DBJ creditworthiness affected by lack of focus on risk management

Regional rating agency, the Caribbean Information and Credit Rating Services (CariCRIS), has returned a rating of "adequate" for the Development Bank of Jamaica (DBJ), but noted that its creditworthiness is constrained by the lack of institutional focus on risk management.

In its mid-year assessment, the agency reaffirmed the ratings of CariBBB (foreign currency rating) and CariBBB+ (local currency rating) on the regional rating scale, and jmAA- on the Jamaica national scale to the notional debt issue of US$5 million.

"These regional scale ratings indicate that the level of creditworthiness of this obligation, adjudged in relation to other debt obligations in the Caribbean, is adequate," the agency said.

DBJ Managing Director Milverton Reynolds is upbeat about the classification, stating last Friday that "we are on par with the National Commercial Bank," whose rating was increased a few months ago.

Reynolds added that CariCRIS's recommendation that the DBJ increase its focus on institutional risk management "has been accepted and a risk management unit will be established at the DBJ in the 2011/12 financial year".

Tempering the ratings is the fact that DBJ operates in an economy characterised by high debt levels and limited financial flexibility, the ratings agency said.

"Government ownership entails a certain extent of intervention in its operations, which has led to DBJ undertaking a few non-commercial transactions," said the agency. "The debt overhang from the GOJ infrastructural loan constrains DBJ's balance sheet while the Credit Enhancement Facility (CEF) and entrance into microfinance lending increases the credit-risk profile of the company. DBJ's creditworthiness is constrained by the lack of institutional focus on risk management."

The report noted that the DBJ's strengths continue to be reflected in "strong capitalisation, positive liquidity gaps and moderate levels of profitability" over the past five years with performance ratios atypical of a development bank.

A release on the ratings issued by the DBJ noted that the rating agency's summary included in its assessment the bank's strategic importance to the government of Jamaica, as well as the "high level of support that it enjoys via loan guarantees and its tax-exempt status."

The DBJ said its capitalisation was strong, as reflected in a capital adequacy ratio of 37.8 per cent as at February 2011, averaging 33.8 per cent over the last three years. "This compares favourably to other financial institutions in the Caribbean," the bank said.

Risk assessment

CariCRIS, established in 2004, provides risk assessment of entities and the debt that they issue within a wider context of an analysis of economic trends and financial developments. The aim is to enable investors to compare sovereign and corporate credits in the region. For borrowers, CariCRIS ratings enhance credibility and expand access to funding sources.

Reynolds indicated that the bank has concluded an overhaul and reassigning of its portfolio since the start of 2011, but said this was unrelated to the suggestion of the Public Sector Transformation Unit to merge DBJ functions with some belonging to the Export-Import (EXIM) bank.

The execution of those decisions, he said, was the purview of the Ministry of Finance. "We do not know more than is in the public domain," he added.

Reynolds said a recent restructuring at the DBJ was based on a management decision "to realign the institution with its targets and put some focus on where and how to target our resources to achieve the best results as per our updated mission. In the process, we rearranged staff to strengthen our capacity to perform our core functions. There was no impact on staffing levels and the bank's operational budget was unaffected."

Reynolds stated that the bank's willingness to submit to CariCRIS's fact-finding exercise demonstrated the DBJ's commitment to transparency.

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