Why does National Bank need to raise money?

By G.A. Dwyer Astaphan

Up to about ten years ago, the Government owned 60% of the National Bank’s shares.

Then the Bank decided to increase its shares and apparently gave the Government a chance to buy a portion of the new share issue in order to maintain its parity and its 60% holding. But it seems that Government was unable to buy the shares, and its holding slipped by nine percentage points to 51%.

I had some problems with that.

Was there a need to increase the number of shares? Was there a need for more money? Why had Cabinet not been informed previously and its views,  indeed, its approval given, considering the fact it is supposed to act as the board of directors of the Government which was(and still is) the major shareholder in the Bank?

And instead of losing 9% of its shares in the Bank just so, why did Government not get the chance to sell the 9% of its shares so that it could get some money to pay down its debt to the Bank?

Now, ten years later, I am seeing another development.

The Bank held its annual general meeting in March of this year. And it passed a resolution to increase its authorized share capital from 135 million shares to 270 million shares, that is an increase of 135 million new shares.

I am told that the reason given was that the Bank wants to raise money. I am told also that the Government has given its blessings, but it has asked that nothing be done to further erode its parity position.

I don’t know how that is going.

But there are some questions which require our attention. And in bringing this matter to you, I am not motivated by anything other than a sincere desire to have a decent discussion.

Firstly, the Bank agreed to pay a dividend of about 18.5 cents per share, some in cash and the rest in shares. I understand that as many as 54 million shares might be distributed in this manner.

Put on sale at a lowly $3.00 each, these shares could have fetched as much as $162 million. So if they were to be used to pay out dividends, why so many?

There may be a totally plausible explanation, but it needs to be given. And not just to its shareholders, but, seeing that it is majority-owned by the Government, to the people of this country who, through the Government, are the real shareholders. Somebody needs to talk.

And, anyway, why does the Bank need to raise money when it says that it is stronger than ever before?

In its Financial Report, its chairman declared that the Bank had had “another successful year” with an “operating income before tax of $161.8 million and a net income of $110.9 million”.

Meanwhile, its Managing Director stated that since it started to trade in 1971, the Bank “has consistently achieved better results in each year than in the preceding year”.

Earnings Per Share (EPS) was $1.37, almost twice the 70 cents in the previous year.

All indications are that the exceptional year was due in no small measure to the report that in 2008, VISA Inc. (the credit card operator) converted from being an association of members to becoming a corporation of shareholders. In the reorganization, the Bank was allotted a very valuable amount of shares in VISA at no cost to the Bank, then VISA bought back some of those shares. This transaction apparently involved a lot of money, contributing 49.6% of the Bank’s said $161.8 million operating income for last year.

So what is the problem?

Can we fairly anticipate that with the VISA windfall now behind it, the Bank will in its next fiscal report show an EPS of closer to 70 cents, given the terrible global economic situation?

I think so.

Might the Bank also be measuring matters in terms of the large Government debt to it? Maybe.

If so, then ways have to be found to bring down that debt, which becomes an especially challenging task in the present economic climate.

Suggestions have been made.

Here is one. If Government was to sell, say, 2,000 acres of land to Social Security at $100,000.00 per acre. That would be a $200 million sale. This would reduce the SSMC (and the Government’s) debt by the $200 million, while at the same time vesting the lands in an entity which holds and operates a pension fund for the workers of this country. And Social Security could now set up a scheme to build and sell low income homes, setting up in the process a new and lucrative portfolio. It could even sell off and cash in its mortgages.

But the $200 million payment would reduce the SSMC and Government debt by more than an equal amount, because it would also reduce interest payments, which keep getting  piled on to the debt, taking this item closer and closer to the line of bad debt. (Mind you, I’m not saying that it is near that point yet).

I have always believed that something realistic, and acceptable to the ECCB, needs to be worked out between the Government and the Bank with regard to this debt and interest story.

Look, if the Bank is paying Social Security’s interest on its money at a rate of say, 5%-6%, and the Bank is lending that same money to the Government at a rate 9%-10%, then is it not more beneficial for both Social Security and the Government for the latter to borrow from the former directly, even on a short-term basis where possible?

Meanwhile, as things stand, we seem to be paying the Bank to lend us our own money.

Another suggestion has been for Government to sell its shares in the Bank to Social Security, which sale, based upon the present, probably undervalued market price of about $3.00 per share, would add up to some $205 million.

Those two transactions would reduce the Government’s debt to the Bank, and its debt overall, by well over $400 million (later on in this discussion you will see a much larger figure popping up). That’s a big load off the Government and off the Bank, as well as a savings to Government and Social Security.

All of this might put the Bank in a position where it does not have to raise money by increasing its share capital or perhaps not that much money. And if does have to, it might do so under healthier fiscal circumstances.

Meanwhile, let’s assume that the Bank proceeds with the launch of the new shares. For the Government to maintain its parity position of 51%, it would have to buy 51% of the new shares, which is 68,375,000 shares.

If those shares are to be bought at the market price of $3.00 each, then the Government would have to some way find $205,125,000.00.

That will not happen.

So if the Bank really needs the money, and if it really needs it because, to a significant extent, of the Government’s debt to it, then it seems that we may have a repetition of 1999, and the continuation of a process whereby the Government’s share ownership keeps evaporating, with little to show for it. Yes, perhaps a smaller portion of a stronger Bank, but more than likely a significant net loss to the Government anyway.

If a sell-off is absolutely unavoidable, then I hope that the Government will first guide the process so that it can have its shares sold to Social Security.

Let me now touch on EPS.

I am told that one way of valuing a company’s shares is by multiplying its EPS by 10 to 15. Using this method, the Bank’s shares would be valued, not at $3.00, which would be the value based on an EPS of 30 cents, but at between $13.70 and $20.55 each. And even if last year’s revenue was a welcome aberration, and we revert to the previous year’s EPS of 70 cents, we would see a price of $7.00 to $10.50 per share.

By this method, the 135 million shares in the bank would have an aggregate value of $1.85 billion or more (at $13.70 per share) or $945 million (at $7.00 per share) and the total value of the Government’s shares would be about $940 million in the first scenario, or about $480 million in the second.

The other method is to calculate the total value of the shares and multiply it by 2. At the present, low price of $3.00 per share, the total value would be $405 million, twice of which would be $810 million. And 51% of $810 million is $405 million, which would be the value of the Government’s shares at the present, low price.

It would be nice, therefore, and I think fitting and proper, if the Government could sell 2,000 acres of land and its shares in the bank to Social Security. This could lower the Government’s debt by $600 million (remember the $400 million above?), and at the same time ease the burden on the Bank, and further empower Social Security in many ways, including fueling its activities in housing and commercial developments for lower income folks, etc.

Of course, being such a massive transaction, or, if you will, double transaction, all parties would have to ensure that no trauma is caused to our banking and financial system.

This matter, challenging us in these especially troubled times, requires honest, analytical and committed brainpower, and deliberate, incisive, professional action, not hype, glitz, glamour or political grandstanding one way or another.

It appears to me also to be an historic opportunity to get a number of critical things right, and in the process to protect, and indeed enhance, the interests of the people of this country and their Bank.

As I reflect, however, I must confess that I am concerned that if a deliberate and careful approach is not taken quickly, the situation might lend itself to predators who, God forbid, could be lurking and ready to pounce.

Until Next Time, Plenty Peace.