IN the last fortnight, two Canadian banks concretised the perception that the interest of banks from that country in the Caribbean region is definitely waning, if not coming to an end.
Scotiabank completed the sale of seven of its operations in the region on October 31 and recommitted to selling its insurance operations in this country to Sagicor, while announcing that by mutual agreement it has decided not to sell its Jamaican insurer to the Bermuda-registered but Barbados-headquartered company.
And CIBC announced that it was selling 66.73 per cent of FirstCaribbean International Bank (FCIB) to Colombia’s Gilinski group for US$797.4 million. The fact that CIBC wanted to sell FCIB has been well known in financial circles for at least two years. So there was no surprise at the transaction. What was surprising was that the Canadian bank was prepared to sell its Caribbean subsidiary for such a small amount of money.
At Friday’s market capitalisation on the local stock market, FCIB was worth US$2.08 billion, meaning 66.73 per cent of the Barbados-headquartered bank should have been worth US1.39 billion.
At a consideration of US$797.4 million, that means CIBC was prepared to accept 43 per cent less for FCIB than its market capitalisation.
Also, if FCIB’s issued share capital is 1,577,094,570 shares, then 66.73 per cent of that is 1,052,395,206 shares, which means the Colombian banking group paid about US$0.757 per share to acquire a majority stake in one of the region’s largest banks.
According to its website, FCIB was established in October 2002 as a result of the combination of the Caribbean operations of CIBC and Barclays, the English bank, with each partner holding a 45 per cent stake in the entity and mostly Caribbean individuals and institutions owning ten per cent of the bank. In January 2003, FCIB completed a rights issue that increased the public shareholding in the bank to 12.5 per cent, with CIBC and Barclays each retaining a 43.75 per cent stake.
The point here is that in December 2006, CIBC purchased 599,401,230 FCIB shares from Barclays, comprising its 43.7 per cent stake in the bank. CIBC paid Barclays US$988,652,389 in cash. The consideration paid to Barclays represented US$1.62 for each FirstCaribbean share, plus accrued but unpaid dividends.
So, in December 2006, CIBC was prepared to pay US$1.62 per share for a majority stake in FCIB. But almost 13 years later, the Canadian bank felt obliged to offload a majority stake in FCIB at US$0.757 per share.
And, according to the CIBC press release last week: “The transaction is expected to result in an after-tax loss of approximately C$135 million (US$103 million) that will be recognised in the fourth quarter of 2019, representing a reduction of the carrying value of goodwill related to FirstCaribbean.”
Not only did the Canadians offer the Colombian banking group a discounted price for FCIB, CIBC also threw in what the folks at TSTT, in relation to the purchase of equipment from Chinese technology giant Huawei, like to call vendor financing. In other words, CIBC is providing partial financing for the Colombians to acquire the 66.73 per cent stake in FCIB.
Here is what the CIBC press release says: “The total consideration is comprised of approximately US$200 million in cash and secured financing provided by CIBC for the remainder. Following the close of the transaction, CIBC will remain a 24.9 per cent minority shareholder of FirstCaribbean and will benefit from various minority shareholder protections, as well as liquidity rights in respect of its minority stake.”
So an up-front payment of only US$200 million in cash with the balance of US$597.4 million on “terms,” to be repaid over an undisclosed period at an undisclosed interest rate. US$200 million in cash and US$597.4 million on terms.
What did CIBC do to transform a Caribbean bank that was worth US$1.62 a share in 2006 into an entity that was worth less than half of that 13 years later?
How did the CIBC, the owner of 91.63 per cent of FCIB, manage to degrade the shareholder value of its Caribbean franchise to the point of accepting what from the outside looking in seems to be a fire-sale price, arrived out of desperation to get rid of the asset, after shopping it around for more than two years.
It was on December 12, 2017 that Reuters wrote an exclusive article in which the wire service reported that CIBC planned to list FCIB on the New York Stock Exchange as CIBC had been trying to sell the business “for the last two years but could not find a single buyer for the whole business.”
Parent betters subsidiary
In July 2014, in a column in the Business Guardian, which was headlined ‘Is CIBC ready to sell FCIB?’ I had written: “The market value of CIBC FirstCaribbean has declined because its net income has fallen every year since 2007, the first full year of majority ownership by CIBC. In 2007, the bank reported net income of US$261 million, which included a US$52 million gain on the sale of shares in Visa. In 2013, it reported a net loss of US$27 million.”
FCIB’s loss in 2013 was followed by a US$148 million loss in 2014 and net income of US$98 million, US$143 million, US$142 million and US$101 million in the years 2015 to 2018. In the four years between 2015 and 2018, FCIB declared returns on equity (ROE) of 7.2 per cent, 10.4 per cent, 10 per cent and 7.5 per cent. In that four-year period, CIBC declared ROEs of 17 per cent, 18.84 per cent, 16.8 per cent and 15.23 per cent, according to the Macrotrends website.
In short, while FCIB was profitable, its ROE paled in comparison to the performance of the parent, CIBC. That, in a nutshell, accounts for why CIBC has been so anxious to dispose of, or at sell its majority stake in, its Caribbean franchise.
And on the issue of CIBC’s anxiety to sell FCIB, it is beyond belief that neither Republic Bank nor First Citizens would have been approached by CIBC with an offer to buy FCIB.
My understanding is that CIBC did have talks with Republic, but those took place shortly after Republic made a commitment to purchase nine of Scotiabank’s Caribbean operations (confirmed at seven...or perhaps eight if the reports of the swap of the British Virgin Islands for Antigua prove to be accurate).
If First Citizens—which is chaired by former Attorney General Anthony Isidore Smart with Karen Darbasie as its CEO—was approached to buy 66.73 per cent of FCIB for US$797.4 million, with only US$200 million “up front,” did the majority state-owned bank allow this potential golden goose to slip out of its grasp?
And if the owners of RBC Royal Bank decide to follow CIBC in beating a hasty retreat from the Caribbean in the near future, is First Citizens putting its affairs in order so that it can make a winning bid?
Will RBC insist on recovering at least the US$2.2 billion it paid the shareholders of RBTT Financial Holdings in June 2008, at the pre-collapse peak of global equity values?
Can First Citizens afford an up-front payment of US$200 million with the balance to be funded by a rights issue?
Will our current minister of finance block the aspirations of First Citizens to grow its franchise through acquisition, thereby returning additional value to its shareholders, including the Government?
Will the Royal Bankers here and elsewhere in the region rejoice if First Citizens ends up owning RBC Caribbean?