Demerara Bank Limited
Annual Report - September 30, 2000
Demerara Bank Limited, the brainchild of entrepreneur
Yesu Persaud, suffered a financial setback when for the first time since its
formation it suffered declining profits. This is against a background of a
national economy that recorded a decline in 2000 and a banking sector that
saw a spate of foreclosures. The bank continues to pursue an aggressive
marketing strategy and has increased market share for both loans and
This week’s Business Page reviews the Annual Report of Demerara Bank
Limited for the year ended September 30, 2000 presented to the shareholders
of the Bank at its AGM on February 26, 2001.
Pre-tax profits for the year was $265 million, a 27%
decline over the preceding year on a 17% increase in interest income. On the
other hand the National Bank of Industry and Commerce which has the same
year end as Dembank, recorded a 57.8% increase in pre-tax profit despite a
decline of 7% in interest income. Chairman Yesu Persaud attributed this weak
performance to the difficulties facing the rice sector and the general
downturn in the economy.
After tax income showed an identical decline as pre-tax
income, i.e. 27%. As a consequence all the other profitability measures
showed decreases. The return on equity capital, which reflects the efficient
use of the shareholders’ funds in the production of income, was 17.4% - a
decrease of 37% over 1999. The return on assets ratio (after tax profits)
was 1.49% as compared with 2.65% in 1999.
2000 1999 % Change
Net Income before Taxation 265,118 361,459 -27
Net Income after Tax 142,456 195,665 -27
Earnings per Share 31.66 43.48 -25
Return on Equity after Tax 17.4% 27.6% -37
Return on Total Assets after Tax 1.49% -2.65% -44
Total revenues (interest income plus other income)
increased by 11%, from G$1.1Bn in 1999 to G$1.231Bn, of which interest
income on loans and advances accounted for 71% and “other income”
arising from exchange gains and commission accounted for 17%. Interest
income on loans and advances rose by 34% over 1999 while loans and advances
increased by a much larger 57%. Other interest income fell from $55Mn in
1999 to $0.3Mn in 2000. The Report does not however address this significant
fall and the reader is left to speculate on what the figure represents.
Dividends paid to shareholders dropped from $76.5Mn to
$45Mn or $0.1 per share. Since the shares are not publicly traded there is
no market price and it is not possible therefore to calculate the return on
the current value of the shares.
2000 1999 % Change
G$’000 G$’000 G$’000
Interest Income 1,021,322 873,177 +17
Interest Expense 654,270 452,963 +44
The net interest ratios showed decreases over 1999. The
net interest spread is 7.9%, a 6.2% fall from 1999. This ratio measures the
spread and relationship of interest bearing assets to interest bearing
liabilities. The net income margin also showed a decrease of 1.8% from 5.7%
in 1999 to 3.9% in 2000.
The Report does not attempt to discuss the market for
interest rate in any detail but explains that in its quest for increased
deposits it had to offer attractive rates in competition with Treasury Bills
and other banks. Bank of Guyana statistics indicate however that the
Treasury Bills rate as well as the prime lending rate in the banking sector
both fell in 2000.
Non-interest expenses including Personnel, Property and
Administration increased by a comparatively modest 7%. The Income Statement
itself does not disclose the critical net or gross charge for loan loss
provision which is included in the notes to the financial statements.
Despite a very substantial increase in non-accrual loans the Loan Loss
Reserve to Loans moved only marginally from 5.53% in 1999 to 5.61% in 2000.
It is not easy to reconcile this to the Chairman’s statement about the
Bank’s management’s prudent and conservative approach to banking.
Assets and Liabilities
2000 1999 % Change
G$’000 G$’000 G$’000
Total Assets 10,964,558 8,106,453 +35
Total Deposits 8,223,673 6,359,758 +29
Loans and Advances 6,443,866 4,112,857 +57
With all of the bank’s business stemming from the
private sector and with the reported drop in the productivity of the rice
industry and the economy during 2000, the Bank still managed to increase its
loan portfolio by 57%. Interest bearing deposits also increased by 29% over
1999. For the banking industry as a whole, deposits increased by 3.75% and
loans decreased by 3.7% in 2000. In terms of market share therefore the bank
has done very well without a whole lot of expensive branches going after the
same deposit base.
The loans to deposits ratio, a measure of liquidity in
banking increased from 65% in 1998 to 78% in 2000, quite a high ratio. The
composition of its deposits show that 89% is in savings or term deposit
The remainder of total assets is made up mainly of
investments ($1.1Bn) or 10% and cash and short-term funds of $2.3Bn or 21%
and Bank premises of $358.7Mn or 4.4%.
It is unclear from the Report whether the Bank follows
FIA guidelines on provisioning or whether it is only the general provision
that conforms with FIA. Provisioning is perhaps the single most important
determinant of bank profits and in an economy when bank customers are
walking away from their property prudence is absolutely vital. No company
likes to report declining profits and there must be a great temptation not
to accept that there the performance of the loan portfolio may be
deteriorating. With no immediate end in sight to the difficulties facing our
commodities and therefore the economy, the Bank would do well to bite the
bullet and not delay the inevitable.
Consistent with good practice in banking the report
contains a Maturity Profile of Assets and Liabilities which indicates that
67% of the loans and advances will mature within one year - a highly
unlikely proposition. If this is used by the Bank for asset and liability
management purposes then it must review the accuracy of this information.
One area where the bank’s report continues to be very
inadequate is in its disclosure of transactions with related parties.
International Accounting Standards adopted in Guyana require the disclosure
of the identity of related parties and the transactions with them during the
year. A party is considered related if one party has the ability to control
the other party or exercise significant influence over the other party in
making financial and operating decisions. All the Report says is that the
Bank provides to its unidentified related parties “normal banking services”
As expected, the quality of the Report and the clever use
of graphs is of a high standard but a more detailed review of the
performance would have greatly enhanced the quality of the Report. There is
no Chief Executive’s Report which usually contains the type of information
which readers find helpful. A Chairman’s report seldom serves more than a