Mon | Sep 25, 2023

Headwinds blunt Barita profit rise, but not its outlook

Published:Friday | November 25, 2022 | 12:12 AMHuntley Medley - Associate Business Editor

Having fattened its balance sheet by almost $20 billion more in assets over the financial year ending September, stockbroking and investment management house Barita Investments Limited appears set press to ahead on the buildout of the property bank it has been amassing since early last year.

This is despite its management raising concerns in the year-end financials about the tight macroeconomic environment in which the company has been operating for the past year, during which it eked out a $100-million, or two per cent, increase in profit over last year.

This profit growth is negligible by Barita’s standards, the company having experienced a sustained spurt in earnings from $203 million to $4.1 billion over the past five years.

Barita previously disclosed that it has so far spent some $10 billion buying up real estate.

“Our expectation for the portfolio of real estate investments is that its development will be phased over multiple financial years. Based on our schedule for the phased development of this stock of real estate which is dynamic and adaptive in nature, we do not anticipate that an economic slowdown will adversely impact or derail our plans,” Ramon Small-Ferguson, Barita’s executive vice-president for investments, told the Financial Gleaner via email on Thursday.

On and off-balance sheet funds under management grew from $316.3 billion to $337.2 billion over the year, in which operating revenue was $8.9 billion, reflecting a nine per cent increase over the $8.1 billion reported last year.

“Our results were achieved in an operating environment characterised by rising inflation and correspondingly rising interest rates, consistent with global policy responses, including those by the Bank of Jamaica. As a result, net interest margins and liquidity tightened and asset prices generally fell, causing a difficult securities trading environment,” Barita Chairman Mark Myers said in the prelude to the financial results.

He noted that Barita’s ultimate parent company, Cornerstone United Holdings Jamaica Limited, continued to make progress with its financial holding company, or FHC, licence application to the central bank and had met all the BOJ’s information requests to date, including proforma consolidated accounts for the proposed FHC that encompass all special-purpose vehicles under Barita’s management.

The accounts of these special vehicles, such as MJR Real Estate Holdings, through which it holds its formidable property portfolio, have largely been off Barita’s books. Barita said this format would continue.

“Cornerstone has taken a holistic view of the group of companies, to include both on and off-balance structures as a critical part of the buttressing of our governance structures, as well as risk-managing any contingent risks that might arise from our special-purpose vehicle structures. Barita intends to continue to follow international accounting standards by reporting, as it currently does, with the SPVs being accounted for separately and, therefore, not constituting a part of Barita’s published financials,” said Jason Chambers, Cornerstone’s group chief investment officer.

Myers also noted in the published financials that Barita’s strategy has emphasised maintaining ample liquidity to take advantage of potential mispricing of securities, and that the focus on growing its alternative investments, credit and fixed-income portfolios has helped Barita weather the economic headwinds so far.

Barita’s net interest income saw an eight per cent improvement to $1.7 billion in the year just ended. Non-interest income was up 10 per cent to $7.2 billion, driven by an 111 per cent, or $1.8 billion, increase in gains on investment activities. Those gains offset a $1.1-billion, or 59 per cent, decline in foreign exchange gains that fell to $748 million. Fees and commission income also declined by three per cent to $3 billion during the year.

There was a $4.6-billion, or 77 per cent, increase in the company’s loan portfolio to $10.5 billion. Barita said its loans are comprised largely of secured credit facilities, including margin loans to its clients.

Total liabilities grew 44 per cent, or $23.5 billion, to $77.5 billion, made up chiefly of $59 billion in repurchase agreement financing and $11.9 billion of secured investment notes.

Despite this, the company says its capital buffers remain strong, noting that the $34.5 billion in capital it raised between March 2019 and September 2021 resulted in the business having a lower leverage ratio than other financial companies in the industry.

Small-Ferguson said Barita would now be looking to secure new partnerships to execute on the various elements of its alternatives investment strategy.

“To use an athletics metaphor, at this stage of our growth, we are entering into the period of maximum velocity. Since Cornerstone’s acquisition of Barita in 2018, we have hunkered down in the drive phase to build up the company’s store of permanent capital and acquired significant assets,” he said.