Jamaica Money Market Brokers Acquisition could lead to robust revenue growth Mario Ahjahorie Financial Analyst

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1 Price($) Volume (Millions) September 26, 2011 Jamaica Money Market Brokers Acquisition could lead to robust revenue growth Mario Ahjahorie Financial Analyst JMMB to Acquire CCFG JMMB has offered to purchase all the outstanding shares of CCFG at a price of $4.55 per share or $4.22 billion. The offer is pending the approval from local regulators and could see JMMB gaining CCFG s Merchant Banking and Unit Trust Licenses as well as it portfolio of loans, deposits and investments & repo portfolio. Regulatory Approval of Acquisition Both CCFG and JMMB are multijurisdictional firms and will have to undergo various stages of approval. The main regulators will be the Financial Services Commission (FSC) and the Bank of Jamaica (BOJ). The BOJ will have decision making authority on the Merchant Bank License of CCFG, while the FSC maintains oversight of the Investment Banking Operations which includes CCFG s Unit Trust License. Both companies are also listed on Trinidad & Tobago Stock Exchange and Jamaica Stock Exchange (JSE), while JMMB is listed on the Barbados Stock Exchange. This layer of the approval process should not be a major impediment since core operations are domiciled in Jamaica. We anticipate the BOJ will approve the acquisition despite their refusal to grant JMMB a commercial banking license back in In 2008, JMMB was significantly impacted by the collapse of Lehmann Brothers which weakened their capitalization. However, the company has strengthened its capitalization levels since then and is much better positioned to undertake this opportunity. Therefore, the expected timeline of approval of the deal is reasonably placed at December Merchant Bank License The Merchant Bank License will enable JMMB to offer services they have long sought to offer since they applied for a commercial bank license. The merchant bank license is in fact a good substitute and permits them to offer credit card and debit card facilities. In addition, it opens up an avenue to get cheaper balance sheet funding while allowing them to expand their loan offerings. Unit Trust License An additional benefit of a JMMB/CCFG deal is that JMMB will be able to delve into the restricted unit trust market with CCFG s three established products. This is in addition to JMMB s two indexed funds which are both incorporated as companies in Cayman. The attractiveness of this business line is that it enables the company to unlever its massive balance sheet in light of tighter capital requirements by the FSC. JMMB is the most leveraged of all the members in its peer group. JMMB spreads higher than CCFG Currently, JMMB enjoys better investment spreads than CCFG on its repurchase agreement portfolio. JMMB s interest spread is approximately 2.43% while CCFG s was calculated at 1.77% for the June quarter. The reason for the smaller spread at CCFG was due to the higher cost of funding than JMMB. Thus, with the combination of the two entities, we anticipate JMMB will re-price CCFG s portfolio to match JMMB s rate structure as client liabilities mature. Notably, maturities are concentrated in a 1-3 months band and the full effect of the re-pricing will therefore BUY Price at Sept 7, 2011 $10.10 Price Target $ Week Range $3.50 $12.25 STOCK DATA Market Cap ($) 8.05 bn Shares Outstanding 1,463 mn Free Float 20.37% Last Trade Volume 67,936 Figure 1: Share Price Movement Mar-2010 Jun-2010 Sep-2010 Dec-2010 Mar-2011 Jun-2011 Figure 2: The Offer Total Price Price/Share Purchase Price $4,216,922 $4.55 Cash $2,951,845 $3.19 JMMB Shares $1,265,077 $1.37 Figure 3: Repo Yields Company Last Price Volume Avg Repo Yield JMMB 5.39% CCFG 5.90% Difference 0.51%

2 be visible 3 months after the deal is completed. CCFG Loan Portfolio Dirty but JMMB can expand Previously, we had discussed the possibility of JMMB partnering with a commercial bank to widen its product offering in the near future. However, acquiring a merchant banking license by buying out CCFG is just as valuable. At the onset, JMMB would be acquiring a relatively bad loan portfolio which would provide the first major challenge for management. However, the tremendous opportunity to expand the loan portfolio, considering JMMB s large client base and relatively large balance sheet far outweighs the poor quality of the loan portfolio being inherited. Additionally, JMMB s fledgling loan business can be funded by lower cost deposits instead of its more expensive investment portfolio and capital. Extraordinary Gain on Acquisition? Based on the offer, JMMB is acquiring CCFG significantly below its book value in June Additionally, based on CCFG s audited financials as at December 31, 2010, we are unable to detect any major impairment to the balance sheet, with the exception of the loan portfolio s quality. In the best case scenario, there will be no write-down on the loan portfolio and JMMB would make an extraordinary gain of $2.94 billion. The absolute worst case would be to write off both those loans categorized as Doubtful and Loss which would result in a mere gain of $188 million. However, the likely case seems to be to write-off those categorized as Loss which result in a gain of $1.75 billion. Share Swap and Dilution Company is expected to finance the deal with 70% cash and pay the remaining 30% by issuing new JMMB shares. JMMB has requested their shareholders to approve an increase in the company s share capital at the upcoming annual general meeting (AGM) slated for September The issued shares are expected to value $1.26 billion based on the structure of the offer. However, there is still the question as to what ratio they will be swapped at and what value will be placed on the new JMMB shares. Figure 7: Swap Scenario s Price $ New JMMB Shares Issued JMMB New Total Shares Book Value* Proj EPS Mar ,725,220 1,644,111, ,134,568 1,621,521, ,564,060 1,603,950, Swap Ratio ,507,654 1,589,894, ,006,958 1,578,393, ,423,045 1,568,809, *normalized to reflect writedown of bad loans Figure 4: Loan Quality Breakdown Loan Quality Amount % Standard 2,374,508 36% Special mention 977,926 15% Sub-standard 407,973 6% Doubtful 1,563,363 24% Loss 1,192,012 18% Total 6,515, % Figure 5: Bad Loans Doubtful 1,563,363 Loss 1,192,012 Doubtful to Loss 2,755,375 Figure 6: Extraordinary Gains Scenario Write-Off Gain Best Case None 2,944,276 Middle Loss 970,583 Worst Case Loss & Doubtful 188,901 From our perspective, the JMMB shares can be valued anywhere between $7.00/share to $12.00/share. Before the announcement, JMMB shares were valued just above $8 on the market, on the heels of very strong first quarter results. At the time, the book value of JMMB s shares was $7.54. Since the announcement, the stock has traded as high as $12.25 before settling around $ In our view, the sweet spot for the deal will be somewhere between $7 and $9. At that price range, a maximum of between 141 million and 180 million new shares will be issued. The resulting book value of the new entity would be between $8.66 and $8.88. Additionally, with the synergies garnered and expected extraordinary gain on acquisition, March 2012 EPS should surface between $2.05 and $2.11. Figure 8: Top Shareholders

3 What if CCFG minority Refuses? It is unlikely that all CCFG minority shareholders will accept the offer. However, with the main shareholders accounting for more than 78% of the shares outstanding, the worst case is that CCFG will be a strongly controlled subsidiary of JMMB. Therefore, JMMB would still have decision making voting rights and control of CCFG. Capital Adequacy JMMB is adequately capitalized based on the current FSC requirements and most recent results. However, JMMB will be required to maintain increasing amounts of regulatory capital as the risk weighting on US$ GOJ assets is increased. Currently, the risk weighting of US$ GOJ assets is 25% but they are targeted (by the FSC) to increase to 100% over the next two years. Shareholders Shareholding % Ryland Campbell 400,883,680 43% National Insurance Fund 208,327,404 22% Andrew Cocking 128,219,797 14% Tewani Limited 10,843, % Mayberry 779, % Assuming the company grows it balance sheet no more than 1% to 2% over the next 4 years, our capital adequacy model suggests a balance sheet which is 117% - 118% of required capital (including CCFG). The FSC s warning level is 110% and we think anything above 115% provides reasonable room to handle shocks. As at March 2011, JMMB had as much as JMD equivalent of $50 billion US denominated assets backing repurchase agreements while CCFG has as much as JMD equivalent of $21 billion US denominated assets backing repurchase agreements as at December This phenomenon which affects the entire securities dealer industry is one of the reasons we find the potential addition of a Unit Trust License so attractive. It provides an avenue for the company to delever its massive balance sheet (should the need arise) by migrating repo clients to suitable unit trust products. The most straightforward short term strategy is migrating interest accretion to unit trust and other off balance sheet products. This keeps total assets flat while allowing equity to grow through retained profits. Evaluation of the Offer From a book value perspective, CCFG is worth about $7.21 but when the bad loans (doubtful and loss) are removed, the adjusted book value is $4.75. Therefore, JMMB would be getting CCFG s portfolio at a discount to their carrying value. From this perspective, JMMB s offer price gives their shareholders good value in offsetting the dilutive effects. From an earnings perspective, CCFG s intrinsic value is $1.71/share and therefore JMMB is paying a significant premium of $2.84. It also equates to a $0.89 premium above the market price, the day before the offer was made. Notwithstanding, the potential synergies and growth prospective of the merger far outweigh the premium JMMB will be paying. Projections & Valuation In anticipation of a closed deal by the end of December 2011, we project year end Revenues at $6.17 billion with Net Interest Income contributing $3.75 billion and Non-Interest Income $2.42 billion. Administrative expenses of the combined entity should total $2.91 billion resulting in Operating Profit of $3.26 billion. Taking into account an expected extraordinary gain $971 million, Net Profit should surface at $3.38 billion at the March 2012 year end. In March 2013, we expect some normalization of revenues (especially a reduction in securities trading) and we conservatively project net profit at $1.75 billion. Over the last few years, the company s dividend payout ratio (dividends/earnings) has fallen to

4 18%, but we expect this will improve to between 20% and 25%. Therefore, we utilize a 2 two stage dividend discount model to value the company. The model takes detailed projections of earnings and dividends to 2016, after which we expect long term growth of 10%. The model produces a valuation of $ The stock therefore could appreciate 45% from its last closing price of $ With the expected improvement in fundamentals, dividends and capital appreciation JMMB is recommended as a BUY. First Quarter Review JMMB reported a stellar performance for the first quarter ended June 2011 as net profit soared to $951 million. This tripled our projection of $331 million and was driven by the exceptional growth in the line item securities trading. Otherwise, all other components of net income were reasonably close to our projections. Net Interest Income (NII) continued its recent strength showed year on year growth of 51% to $725 million, in line with our expectations. The company continues to improve its spread management and have done so without further expansion in their balance sheet. Non-Interest Income contributed an impressive 76% of Net Revenues for the quarter, driven by securities trading which soared 375% to $872 million. According to JMMB s quarterly report, the company took advantage of market opportunities, seemingly related to the rally in the bond market in which they actively traded. Operating Expenses climbed 22% to $637 million year over year but represents a 12% reduction from the previous quarter. The year on year increase is related to the build out of the Dominica Republic operation. Balance Sheet: JMMB s Equity Base stood at $11.03 billion, up 51% y-o-y and 17% q-o-q, through a combination of retained earnings and gains on fair value reserves. Total assets increased 2% to $120 billion, funded by a 1% increase repo s to $102 billion. The growth in retained profits and fair value reserves continue to strengthen the equity base. Tier 2 capital was also bolstered in January 2011 by the re-issue of $2.96 billion preference shares. The high financial leverage of the company has been a concern but management has been bringing this under control.

5 Year Ended Quarter Ended June Projections (Quarterly & Annual) 2011 Q Q1 011 Q Q Q YE Income Statement Interest Income 8,813,920 2,762,471 2,170,291 2,170,291 2,188,867 3,100,941 9,630,390 11,315,815 Interest Expense 6,294,878 2,280,725 1,444,867 1,371,818 1,381,872 1,686,491 5,885,048 7,248,427 Net Interest Income 2,519, , , , ,995 1,414,450 3,745,342 4,067,388 Non Interest Income 1,580, , , , , ,260 2,422,923 2,157,040 Operating (Net) Revenue 4,099, ,952 1,675,567 1,272,733 1,281,255 1,938,710 6,168,265 6,224,428 Administrative Expenses 2,585, , , , , ,245 2,908,954 3,933,773 Operating Profit 1,513, ,760 1,037, , , ,465 3,259,311 2,290,655 Share of Associates 24,327 1,788 4,085 5,000 5,000 5,000 19,085 20,039 Gain Acquisition of CCFG , ,583 0 Profit before Income Tax 1,509, ,548 1,042, , ,359 1,947,048 4,248,979 2,310,694 Income Tax 366,705 54,682 91, , , , , ,513 Net Profit 1,142, , , , ,421 1,473,903 3,378,290 1,749,181 Balance Sheet Total Assets 113,019, ,322, ,291,565 N/A N/A N/A N/A N/A Investments Securities 98,912, ,966, ,478, ,389, ,304, ,967, ,967, ,682,299 Loans N/A N/A N/A N/A N/A 4,300,087 4,730,095 5,439,609 Total Liabilities 103,616, ,030, ,260,117 N/A N/A N/A N/A N/A Repurchase Agreements 97,068, ,770, ,565, ,317, ,070, ,092, ,092, ,441,952 Deposits N/A N/A N/A N/A N/A 6,163,182 6,163,182 6,779,500 Preference Shares 2,924,994 2,690,085 2,924,994 2,924,994 2,924,994 2,924,994 2,924,994 2,924,994 Total Equity 9,402,331 7,292,182 11,031,448 N/A N/A N/A N/A N/A Per Share Data Revenue per Share Earnings per Share Dividend Per Share Book Value per Share Ratios Net Interest Margin 28.6% 17.4% 33.4% 36.8% 36.9% 45.6% 38.9% 35.9% Operating Margin 36.9% 30.6% 61.9% 49.1% 48.7% 50.1% 52.8% 36.8% Net Margin 13.0% 6.4% 43.8% 22.0% 21.8% 47.5% 35.1% 15.5% Effective Tax Rate 24.3% 23.6% 8.8% 24.3% 24.3% 24.3% 20.5% 24.3% Efficiency 63.1% 69.4% 38.1% 50.9% 51.3% 49.9% 47.2% 63.2% Dividend Payout Ratio 20.5% 0.0% 15.4% 20.0% 20.0% 20.0% 20.0% 20.0% R.O.E. - Annualized 14.0% 10.8% 41.5% 26.8% R.O.A. - Annualized 1.0% 0.6% 3.1% 3.2%

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