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Furthermore, we often rely on information furnished to us by borrowers and counterparties, including financial statements and other financial information. While we take all actions we deem necessary to ensure the accuracy of the information provided to us, it may not be accurate or we may not successfully identify all of the information needed to fully assess the risk which may expose us to increased credit and counterparty risk.
We seek to control financial risk by, among other things, establishing limits relating to our credit, market and liquidity exposures, including, for example, limits on our credit exposure to any one borrower or counterparty. However, such limits may not adequately limit our risk exposures because they are not adequately designed or because of error in their administration. Any failure by us to effectively implement and consistently follow our risk management procedures may result in higher risk exposures for our operations, which could materially and adversely affect our business, results of operations and financial condition.
We may be unable to realize collateral or collect on guarantees securing loans, which may adversely affect our business, results of operations and financial condition. We grant loans that are secured by collateral, including real estate, plant and equipment, marketable securities and other assets that are generally located in Jamaica. Certain of those loans are required to be secured in accordance with the specific requirements of Bank of Jamaica regulations. The value of such collateral may significantly fluctuate or decline due to factors beyond our control, including economic and political conditions in Jamaica.
At September 30, , approximately An economic slowdown may lead to a downturn in the Jamaican real estate market and other asset markets, which may, in turn, result in declines in the value of real estate or other assets securing loans we have made to levels below the principal balances of those loans. Typically, a loan would become non-performing before we would regard it as exhibiting signs of impairment.
Once collateral for a non-performing loan is to be disposed of, a valuation of the collateral is usually sought from independent appraisers in preparation for disposal of the collateral. That valuation is used to assess the extent of any impairment. If it is necessary to assess impairment before an updated valuation is received, an earlier valuation would be used in that assessment. While the. Table of Contents loan remains non-performing, the valuation is updated periodically, as steps to dispose of the collateral continue.
The Bank does not apply any in-house adjustments to the valuations received by independent appraisers, including for purposes of determining allowances for loan losses. A decline in the value of the collateral securing loans we have made may result in reduced recoveries from collateral realization which, in turn, may have an adverse impact on our business, results of operations and financial condition.
We also make loans on the basis of guarantees from persons affiliated or associated with borrowers. To the extent that guarantors encounter financial difficulties due to economic conditions, personal or business circumstances or otherwise, our ability to enforce those guarantees may be impaired.
We may face difficulties in enforcing our rights as secured creditors against borrowers and guarantors, and may face difficulties in realizing the value of collateral. In particular, timing delays and procedural problems, as well as debtor-protective judicial interpretations of the law, may make it difficult to realize on collateral or against guarantees or enforce judgments in our favor, which could materially and adversely affect our business, results of operations and financial condition.
We may be unable to realize value from real estate collateral securing non-performing loans or impaired loans, which may have an adverse effect on our business, financial condition and results of operations. A significant portion of our loan portfolio is secured by real property.
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During the ordinary course of our business, we may seek to realize value from real estate collateral securing those loans. The amount that we, as a mortgagee, may be able to realize from the real estate collateral after a default depends upon factors outside of our control, including the following:. If we are unable to realize value from the real estate collateral securing non-performing or impaired loans, we may be required to recognize additional provision for credit losses and our business, results of operations and financial condition may be adversely affected.
Table of Contents Proceedings against our customers under Jamaican insolvency law may limit our ability to collect monetary obligations. We may experience difficulty enforcing our rights under loans made to customers who initiate insolvency proceedings under Jamaican law or against whom such proceedings are initiated.
If a decline in general economic conditions or other factors cause an increase in the incidence of insolvency proceedings, we may not be able to enforce our rights to collect amounts owed to us and our business, financial condition and results of operations could be materially and adversely affected. Loans made by us and certain investment securities held by us may be prepaid, which may result in reinvestment of assets on less profitable terms.
Our loans and certain of our investment securities are subject to prepayment risk, which results from the ability of a borrower or issuer to pay a loan or redeem a security prior to maturity. Generally, in a declining interest rate environment, prepayment activity increases with the effect of reducing weighted average lives of interest earning assets and adversely affecting results.
This likelihood has been increased by recent legislative changes that substantially reduce the cost of re-registering liens on real estate when borrowers seek to refinance their loans. Prepayment risk also has an adverse impact on credit card obligations, since prepayments could shorten the weighted average life of our portfolios, which may result in a mismatch in funding or in reinvestment at lower yields. Significant prepayments in our loan, credit card and investment portfolios in the future could have an adverse effect on our income since proceeds from the repayment of loans may be reinvested in instruments with lower interest rates.
Our pension fund management business is subject to risks relating to declines in the value of securities portfolios managed by us. We face risks in our pension fund management business relating to the performance of the pension trusts we advise. We are generally paid a fee based on assets under management and, accordingly, a decline in the value of the securities portfolios that we manage will cause a decline in our revenues. Jamaican government debt securities constitute a large portion of the debt securities in pension funds whose assets are managed by NCB Insurance Company Limited, and our pension fund management business is therefore particularly exposed to declines in the values of those securities.
Some pension fund trustees benchmark investment returns, and, if we are unable to consistently produce returns in excess of that benchmark, we may lose pension fund clients and our assets under management may decrease. Any customer loss could adversely impact our pension fund management business. NCB Insurance Company Limited has retained an exclusive agent to manage the real estate portfolios of the pension funds.
However, NCB Insurance Company Limited remains responsible for some of the actions of that agent and, accordingly, may be adversely affected by any activities of that agent in managing the portfolios if such activities are deemed to be improper or if the agent is deemed to have been improperly engaged by us.
Amendment No.1 to Form F-1
Table of Contents We may be required to increase our reserves for future insurance policyholder benefits and claims, which could adversely affect our business, results of operations and financial condition. NCB Insurance Limited holds amounts as reserves for future insurance and annuity contract holder benefits and claims. The amount of the reserves is based on certain assumptions regarding yields, expense levels, mortality of the contract holders and duration of the insurance policies. If any assumptions turn out to be incorrect and we conclude that those reserves, together with future premiums and financial surplus, are insufficient to cover future insurance policyholder benefits and claims, we would be required to increase our reserves and incur income statement charges for the period in which we make the determination, which could adversely affect our business, results of operations and financial condition.
The profitability of our insurance operations may decline if mortality, morbidity or persistency rates differ significantly from our pricing expectations. We set prices for many of our insurance and annuity products based upon expected claims and payment patterns, using assumptions for mortality rates, or likelihood of death, morbidity illness and persistency rates a measure of the percentage of our insurance contracts that remain in force during a specified period without lapsing or being replaced by policies of other insurers.
In addition to the potential effect of natural or man-made disasters, significant changes in mortality, morbidity or persistency could emerge gradually over time, due to changes in the natural environment, the health habits of the insured population, treatment patterns for disease or disability or other factors. The pricing of our insurance and annuity products is also based in part upon expected persistency of these products.
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Strong deviations in actual experience from our pricing assumptions could have an adverse effect on the profitability of our insurance and annuity products. Some of our insurance products do not permit us to increase premiums or adjust other charges and credits or limit those adjustments during the life of the policy or contract.
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Downgrades in our credit ratings would increase the cost of, or impair access to, funding. Our credit ratings are an important component of our ability to obtain funding. Our ability to compete successfully for deposits depends on various factors, including our financial stability as reflected by our credit ratings. A downgrade in our credit ratings may adversely affect the perception of our financial stability and our ability to raise deposits and the cost of existing funding.
Adverse changes in credit ratings would also increase our cost of raising funds in the capital markets or borrowing funds. In addition, lenders and counterparties in derivative transactions are sensitive to ratings downgrades and, accordingly, if any of our credit ratings is downgraded, we may have difficulty in entering into transactions with lenders and counterparties that we depend on to operate our business.
Any downgrade of our credit ratings could materially and adversely affect our business, results of operations and financial condition. Table of Contents Noncompliance with regulatory requirements may result in penalties and restrictions that could materially and adversely affect our business, results of operations and financial condition.
Our operations are subject to extensive regulation and supervision by Jamaican banking, insurance and securities authorities. Failure to comply with applicable regulations, including regulations relating to the maintenance of capital reserves and liquidity positions, could subject us to penalty interest rates on borrowings from the Bank of Jamaica or other sanctions, such as the imposition by the Bank of Jamaica of directions to prevent further violations, the assumption of the management of the Bank by the Bank of Jamaica, the suspension or revocation of our banking license, or the delisting or suspension of our listing with the JSE or TTSE.
In the event we encounter significant financial problems, are in danger of insolvency or become insolvent, or are otherwise not deemed to be viable, the banking authorities would have broad powers to intervene in our management and operations, including by suspending or removing management and, in extreme circumstances, putting all or a portion of our businesses under temporary management or taking control of our business operations, which could adversely affect our business, results of operations and financial condition.
Changes in laws and regulations in Jamaica could adversely affect our business, results of operations and financial performance. Jamaican banking and financial services laws and regulations are subject to ongoing review and revision, including changes in response to global regulatory trends and have been impacted by the global economic and financial crisis and its aftermath. In the wake of this crisis, the Jamaican government has been actively considering new banking and financial sector laws and regulations, and reviewing and revising existing laws and regulations, including in relation to capital adequacy requirements.
The Jamaican Financial Services Commission has recently approved changes to the regulatory requirements for securities dealers in Jamaica, which have resulted in increased capital requirements for participants in the industry, including our subsidiary NCB Capital Markets Limited. Some of the changes to the regulatory requirements have been implemented while others, including some of which are still in draft form, were phased-in beginning in June These changes, coupled with the current low interest rate environment, may force securities dealers such as NCB Capital Markets Limited to shift their retail client funds from reverse repurchase agreements to off-balance sheet vehicles.
Although the off-balance sheet model exposes a securities dealer to less market risk and potentially less overhead costs, it is more dependent on fee income and less dependent on income being generated based on margins, and is potentially less profitable than the reverse repurchase agreement model that is currently popular.
If all of the proposed changes were to take effect immediately, the pace and extent to which NCB Capital Markets Limited shifts from the reverse repurchase model to the off-balance sheet model could affect its financial position. The Jamaican government may implement additional reforms impacting the financial system, such as measures intended to achieve greater stability of or more effective supervision over financial institutions, although we cannot predict the nature or timing of such future measures, if any. The adoption of new laws or regulations, or changes in the interpretations or enforcement of existing laws or regulations may have an adverse impact on our business, results of operations and financial condition.
However, the Bank of Jamaica currently requires us to maintain a risk-weighted capital adequacy ratio of At September 30, , the ratio of our qualifying capital to risk-weighted assets was Certain developments could affect our ability to continue to satisfy the current capital adequacy requirements applicable to us, including the following:.
Preparations for this change have begun but the completion date cannot be specified at this time. These guidelines could result in a different level of minimum capital required to be maintained by us than under current Bank of Jamaica regulations. We cannot assure you that the adoption of the Basel II and III capital requirements will not have a material impact on our ability to meet the required capitalization ratio.
We may also be required to raise additional capital in the future in order to maintain our capital adequacy ratios above the minimum required levels. Our ability to raise additional capital may be limited by numerous factors, including, among others, our future financial condition, results of operations and cash flows; any necessary government regulatory approvals; our credit ratings; general market conditions for capital raising activities by commercial banks and other financial institutions; and domestic and international economic, political and other conditions.
If we require additional capital in the future, we cannot assure you that we will be able to obtain such capital on favorable terms, in a timely manner or at all. Furthermore, the Bank of Jamaica may increase the minimum capital adequacy requirements applicable to us.
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Accordingly, although we currently meet the applicable capital adequacy requirements, we may face difficulties in meeting these requirements in the future. If we fail to meet the capital adequacy requirements, we may be required to take corrective actions. These measures could materially and adversely affect our business, financial condition and results of operations, including our ability to grow our loan portfolio and declare dividends.
Table of Contents Increases in Jamaica Deposit Insurance Corporation premiums could have a material adverse effect on our future earnings. The JDIC charges the insured institutions premiums annually to maintain adequate funding for the Deposit Insurance Fund, and these premiums are calculated as a percentage of insurable deposits. Given the size of our deposit portfolio, any increase by the JDIC in this premium could have a material adverse effect on our business, financial condition and results of operations. The cost of providing pension benefits to employees could be significantly impacted by changes in legislation, changes to the level of benefits, actuarial assumptions and methods, changing demographics and changes in investment performance.
We maintain two pension schemes, one of which provides defined benefits to our employees. The scheme has, since , been closed to new participants.