Banks and Profitability

By Dashan Hendricks

In the last few years, it seems profit has become a bad word in Jamaica, especially when it comes to banks.

And so with a few notable exceptions, every time a bank reports profit or "high" salaries are revealed, the society seems to gravitate around a tediously predictable banker-bashing, anti-profit, bonus-hating and anti-big-salary agenda.

And the banks themselves, at least publicly, seem to buy into the rhetoric and so are careful how profits are reported in the media.

I myself, have fielded calls from banks saying I must be careful not to report their profit in a way that "incites". I often retort:  “Incite what, or whom?

I cannot understand the hesitance to say a bank made $10bn or how reporting it in any way "incites" if it is the fact. It's almost like the banks are ashamed that they make money.

People who argue, however, that $10bn in profits for a bank in Jamaica is too high are misguided. They argue that banks make that money by exploiting poor people. But which business doesn't exploit its customers for as much as can be gained?

Established to make money

Mind you, I am not arguing that banks or any business should levy unreasonable charges on their customers. But if we are honest we will all admit that businesses are established to make money and to make as much of it as possible. Can a business make too much money?

Recalling that businesses invest assets to make money, and examining the financials of the two largest banks in Jamaica, show the returns are very low.

National Commercial Bank, with an asset base of over $446bn, made only $8.5bn in profits in 2013. That's a return of only 1.91%! The Bank of Nova Scotia (Jamaica) in 2013, made $11.5bn from $389bn in assets, representing a return of 2.96%.

These are very low returns and the type very few investors in Jamaica would put up money for. But what is the alternative? Should banks temper their earnings in response to public outcry that they make "too much money?"

Required earning level

The truth is, banks have to earn a certain level. If they don't do that they would have to take higher risks and that is not what we want, so we must be interested that there is always a certain level of earnings that makes them safer. Whether they are achieving that level of earnings is debatable.

Still, it is clear that while banks must be "credible" and have capital buffers in place that meet regulatory standards, they also must remain profitable and make solid earnings to prevent them from taking unnecessary risk.

Safer banks

No one would argue that Jamaicans banks are not much safer than they used to be. That much was demonstrated in the global financial meltdown of 2008, when financial institutions in Jamaica, for the most part, were largely unscathed. That is because, since the 1990's banking crisis, the banks have increased and improved their capital ratios with the aid of stronger earnings.

Profitability has become a bad word in some circles and it need not be. Let's hope banks make more money, not through unjust exploitation, but on a stronger economy in which more banking is done.

Dashan Hendricks is Business Editor for the RJR News Centre