Headquarters of the Capital and Credit Financial Group, parent company of Capital and Credit Securities Limited, on Grenada Way in New Kingston. - Junior Dowie/Staff Photographer

Susan Gordon, Business Reporter

Capital and Credit Merchant Bank's net profit for the first quarter ending March 2007 plunged to $153.9 million, a more than 100 per cent drop, the financial house has reported.

Chief Executive Officer Curtis Martin said the sharp decline in profit was due to a fall in net interest income - NII was down 35 per cent - resulting from fluctuations in the external and local markets.

Its securities trading business was also depressed, which Martin said was due to a lacklustre stock market and highly priced Government bonds, with little expectation of the latter appreciating.

Net profit after tax for the March quarter 2007 was at $153.9 million compared with $348.38 million for 2006 quarter while net interest income for the quarter stood at $170.84 million (Q1 2006: $263.88 million)

Net gain on securities trading rounded out the quarter at just under $196 million, an approximate 40 per cent drop when matched against the year prior period's $325.57 million.

However profits dipped, the company managed to increase total assets under management by $1.15 billion to record $56.84 billion at the end of March 2007.

Loans, net of provisions, grew by 108 per cent in the quarter to $5.42 billion.

"The growth in loan balances has led to increased loan interest income not withstanding the overall reduction in yields generally in the market," the company said in its statement to shareholders.

Commenting on the factors impacting the profitability of the merchant bank which constitutes a significant portion of the capital base of the Capital and Credit Financial Group, Martin said the flattening of the yield curve on interest rates in January resulted in a reduction in the spreads on repurchase agreements (repo).

He noted that in March 2003 when the Bank of Jamaica's reverse 30 days repo was at 12.95 per cent and its one day repo was at 24 per cent, securities company could take a 30-day deposit of 12.95 per cent, and invest it for one year, and earn a spread of 11 per cent.

"Since January 2007, that spread has fallen to 0.35 per cent, the differential between the 30 days repo rates and the one day report rates," said Martin at the Group's annual general meeting held Wednesday at the Pegasus.

"We also had a problem in the United States market where our funding bench market, [the Federal Reserves Funds] was at 1.25 per cent in January 2003 and went up to 5.25 per cent in 2007.

The impact of this is that there will be an erosion in the interest spread to the extent that financial companies are holding fix assets."

The third factor affecting the bank's interest income was linked to the inversion of the US yield curve where short terms rates have reversed to the point where they are higher than long term rates, resulting in negative spreads.

"What we are now seeing is that short term rates are higher than long term rates. So if I were to borrow the short term end of the market, I would borrow 5.25 per cent. if I invest it for two years the investment rates would be 4.72 per cent, so again there is a negative spread," Martin told the Financial Gleaner in a brief interview following the AGM.

Net gain on securities trading was $195.75 million in Q1 2007 versus $325.57 million in the 2006 quarter while net interest stood at $170.84 million in the review period compared with $263.88 million for the corresponding quarter.

susan.gordon@gleanerjm.com