Business Page – July 30, 2000

Accounts for the year 1999 Guyana Bank for Trade and Industry 
and Citizens Bank

This week's Business Page examines the financial performance of Guyana Bank for Trade and Industry Limited (GBTI) and Citizens Bank Guyana Inc between which there is some coincidence. Both are locally owned, are connected with major conglomerates and both have just published their annual financial statements.

While Citizens Bank showed a slight increase in its net income after tax over 1998, GBTI's profits took a significant dive. According to the Annual Reports circulated to shareholders, the after tax income of Citizens Bank increased by 3.4% while GBTI’s declined by 39.8%.

In his report included in his Bank’s Annual Report, GBTI's former President and CEO attributes this fall to the inability of the rice sector, which contributes to 38% of the Bank's loan portfolio, to adequately service its financial commitments to the Bank. In addition, the Bank has experienced difficulties in recovering losses on these accounts due to the inefficiency in our legal system.

The following summary of the earnings of the Banks is reproduced from their Reports:

 

GBTI

Citizens Bank

 

1999 G$Mn

1998 G$Mn

% Change

1999 G$Mn

1998 G$Mn

% Change

Operating Income

2,488

2,518

-1.2

607

549

10.6

Operating Expense

2,151

1,962

9.6

521

446

16.8

Net Income before Tax

336

556

-39.6

77

94

-18.1

Taxation

145

239

-39.3

12

31

-61.3

Net Income after Tax

191

317

-39.7

65

63

3.4

Profitability and Revenues:

Total operating income for GBTI fell by 1.2% while Citizens Bank showed an increase of 10.6%. Both Banks recorded substantial decline in pre-tax income - GBTI 39.6% and Citizens Bank - 18.1%. The Annual Reports of the Banks attribute this poor performance to the deteriorating national economy and continuing political difficulties.

For GBTI, interest income from loans and advances and investments increased by 1.1% and 17.1% respectively. These increases were achieved in spite of the Bank's decrease in its portfolio of investments and loans from $14.2Bn in 1998 to $13.9Bn in 1999. On the other hand, exchange gains fell by $127M or 31.3% while commissions increased only marginally. Another significant expense contributing to the loss was the increase in loan loss provision of $136M causing income after tax to fall by $126M to $191M.

For Citizens Bank total revenues increased by 10.6%, from G$549M in 1998 to G$607M of which interest income on loans and advances accounted for 63.5% and “other income” arising from exchange gains and commission accounted for 14.8%. Interest income on loans and advances increased by 17.6% over 1998 whilst loans and advances rose significantly by 35%.

Although its income before taxation declined from $94M in 1998 to $77M in 1999, Citizens Bank still recorded a 3.2% increase after tax profit which the Report attributes to relief on investment income subject to the Caricom Double Taxation Treaty but which is also due to the company taking a credit on minimum corporation tax resulting in a nil corporation tax charge for the year. The net tax charge of $12M is $18M less than in the previous year and is made up only of property tax and deferred taxation.

Earnings per Share

Earnings per share decreased by 41% from $7.9 in 1998 to $4.7 in 1999 for GBTI. This was as a direct result of the 39.7% decrease in after tax profits for the year. In comparison, Citizens Bank earnings per share increased by 3.8% from $1.06 in 1998 to $1.1 in 1999.

Earnings per share is a significant factor in the pricing of equity investments but it is a phenomenon in Guyana that neither EPS nor the issue of bonus shares has any noticeable impact on share prices.

Return on Equity

The return on equity capital, which reflects the efficient use of the shareholders’ funds, was 7.8% for GBTI a decrease of 5.7% over 1998. This ratio also fell for Citizens Bank but by a much smaller 0.6% to 10.3%.

The rate paid on funds ratio, a measure of the cost of funds, decreased by 0.1% and 0.2% for GBTI and Citizens Bank respectively.

Both Banks transferred sums from their net profit to their statutory reserve account in compliance with the 15% requirement of Section 20(1) of the Financial Institutions Act. This was $28M for GBTI and $9.8M for Citizens Bank. After paying no dividends in 1998 and 1997, Citizens Bank declared dividends of $29.7M. In spite of the fall in the bank’s performance, GBTI recommend a $3.00 per share dividend against $4.00 per share in the previous year. Dividends for the year decreased by $40Mn, or 25%.

Returns on Assets

The return on total average assets in 1999 was 0.93% for GBTI and 1.2% for Citizens Bank. The ratios for both Banks declined over the preceding year by 0.6% and 0.1% respectively.

Expenses:

Operating Expense for GBTI is made up of interest paid G$1,081Mn and non-interest expenses of G$1,070Mn. Interest payments reflected a decrease of 0.4% over the previous year whilst deposits increased by 2.9%. Other expenses increased by $153M over 1998 largely due to the substantial increase of $136M in the provisioning for bad debts.

Interest expense for Citizens Bank amounted to $253M while the loan loss provision and non-interest expenses were $9M and $267M respectively. In spite of a fall in interest rates, interest expenses rose by 17.8%. Included in this was an increase in staff costs due to a higher staff complement - from 49 to 62 - and to an increase in salaries in 1999.

There was an increase in the average interest rate on savings accounts at GBTI from 7.06% in 1998 to 8.12% in 1999. For Citizens Bank, this rate fell from 6.7% in 1998 to 6.4% in 1999. However, Citizens Bank is the only Bank in Guyana offering interest on current accounts.

The net interest ratios for GBTI showed small increases over 1999. The net interest spread, measuring the relationship of interest bearing assets to interest bearing liabilities, is 14.02%, a 1.2% growth over 1998 while Citizens Bank fell from 15.5% in 1998 to 11.97% in 1999. The net income margin also showed an increase of 0.5% for GBTI from 4.6% in 1998 to 5.1% in 1999. This margin decreased for Citizens Bank from 5.3% in 1998 to 4.9% in 1999.

Loans and Advances

GBTI suffered from an increased level of delinquent loan portfolios due to the strains of the economy on the rice sector which accounts for 38% of its portfolio. In light of this, the Bank has had to divert its focus to the manufacturing and service sectors. The value of loans and advances remained fairly stable, falling by only 0.1% to $10.32Bn.

With all of its business stemming from the private sector and with the reported drop in the productivity of the Agriculture, Mining and Manufacturing industries during 1999, Citizens Bank still managed to increase its loan portfolio. The Bank's loans and advances increased from $2.2Bn in 1998 to $3Bn in 1999. The loan loss provision increased by $7M to $39M. At 1.3%, Citizens has the lowest doubtful debt to gross loans ratio among commercial banks in Guyana. For GBTI, the corresponding figure is 9.5%. Despite this, the Chairman Clifford Reis is quoted in the Stabroek News of Wednesday July 26th as referring to the “high incidence of loan defaults in 1999” indicating that the Bank has to rely on income from investment in Government Treasury Bills.

The Loans to Deposits ratio, a measure of liquidity in banking, decreased from 65% in 1998 to 63% in 1999 for GBTI and increased for Citizens Bank from 61% in 1998 to 66% in 1999. The loan loss reserve to total loans fell for Citizens Bank from 1.5% to 1.3% in 1999 while GBTI's increased from 8.9% to 9.5% or 0.4% indicating a higher degree of risk to loan losses.

Deposits

Deposits for GBTI grew by a modest 2.9% to $16.4Bn while Citizens Bank showed a more significant increase 25.6% from $3.5Bn to $4.4Bn. In spite of a fall in deposits, GBTI's interest expense rose by 4.9% due to an increase in interest rates paid on deposits. The rates at Citizens Bank actually fell, but because of the increase in deposits, interest expense rose by 18%.

Demand and savings deposits at GBTI increased over 1998 by 11.7% and 7.5% respectively while term deposits decreased by 4.4%. Demand deposits accounted for 18.6% of total deposits, savings deposits 39.8% and term deposits 41.6%.

General Comments

While both Banks attribute their weak performance to the general state of the economy, one has to consider that other banks with similar characteristics - NBIC and Demerara Bank have both reported impressive earnings.

There continues to be inconsistent disclosure among the commercial banks despite the adoption of an accounting standard governing disclosure, for example Demerara Bank, Scotia Bank and GBTI do not disclose the non-accrual portion of their portfolio while NBIC and Citizens Bank do. Surely it is time the accounting profession takes a consorted and uniform position on disclosure requirements under accounting standards, the Companies Act and other legislation such as the Financial Institutions Act.

Neither of the Banks addressed on this Page gives any disclosure about an audit committee or governance. Citizens however, does present a report by the management attesting to its responsibility for financial reporting.

Following the publication of its Annual Report, GBTI parted company with Mr. Paul Geer, its President and CEO who resigned abruptly and whose resignation is still being speculated on.

More recently there has been some talk about waving some of the conditions of the FIA in view of the flood and other circumstances affecting the economy. Business Page recommends that this be pursued with the utmost caution since rescheduling can often mean merely the delay of the inevitable. A loan should only be rescheduled if there are sufficient reasons for believing that the debtor will be able to service the refinanced facility.