Banks lead market dynamism

..Republic's merger plan may boost its share price

Stock Market Review

Last year was the most phenomenal one in the history of the Trinidad and Tobago market. And, judging from the first three weeks of 1996, we may be in for another very busy year.

By the end of the first month, the market was already close to surpassing the 1994 volume of 67,565,027 stock units. It has already passed the halfway mark of the 1995 volume of 105,354,432.

So far, Republic Bank was been the big player in the market. On January 9, 1996, Republic Bank purchased 52,605,000 stock units in CIBC (WI) Holdings with a value of just under $200 million.

Stock Dilution

This trade was expected because Republic had stated in its 1995 Annual Report that it intends to maintain its given the dilution of its 20 percent holdings.

In its move to acquire Bank of Commerce (BOC), Republic also purchased over one million BOC stocks on the market during the month.

This, together with its purchase of two holding companies previously owned by Rupert Indar and Kyffin Simpson, gave them 53.34% of the equity of BOC. Republic has had effective control of BOC since February 2, 1994 when CIBC Canada sold its 48.40% holding to Republic (23%), Kyffin Simpson's Inter Americana Trading Corporation (18.50%) and Dr Rupert Indar's VHS Holdings which brought the remaining 6.90%. Republic then initiated a change in the Board and top management.

New Dynamism

BOC was not a dynamic bank until Republic took effective control. Republic changed BOC's style of operations with BOC becoming more aggressive. The new management upgraded the information system, established a corporate division and restructured the branch network along functional lines.

Within the first year it had full inter-branch capabilities, and introduced a line of VISA cards. This new dynamism was reflected in BOC's performance.

BOC Profits

Its after tax profits grew from $13,729 million in 1993, the last full year before the management change to $23,133 million in 1995, an increase of 68.50%.

The significant benefits that would derive from a full merger would undoubtedly enhance the profitability of the combined entity. Republic would not only be getting an increase in market share but also greater economies of scale in its operations. The synergies presented by this deal include lower cost for premises and staff, the two largest costs for a bank.

It would also achieve greater economies of scale in areas such as information technology, training and risk management.

Takeover Risks

The inherent risks of takeovers such as loss of customers, different corporate cultures and high integration cost should be mitigated in this case. Republic has effectively run BOC for the past two years and its management always hoped some day to fully acquire it. Therefore, BOC may already be operating in the same style as Republic.

During BOC's information technology upgrade, it probably became more compatible with Republic. However, there could potentially be high cost in the short term, resulting from a reduction in staff and relocation, the benefits of which would only be realized in the medium to long term.

For this bid to be successful, the remaining major shareholder would have to agree to accept Republic's offer, which is not a foregone conclusion.

Price Boost

Takeovers are usually at a premium to current market price but Republic has stated that $6.93 is the final offer price.

We anticipate that some BOC shareholders may sell their holdings and switch to Republic, which would put some upward pressure on Republic's stock price. The bid itself and the benefits to be derived from it would increase demand for Republic's stock, as such we anticipate an upward movement in its stock price.

If Republic does not get the required 90% shareholding to invoke Section 153 of the Companies Act to receive acceptances for the full 100%, it will operate BOC as a subsidiary which would also be beneficial to Republic's stockholders.

In other news, the 1996 Budget removed the dividend income allowance which was a major contributor to the stock market's phenomenal performance in 1995.

While this loss would be a major disincentive to individuals and Pension Funds, we believe that the market's reaction would not be overly negative.

We have based this opinion on the fact that most equity investors invest for capital appreciation. The loss of the allowance, while substantial, would be partly made up by improved dividends because of improvements in profits brought about by lower taxes and the resurgence in the domestic economy.

Thus, while we do expect another 69.55% increase in the Composite Index, we also expect the market to continue to appreciate.

This is based on the continued resurgence in the domestic economy and more importantly, the renewal in confidence in the direction the economy is headed.

The new Government headed a Budget which stressed continued fiscal responsibility, a tenet religiously followed by the previous two administrations and which is mainly responsible for the bright outlook for the domestic economy.

We hope the new Government continues the policy of divesting part of its equity in state enterprises on the market.

New Offerings

The previous Government had planed to divest a further 29% of National Flour Mills and 18% of Telecommunications Services of Trinidad and Tobago (TSTT) on the market.

This would go a long way towards adding some much needed dynamism to the market. In 1995, only one listed company, Caribbean Communications Network (CCN), raised funds through a Rights issue on the market.

It is our hope that other companies take the opportunity to raise funds on the market either through Rights issues or new offerings.

While there are disadvantages to listing, such as stricter disclosure requirements, which cause a loss of privacy, the benefits to be derived from listing far outweigh these obstacles.

Another wish we have for 1996 is that individuals become more interested in the stock market, especially small savers. It has been proven by various empirical studies that return on investment from equities far outweighs the returns from any other form of investment, as long as you invest sensibly and with the long- term view in mind. It is a simple process and even the smallest of investors can benefit.

Yes, the Government has removed almost all the incentives to save, but as responsible individuals we should continue to save as it the only way to ensure long term financial security.

There are no longer tax credits for the Unit Trust First Scheme nor any dividend income allowance, but this should not stop us from saving.

This may have been the greatest challenge Government may have given to the population; it has put more money back in our hands. Are we going to spend it all, or save for our long-term financial security?