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NCB still faced with bad debt
* But bosses confident about the future

Approximately $2.1 billion worth of loans at National Commercial Bank (NCB) went into arrears last year -- suggesting that institution was still grappling with the problems of bad debt that led to the $19.5 million bail-out by the state one year ago.

Chairman of the banking group, Oliver Clarke, told share holders last week that more customers continue to experience problems with servicing their loans even after the bank sold $13 billion in doubtful debts to FINSAC a year ago. Clarke told scores of shareholders at NBC annual general meeting at Hilton Kingston Hotel that the management was still working diligently to restore health to the institution.

"They are trying very hard to cut the expenses of operating this organisation," Clarke said.

NCB's doubtful debt portfolio is equivalent to roughly 20% of its current performing loans.

Last year the bank made provision of $1.2 billion for that doubtful debt, a charge which was a factor in the $1 billion loss reported by the group for the year ended September 30, 1998.

The group's managing director, Dunbar McFarlane, told the shareholders that the key factor in the apparent deterioration of the loan portfolio was last year's change in the rule governing bad debt provision from 180 days to 90 days.

With the stricter regulation, banks now have to cease booking revenue for loans which are 90 days past due in payment.

According to McFarlane, despite the increase in the doubtful loan portfolio there were no plans by the management to approach FINSAC for additional financial assistance.

Moreover, the management had put systems in place to minimise additional fall-out, he said.

"I wish to state categorically that NCB has not approached FINSAC to sell any loans or indeed, for any additional financial assistance," McFarlane said.

FINSAC injection was through a combination of preference shares, direct equity investment in the bank and the purchase of bad debt.

McFarlane explained that under the bail-out arrangement "FINSAC Ltd assumed responsibility for the collection and management of the large loans in the non-performing portfolio sold".

This related to loans of $5 million and over while NCB was responsible for collecting those loans of below $5 million in face value.

With the FINSAC arrangement, NCB loan portfolio fell more than half, from $24.8 billion in 1997 to $11 billion in 1998.

Income from loans, fell accordingly, from $6.2 billion in 1997 to $3.5 billion last year. Income from the FINSAC bonds replaced the loans as the major source of revenue for the group.

It was, however, he group's performance for the six months to March 31, 1999 which for McFarlane indicated the possibilities for the long-term profitability of the institution and vindicated FINSAC intervention and the management's aggressive cost-cutting programme.

For that period the group reported operating profit of $416 million, up from $117.8 the previous year -- an indication in McFarlane's view of the soundness of the core operation.

"I certainly, expect to see a continuation of this trend as we move forward," McFarlane told the shareholders. "We are rebuilding the institution. We are restructuring the institution."

At the commercial bank, he said, the branches have been cut and the credit administration has been reformed, he explained.

The profit in the last two quarters would apparently have given McFarlane and the NCB the confidence to mount a marketing programme to regain customers lost "during the period of uncertainty".

"We have met and we are continuing to meet with customers in the United Kingdom," McFarlane said. "We are currently developing a new marketing thrust aimed at regaining any ground lost to the competition."

It was as a message reinforced by the chairman Clarke who cited the bank's $48 billion deposit base as proof that the customers had retained their confidence in the institution.

"In spite of the difficulties the deposit base did not go down," said Clarke. "It is a very re-assuring thing."

But shareholders also expressed their concern about the performance of the bank. Clarke fielded questions from several, who raised questions about last year's $1 billion loss.

Clarke said a substantial provision for bad debt, insurance and consultants' fees had contributed to the loss.

One shareholder, Christopher Lue, raised the issue of the breach of the Bank of Jamaica's restrictions on secured credit.

Clarke said only that the institution hoped to have the outstanding credit reduced to return the bank's position to within the statutory guideline on credit.

June 30, 1999


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