Business Page – March 4th, 2001

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 deposits.

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.

Financial Highlights

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

G$’000 G$’000

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

Profitability

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.

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 accounts.

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%.

Comments

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 PR purpose.