Financial Review
Highlights
The period under review comprises the fourteen months to March 1998. The company incurred losses and has a deficit of $45.58 billion at the end of the 1997/98 financial year. In arriving at the operating results for the year, full provision has been booked against those investments that have had permanent impairment in their values, so as to reflect market valuation at the reporting date.
The company generated its income from investments and from interest on loans and deposits. Loan interest, earned at concessionary rates ranging between 4.5% and 12%, formed the basis of 76.3% of total income earned during 1997/98. The other sources of income were those generated through deposit interest earnings that accounted for a further 23% of total revenues. Earnings from investments were less than 1% of total revenues.
A total of $15.97 billion or 35% of the period’s losses arose from the direct operation of the company, after taking general and administrative expenses as well as loan and deposit loss provisions into consideration. The remaining losses arise on the consolidation of the operating results of subsidiary and associated companies and losses on the revaluation of investments in those companies. Provisions for losses in subsidiaries and associated companies have been made in accordance with the company’s accounting policy as disclosed in note 2 (d) of the accompanying financial statements.
Loan and Deposit Loss Provisions
Reported expenses include $11.86 billion of provisions against losses on deposits and on loans placed with, or advanced to FINSAC-intervened and assisted entities. The effect of these provisions is to write down the carrying values of the company’s loans and deposits with intervened financial institutions to $4.35 billion. This carrying value represents 26.9% of original amounts loaned to or placed with the institutions.
This rate of provisioning reflects management’s estimate of the likelihood of recovery of the original amounts loaned or deposited after taking all factors into consideration, including business and economic conditions. In arriving at the level of provisioning, due consideration was also given to the fact that the advances and loans represented by these amounts are unsecured. The transactions were effected on an unsecured basis as the objective was to improve the liquidity of the institutions concerned.
Interest Costs
Interest on loans and advances over the period amounted to $4.3 billion, representing 66% of total operating expenses. The company’s funding cost over the period covered by this report, ranged from 25% to 29% and was based in the main, on the ruling Treasury Bill rate plus 1%, at the time the borrowing was contracted. FINSAC's operations have been funded by advances from the Bank of Jamaica in the aggregate amount of $21.7 billion, $2.3 billion from the Government of Jamaica, and earnings from the company’s operations.
Operating and Intervention Expenses
General and administrative expenses covering personnel, premises, legal and professional fees and other administration costs amounted to $0.3 billion. This represents approximately 5% of total operating expenses as we sought to maintain a low cost intervention and administrative infrastructure. In addition to the provisions for loan and deposit losses, and consistent with our conservative approach, bad debt provision were booked for doubtful receivables, including $1.89 billion of interest that is deemed uncollectible.
Asset Composition
FINSAC has net total assets of $20.2 billion of which $19.35 billion or 95.8% represent net loans to and investments in financial institutions that were intervened during the period. In addition to the loans and deposits advanced to the financial institutions to assist with their liquidity problems, the company disbursed $45.94 billion in acquiring investments in the various troubled financial entities in the banking and insurance sectors.
The form of the investments varied according to the purpose of the funding injected. A total of $18.47 billion was disbursed for the purchase of non-performing loans which have been housed in two FINSAC subsidiary companies, Recon Trust Limited and Refin Trust Limited to facilitate coordinated collections and work-out effort. The remaining $26.97 billion of investments represent long term loans of $16.1 billion, preference shares of $8.42 billion and equity share acquisition amounting to $2.45 billion.
Consistent with the conservative approach applied in the restatement of loans and deposits to market values, investments were also revalued. The carrying values in this case represent $15.85 billion or 34.9% of original investment cost.
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