. We may experience higher than anticipated operating expenses as well as outside auditor fees during the implementation of these changes and thereafter. We will need to hire additional qualified personnel in order for us to be compliant with Section 404. If we fail, for any reason, to implement these changes effectively or efficiently, such failure could harm our operations, financial reporting or financial results and could result in our conclusion that our internal control over financial reporting is not effective.

Judgments of Jamaican courts with respect to the ADSs will be payable only in Jamaican dollars.

If proceedings are brought in a Jamaican court seeking to enforce the rights of holders of the ADSs, any judgment made in favor of such holders, even if the judgment is on an obligation deemed to be denominated in U.S. dollars, could only be made or awarded in Jamaican dollars based on the exchange rate in effect at the time the judgment is entered. The prevailing party in such proceeding would therefore bear exchange rate risk until the judgment could be collected.

U.S. investors in the ADSs may find it difficult or impossible to enforce service of process and enforcement of judgments against us and our executive officers and directors.

We are incorporated under the laws of Jamaica, and all of our subsidiaries are incorporated in jurisdictions outside the United States. In addition, our executive offices are located outside of the United States. All of our directors and executive officers reside outside of the United States, and substantially all of our assets and the assets of most of our executive officers and directors are, and will most likely continue to be, located outside of the United States. As a result, it may be difficult or impossible for U.S. investors to serve legal process within the United States upon us or any of these persons or to enforce a judgment against us for civil liabilities in U.S. courts. In addition, you should not assume that courts in the countries in which we or our subsidiaries are incorporated or where our or our subsidiaries’ assets are located (1) would enforce judgments of U.S. courts obtained in actions against us or our subsidiaries based upon the civil liability provisions of applicable U.S. federal and state securities laws or (2) would enforce, in original actions, liabilities against us or our subsidiaries based on those laws.

We have been advised by our Jamaican counsel that there is no reciprocal treaty provision for direct enforcement of judgments of U.S. courts in Jamaica, including judgments predicated upon the civil liability provisions of the U.S. federal securities laws, and that, accordingly, such judgments are not directly enforceable in Jamaican courts. A claim for the payment of the debt

 

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represented by a judgment of a U.S. court must be made in the Jamaican courts before they will enter judgments in original actions predicated solely upon the laws of the United States, including those predicated solely upon the civil liability provisions of the U.S. federal securities laws. We have been advised by our Jamaican counsel that a Jamaican court should enforce a claim for payment of a final monetary judgment made by a U.S. court without reexamination or review of the merits unless the Jamaican court determines that:

 

 

the judgment debtor was not otherwise subject, or did not willingly submit, to the jurisdiction of the U.S. court;

 

 

the judgment debtor was not properly served in the U.S. court action and did not appear in such action;

 

 

the U.S. judgment was obtained by fraud; or

 

 

the U.S. court was not a proper forum for such action for reasons of public policy or for some other similar reason.

If a Jamaican court determined that any of the above factors was present, the U.S. judgment (though not the underlying claims) would have to be determined to be due in a Jamaican court proceeding prior to enforcement of the judgment in Jamaica.

 

 

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Forward-looking statements

This prospectus includes “forward-looking statements,” within the meaning of the Securities Act and the U.S. Securities Exchange Act of 1934, as amended, or the “Exchange Act.” Forward-looking statements are not based on historical information and include, without limitation, statements regarding our future financial condition and results of operations, business strategy and plans and objectives of management for future operations. Forward-looking statements reflect our current views with respect to future events. The words “may,” “will,” “expect,” “intend,” “anticipate,” “believe,” “project,” “estimate” and similar expressions identify forward-looking statements. These forward-looking statements are based upon estimates and assumptions made by us or our officials that, although believed to be reasonable, are subject to certain known and unknown risks and uncertainties that could cause actual results to differ materially and adversely as compared to those contemplated or implied by such forward-looking statements. These risks and uncertainties include, without limitation, the following:

 

 

economic, social, political and other conditions and developments in Jamaica and globally;

 

 

the actual rates of growth or decline, if any, in GDP and other economic indicators of Jamaica in any relevant year or other period;

 

 

the performance of our investment portfolio—in particular, our substantial holdings of Jamaican government debt securities;

 

 

governmental, statutory, regulatory or administrative actions affecting banks, financial institutions and other businesses in Jamaica;

 

 

crime and civil unrest in Jamaica;

 

 

natural disasters;

 

 

levels of non-performing and impaired loans, adequacy of provision for credit losses, declines in value of Jamaican government securities, values of security and collateral, defaults by borrowers, and other developments affecting our loan portfolio and other assets;

 

 

changes in interest rates or exchange rates;

 

 

the effectiveness of our risk management processes and strategies;

 

 

our ability to realize collateral or collect on guarantees securing loans;

 

 

our assessment of the adequacy of our reserves or provision for contingent liabilities;

 

 

declines in the value of securities portfolios managed by our pension fund management business;

 

 

required increases to our reserves for future insurance policyholders’ benefits and claims;

 

 

significant differences between actual mortality, morbidity or persistency rates and our pricing expectations;

 

 

increases in JDIC premiums;

 

 

material tax assessments;

 

 

reputational and general operational risks;

 

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our ability to comply with regulatory requirements;

 

 

our ability to manage our growth successfully;

 

 

inadequacies, breaches or violations in our computer systems and network infrastructure;

 

 

competition from other banks and financial institutions; and

 

 

loss of key personnel.

We urge you to review carefully “Risk factors” in this prospectus for a more complete discussion of the risks of an investment in the securities and caution you not to place undue reliance on the forward-looking statements contained in this prospectus. We disclaim any obligation or undertaking to update publicly or revise any forward-looking statement contained in this prospectus, whether as a result of new information, future events or otherwise, except as required by applicable law.

 

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Use of proceeds

We expect to receive total estimated net proceeds from this offering of approximately US$            , based on the midpoint of the price range set forth on the cover page of this prospectus after deducting estimated underwriting discounts and commissions and expenses of this offering that are payable by us. Each US$1.00 increase (decrease) in the public offering price per ADS would increase (decrease) our net proceeds, after deducting estimated underwriting discounts and commissions and expenses, by US$            .

We intend to use the net proceeds from this offering for general corporate purposes, which may include funding organic growth through an increase in loan volume, portfolio investments and other income-generating activities; financing expansion of and improvements to our infrastructure; and pursuing potential future acquisitions and other strategic investments. We are unable to estimate the application of the anticipated net proceeds from this offering to our anticipated uses of those proceeds as of the date of this prospectus.

We will not receive any of the net proceeds from the sale of ordinary shares in the form of ADSs being offered by the selling shareholders.

 

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Market information

Prior to this offering, there has been no public market for the ADSs. We cannot assure you that an active trading market will develop for the ADSs, or that the ADSs will trade in the public market subsequent to this offering at or above the initial public offering price. Each ADS will represent ordinary shares. We have been authorized to list the ADSs for trading on the New York Stock Exchange under the symbol “NCJ.”

Trading history of our ordinary shares

Our ordinary shares are traded principally on the JSE and additionally on the TTSE under the symbol “NCBJ.” Due to a relatively low public float (less than 5% of our total ordinary shares), our shares have historically traded at low prices on the TTSE and such prices bear no relation to the offering price for the ADSs set forth on the cover page of this prospectus. The tables below show the high and low closing prices in Jamaican dollars, Trinidadian dollars and the U.S. dollar equivalent per ADS for our ordinary shares on the JSE and TTSE for the periods indicated:

 

       JSE      US$ equivalent per ADS(3)    Average daily
trading volume(4)
 
     High(1)      Low(2)      High    Low   

 

  

 

 

    

 

 

    

 

  

 

  

 

 

 
     (in Jamaican dollars)      (in U.S. dollars)    (in shares)  

Fiscal year ended

September 30,

                              

2007

     25.00         18.00               386,364   

2008

     24.95         19.00               825,080   

2009

     21.00         12.00               731,363   

2010

     21.00         12.93               962,633   

2011

     29.49         16.50               833,014   

Fiscal quarter ended

              

December 31, 2009

     19.00         12.93               1,591,236   

March 31, 2010

     17.00         13.02               543,457   

June 30, 2010

     19.85         16.50               1,527,026   

September 30, 2010

     21.00         16.90               196,501   

December 31, 2010

     19.49         16.50               1,529,951   

March 31, 2011

     20.98         19.20               878,174   

June 30, 2011

     26.99         20.25               455,970   

September 30, 2011

     29.49         24.19               451,947   

December 31, 2011

     34.00         26.50               1,412,316   

March 31, 2012

     28.00         25.00               604,495   

Month

              

September 2011

     28.25         27.00               775,849   

October 2011

     29.00         27.22               248,257   

November 2011

     34.00         27.90               1,829,711   

December 2011

     29.00         26.50               2,117,239   

January 2012

     28.00         26.00               218,952   

February 2012

     27.50         25.00               1,234,926   

March 2012

     28.00         25.05               399,395   

April 2012

     27.00         24.01               118,502   

May 2012 (through May 18)

     26.00         23.31               2,728,704   

 

  

 

 

    

 

 

    

 

  

 

  

 

 

 

(footnotes on following page)

 

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Source:   Jamaica Stock Exchange

 

(1)   Represents the highest price of our ordinary share during the respective period.

 

(2)   Represents the lowest price of our ordinary share during the respective period.

 

(3)   We have translated U.S. dollar amounts from Jamaican dollars at the exchange rate of J$87.1154 per US$1.00, which is the average of the buying and selling J$/US$ exchange rates reported by the Bank of Jamaica for March 31, 2012.

 

(4)   Calculated based on the total volume traded over the number of trading days during the respective period.

 

       TTSE      US$ equivalent per ADS(3)    Average daily
trading volume(4)
 
     High(1)      Low(2)      High    Low   

 

  

 

 

    

 

 

    

 

  

 

  

 

 

 
     (in Trinidad and
Tobago dollars)
     (in U.S. dollars)    (in shares)  
Fiscal year ended September 30,                               

2007

     1.75         0.77               75,200   

2008

     2.19         1.85               85,007   

2009

     1.03         0.91               58,605   

2010

     1.50         0.90               44,636   

2011

     2.30         1.35               100,021   

Fiscal quarter ended

              

December 31, 2009

     1.17         0.90               17,595   

March 31, 2010

     1.11         0.90               82,099   

June 30, 2010

     1.35         1.01               52,764   

September 30, 2010

     1.50         0.90               28,985   

December 31, 2010

     1.46         1.35               10,919   

March 31, 2011

     1.71         1.46               78,119   

June 30, 2011

     1.92         1.50               77,035   

September 30, 2011

     2.30         1.90               235,049   

December 31, 2011

     2.25         1.99               53,880   

March 31, 2012

     2.20         2.05               9,898   

Month

              

September 2011

     2.30         2.09               639,436   

October 2011

     2.10         1.99               6,973   

November 2011

     2.25         2.05               139,999   

December 2011

     2.20         2.15               9,063   

January 2012

     2.20         2.15               20,195   

February 2012

     2.20         2.18               10,957   

March 2012

     2.15         2.05               2,377   

April 2012

     2.00         1.95               6,273   

May 2012 (through May 18)

     1.95         1.90               17,931   

 

  

 

 

    

 

 

    

 

  

 

  

 

 

 

 

Source:   Trinidad and Tobago Stock Exchange

 

(1)   Represents the highest price of our ordinary share during the respective period.

 

(2)   Represents the lowest price of our ordinary share during the respective period.

 

(3)   We have translated U.S. dollar amounts from Trinidad and Tobago dollars at the exchange rate of TT$6.4169 per US$1.00, which is the average of the buying and selling TT$/US$ exchange rate reported by the Central Bank of Trinidad and Tobago for March 31, 2012.

 

(4)   Calculated based on the total volume traded over the number of trading days during the respective period.

On May 15, 2012, the closing price of our ordinary shares on the JSE was J$24.02 per ordinary share and on the TTSE was TT$1.93 per ordinary share.

 

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The Jamaica Stock Exchange

The JSE was incorporated as a private company in 1968. It is regulated under the Securities Act of Jamaica and is governed by a council and board of directors which includes the governor of the Bank of Jamaica, a representative of the Ministry of Finance, up to 10 JSE seat holders and three non-seat holders.

The types of securities traded on the JSE include ordinary shares, preference shares and corporate bonds. The JSE has established rules governing the listing and the maintenance of listings for securities. Since January 2000, the JSE has had an electronic trading platform with modern clearance arrangements through the Jamaica Central Securities Depository.

Listed companies are required to adhere to provisions of the Companies Act of Jamaica, or the “Companies Act,” and the rules of the JSE and must submit certain reports to the JSE, including quarterly unaudited financial reports and annual audited financial statements with certain other information. The JSE imposes specific rules and regulations in relation to mergers and takeovers. A compensation fund has been established to indemnify losses to broker members and their clients in certain situations. At March 31, 2012, there were 52 companies listed on the JSE (including 12 companies listed on the JSE Junior Market).

Since January 2000, the JSE has had an automated trading platform named Horizon. The back office operations which involves clearance and settlement was automated with the establishment of the Jamaica Central Securities Depository in June 1998.

The Trinidad and Tobago Stock Exchange

The TTSE is governed by the Securities Industry Act of 1995, which established the TTSEC.

The Securities Industry Act of 1995 vests with the TTSEC the authority to supervise the securities market in Trinidad and Tobago and ensure orderly, fair and equitable dealings in securities. All market participants, ( i.e. , issuers, underwriters, investment advisors, stockbrokers and dealers), must register with the TTSEC, which is responsible for regulating and supervising their activities. The TTSE regulates trading on the secondary market, as well as the activities of its members, subject to oversight by the TTSEC. At March 31, 2012, there were 36 companies listed on the TTSE.

In 2005, the TTSE implemented an electronic trading system, replacing the manual open outcry system which was used at the TTSE since its inception in 1981.

 

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Capitalization

The following table presents our consolidated capitalization at March 31, 2012, on a historical basis and as adjusted to give effect to the sale of ADSs by us in this offering and the receipt of approximately US$ in estimated net proceeds, assuming an offering price of US$ per ADS, the midpoint of the price range set forth on the cover page of this prospectus, after deduction of the underwriting discounts and commissions and estimated offering expenses payable by us in connection with this offering. The table does not give effect to any use of proceeds from this offering. This table should be read in conjunction with our audited consolidated financial statements included in this prospectus, as well as with “Operating and financial review and prospects” and “Selected statistical information.”

 

       At March 31, 2012
(J$ in thousands)    Actual     As Adjusted(*)

 

  

 

 

   

 

Liabilities

    

Unsecured:

    

Due to other banks

     9,035,590     

Customer deposits

     161,986,131     

Other borrowed funds

     2,752,414     

Liabilities under annuity and insurance contracts

     24,499,521     

Secured:

    

Repurchase agreements

     90,405,867     

Obligations under securitization arrangements(1)

     11,040,453     

Other borrowed funds

     779,471     

Shareholders’ equity

    

Share capital

     6,465,731     

Shares held by NCB Employee Share Scheme

     (3,388  

Fair value and capital reserves

     3,388,767     

Loan loss reserve(2)

     4,664,603     

Banking reserve fund(3)

     6,327,078     

Retained earnings reserve(4)

     14,013,657     

Retained earnings

     27,513,948     
  

 

 

   

 

Total shareholders’ equity

     62,370,396     
  

 

 

   

 

Total capitalization

     362,869,843     

 

  

 

 

   

 

 

(1)   Represents obligations under a US$225 million credit card receivables facility (repaid and terminated subsequent to March 31, 2012) and two securitizations of diversified payment rights under existing and future U.S. dollar payment advances, payment orders and remittances aggregating US$150 million.

 

(2)   Loan loss reserve represents the provision established with respect to non-performing loans under Bank of Jamaica regulations, reduced by the provision established with respect to such loans under IFRS. See “Selected statistical information—Nonaccrual, past due and restructured loans” and “Business—Credit risk management.”

 

(3)   A banking reserve fund is maintained in accordance with the Jamaican Banking Act, which requires that a minimum of 15% of the Bank’s net profits, as defined by the Jamaican Banking Act, be transferred to the reserve fund until the amount of the fund is equal to 50% of the paid-up capital of the Bank and thereafter, 10% of the net profits until the amount of the fund is equal to the paid-up capital of the Bank.

 

(4)   The Jamaican Banking Act permits the transfer of any portion of the Bank’s net profit to a retained earnings reserve. This reserve constitutes a part of the capital base for the purpose of determining the maximum level of deposit liabilities and lending to customers. The deposit liabilities of the Bank and other indebtedness for borrowed money, together with all interest accrued, should not exceed 25 times its capital base.

 

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Dilution

At March 31, 2012, we had net tangible book value of J$61,382 million, corresponding to a net tangible book value of J$24.94 per ordinary share or US$ per ADS (using the average of buying and selling rates as reported by the Bank of Jamaica at March 31, 2012 for Jamaican dollars into U.S. dollars of J$87.1154 per US$1.00 and the ratio of ordinary shares to one ADS). Net tangible book value per share or per ADS represents the amount of our total tangible assets less our total liabilities, divided by 2,466,762,828, the total number of ordinary shares outstanding at March 31, 2012 (excluding 5,293,916 ordinary shares held by the NCB Employee Share Scheme, which are deemed to be owned by us for financial reporting purposes as we control the NCB Employee Share Scheme) , or , the total number of ADSs that would represent such total number of shares based on a share-to-ADS ratio of -to-one.

After giving effect to the sale of the ADSs representing ordinary shares offered by us in this offering (whether or not the underwriters exercise all or any portion of their over-allotment option) and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our net tangible book value estimated at March 31, 2012 would have been approximately J$            , representing J$         per ordinary share or US$         per ADS. At the assumed initial public offering price for this offering of US$         per ADS, the midpoint of the price range per ADS set forth on the cover page of this prospectus, this represents an immediate increase in net tangible book value of J$         per ordinary share or US$         per ADS to existing shareholders and an immediate dilution in net tangible book value of J$         per ordinary share or US$         per ADS to purchasers of ADSs in this offering. Dilution for this purpose represents the difference between the price per ADS paid by these purchasers and net tangible book value per ADS immediately after the completion of this offering.

The following table illustrates this dilution of US$         per ADS to purchasers of ADSs in this offering:

 

Assumed initial public offering price per ADS

   US$            

Net tangible book value per ADS at March 31, 2012

  

Increase in net tangible book value per ADS attributable to new investors

  

Pro forma net tangible book value per ADS after this offering

  

Dilution per ADS to new investors(1)

  

Percentage of dilution in net tangible book value per ADS for new investors(2)

  

 

  

 

 

 

 

(1)   A US$1.00 increase (decrease) in the assumed initial public offering price of US$         per ADS would increase (decrease) our pro forma net tangible book value per ADS after this offering by US$         and the dilution per ADS to new investors by US$            , assuming the number of ADSs offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

(2)   Percentage of dilution for new investors is calculated by dividing the dilution in net tangible book value for new investors by the price of the offering.

 

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Exchange rates

The following table shows the exchange rate (average of buy/sell rates published by the Bank of Jamaica) of Jamaican dollars for U.S. dollars (per US$1.00) for the periods and dates indicated. Since exchange rates are determined by the market, there can be no assurance that the exchange rate will be maintained at current levels. The average rate is calculated by using the average of the exchange rates on each day during a monthly period and on the last day of each month during an annual or nine-month period.

 

(in Jamaican dollars)    High      Low      Average      Period-end  

 

 

Year ended September 30,

           

2007

     70.2673         65.9350         67.7782         70.2673   

2008

     72.4789         70.3444         71.3531         72.4789   

2009

     88.9824         72.5945         85.1159         88.8674   

2010

     86.6477         85.3182         88.0520         86.0219   

2011

     86.1820         85.2717         85.6984         86.1207   

Month ended

           

September 30, 2011

     86.1820         85.7333         86.0377         86.1207   

October 31, 2011

     86.3717         86.0887         86.2218         86.2778   

November 30, 2011

     86.5674         86.2081         86.4456         86.5007   

December 31, 2011

     86.7647         86.3355         86.5749         86.3680   

January 2012

     86.7052         86.3438         86.5630         86.6169   

February 2012

     86.8399         86.5508         86.7068         86.8399   

March 2012

     87.1484         86.9299         87.0620         87.1154   

April 2012

     87.2064         87.0381         87.1354         87.1685   

May 2012 (through May 18)

     87.7258         87.0980         87.3688         87.6425   

 

 

On May 15, 2012, the exchange rate of Jamaican dollars for U.S. dollars, as reported by the Bank of Jamaica, was J$87.5973 per US$1.00.

Exchange rate fluctuations will affect the market price of the ADSs and the U.S. dollar value of any dividends or distributions we make with respect to the ordinary shares underlying the ADSs. See “Risk factors—Risks relating to our ordinary shares and the ADSs—Exchange rate volatility may adversely affect the market price of the ADSs and the dividends payable to ADS holders.”

 

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Selected financial and operating data

The following tables set forth selected financial and operating data at and for the fiscal years ended September 30, 2011, 2010, 2009, 2008 and 2007, at March 31, 2012 and for the six months ended March 31, 2012 and 2011. The selected financial data set forth below at September 30, 2011 and 2010 and for each of the fiscal years ended September 30, 2011, 2010, 2009, 2008 and 2007 have been derived from, and should be read together with, our consolidated financial statements and the accompanying notes included in this prospectus. The selected financial data at March 31, 2012 and for the six months ended March 31, 2012 and 2011 have been derived from, and should be read together with, our unaudited consolidated financial statements and the accompanying notes included in this prospectus.

Our consolidated financial statements from which the selected financial data have been derived have been prepared in accordance with IFRS as issued by the IASB, which differ in significant respects from U.S. GAAP.

The results of operations for the periods presented below are not necessarily indicative of the results to be expected for any future period. In particular, the results for the six months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the full fiscal year ending September 30, 2012. The selected historical financial and other data should be read together with “Presentation of financial and other information,” “Operating and financial review and prospects,” “Selected statistical information” and our consolidated financial statements and the accompanying notes included in this prospectus.

 

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Statement of income data

 

      For the six months ended March 31,     For fiscal year ended September 30,  
    2012(*)     2012     2011     2011(*)     2011     2010     2009     2008     2007  

 

 
    (US$ in
thousands)
    (J$ in thousands)     (US$ in
thousands)
    (J$ in thousands)  

Operating income

                 

Interest income

  US$ 172,804      J$ 15,053,857      J$ 15,128,317      US$ 346,574      J$ 30,191,938      J$ 33,304,294      J$ 35,460,698      J$ 29,402,573      J$ 25,033,370   

Interest expense

    (49,534     (4,315,169     (4,747,654     (103,783     (9,041,078     (12,654,651     (16,580,724     (13,576,269     (12,236,593
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

    123,270        10,738,688        10,380,663        242,791        21,150,860        20,649,643        18,879,974        15,826,304        12,796,777   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fee and commission income

    46,848        4,081,195        3,632,071        86,068        7,497,876        6,900,930        6,105,593        5,747,068        4,720,843   

Fee and commission expense

    (6,486     (564,987     (524,389     (12,379     (1,078,430     (945,145     (1,015,757     (872,877     (964,783
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net fee and commission income

    40,363        3,516,208        3,107,682        73,689        6,419,446        5,955,785        5,089,836        4,874,191        3,756,060   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gain on foreign currency and investment activities

    27,951        2,434,947        1,923,355        46,323        4,035,443        1,962,633        2,654,504        3,566,692        3,201,336   

Dividend income

    428        37,259        8,847        136        11,830        77,331        95,923        72,883        88,032   

Premium income(1)

    11,724        1,021,362        1,673,317        33,541        2,921,919        493,057        371,778        398,754        523,200   

Other operating income

    467        40,649        64,739        1,523        132,698        284,906        180,307        172,234        186,174   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    40,569        3,534,217        3,670,258        81,523        7,101,890        2,817,927        3,302,512        4,210,563        3,998,742   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating income

    204,202        17,789,113        17,158,603        398,003        34,672,196        29,423,355        27,272,322        24,806,110        20,551,579   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

                 

Staff costs

    61,216        5,332,835        4,542,910        106,068        9,240,116        9,252,662        7,989,772        7,281,304        6,987,550   

Provision for credit losses(2)

    17,526        1,526,795        415,947        8,826        768,881        947,962        1,027,634        468,287        277,603   

Depreciation and amortization

    4,233        368,761        282,986        6,659        580,132        528,333        593,538        725,936        889,246   

Impairment losses on securities(3)

    3,604        314,000        0        3,008        262,003        27,520               1,229,610        80,340   

Other operating expenses

    49,792        4,337,693        4,320,442        95,658        8,333,326        5,379,478        4,489,652        4,457,065        3,893,562   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    136,372        11,880,084        9,562,285        220,219        19,184,458        16,135,955        14,100,596        14,162,202        12,128,301   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

    67,830        5,909,029        7,596,318        177,784        15,487,738        13,287,400        13,171,726        10,643,908        8,423,278   

Gain on acquisition of associates(4)

    0        0        0        11,668        1,016,505                               
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Share of profit/(loss) of associates(5)

    3,716        323,729        161,758        2,697        234,979        200,713        (38,091     164,101        170,566   

Profit before taxation

    71,546        6,232,758        7,758,076        192,150        16,739,222        13,488,113        13,133,635        10,808,009        8,593,844   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Taxation

    (16,759     (1,460,004     (1,633,494     (42,527     (3,704,793     (2,413,315     (2,885,450     (2,106,836     (1,992,418
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net profit

  US$ 54,787      J$ 4,772,754      J$ 6,124,582      US$ 149,623      J$ 13,034,429      J$ 11,074,798      J$ 10,248,185      J$ 8,701,173      J$ 6,601,426   

 

 

(footnotes on following pages)

 

 

56


Table of Contents

Statement of financial position data

 

      At March 31,     At September 30,  
    2012(*)     2012     2011(*)     2011     2010     2009     2008     2007  

 

 
    (US$ in
thousands)
    (J$ in
thousands)
    (US$ in
thousands)
    (J$ in thousands)  

Assets

               

Cash in hand and balances at Bank of Jamaica

  US$ 244,486      J$ 21,298,524      US$ 237,908      J$ 20,725,491      J$ 19,472,761      J$ 24,668,011      J$ 15,442,828      J$ 15,307,128   

Due from other banks

    205,938        17,940,402        284,824        24,812,575        17,048,849        14,405,493        15,207,522        18,977,969   

Derivative financial instruments

    242        21,084                      12,864        52,191                 

Investment securities at fair value through profit or loss

    11,874        1,034,377        20,494        1,785,352        698,711        752,578        916,906        1,025,768   

Reverse repurchase agreements(6)

    20,225        1,761,875        19,485        1,697,472        1,143,581        8,185,227        12,578,633        11,425,030   

Loans and advances, net of provision for credit losses(7)

    1,183,831        103,129,915        1,052,950        91,728,138        85,995,102        88,178,270        82,169,396        56,525,564   

Investment securities classified at fair value and at amortized cost

    2,394,730        208,617,883        2,329,815        202,962,775        199,434,273        166,966,379        153,654,776        141,929,771   

Investment in associates

    66,807        5,819,893        67,121        5,847,258        2,320,723        2,133,994        2,181,407        2,034,921   

Investment property

    143        12,500        138        12,000        12,000        13,000        13,000        13,000   

Intangible asset—computer software

    11,347        988,480        10,307        897,862        359,980        246,781        282,264        294,304   

Property, plant and equipment

    52,442        4,568,493        49,622        4,322,866        4,114,155        4,011,495        3,830,313        3,774,574   

Retirement benefit asset

                                       11,632        13,077        11,627   

Deferred income tax assets

    300        26,130        301        26,191        119,794        803,279        1,679,056        289,975   

Income tax recoverable

    15,977        1,391,836        16,103        1,402,777        1,855,938        1,705,001        1,157,799        877,584   

Customers’ liability—letters of credit and undertaking

    3,699        322,249        4,151        361,606        291,106        399,983        700,628        435,196   

Other assets

    33,216        2,893,604        25,080        2,184,878        2,090,174        2,563,163        1,325,792        1,260,943   
 

 

 

 

Total assets

    4,245,257        369,827,245        4,118,299        358,767,241        334,970,011        315,096,477        291,153,397        254,183,354   
 

 

 

 

Liabilities

               

Due to other banks

    103,720        9,035,590        73,491        6,402,201        3,708,232        6,556,209        10,038,502        4,777,587   

Customer deposits

    1,859,443        161,986,131        1,788,437        155,800,401        144,283,158        130,331,351        126,099,896        118,518,051   

Promissory notes and certificates of participation

                  2,714        236,434        223,154        194,492        4,626        319,993   

Repurchase agreements

    1,037,771        90,405,867        965,100        84,075,103        85,292,763        77,374,431        69,619,957        51,305,167   

Obligations under securitization

arrangements(8)

    126,734        11,040,453        165,047        14,378,119        20,456,162        27,157,180        26,259,740        26,409,833   

Derivative financial instruments

    63        5,513                      25,930        126,848        104,754        77,169   

Other borrowed funds

    40,543        3,531,885        60,508        5,271,146        6,575,623        7,815,552        5,522,891        4,983,835   

Income tax payable

    236        20,524        145        12,591        3,095        10,803        489,559        1,260   

Deferred income tax liabilities

    18,161        1,582,119        27,408        2,387,682        104,332        213,080        112,006        261,309   

Liabilities under annuity and insurance contracts

    281,231        24,499,521        270,495        23,564,275        20,405,624        19,114,764        16,533,984        14,487,602   

Provision for litigation

    222        19,300        149        13,000        13,300        28,506        39,000        36,000   

Retirement benefit obligations

    7,411        645,641        6,686        582,491        445,873        421,641        354,321        290,549   

Liability—letters of credit and undertaking

    3,699        322,249        4,151        361,606        291,106        399,983        700,628        435,196   

Other liabilities

    50,072        4,362,056        52,296        4,555,800