Business Page – March 10th, 2002

Introduction

Today we put the spotlight on the financial statements of these two locally-owned and managed banks which now share a common year end of September 30. Readers may recall the announcement in the 2000 Annual Report of Citizens Bank Limited that following the acquisition of control by Banks DIH, that company would be changing its accounting year end to September 30, to coincide with the Banks' Group year end. This point should be borne in mind as comparisons are made between the DBL and CBL. While the financial statements being reviewed are both for a full-year, Citizens' comparatives are for a nine-month period.

Financial Highlights

Demerara Bank Limited

Demerara Bank was started in the mid-nineties with an interesting mix of shareholders with none owning more than 4.9% of the issued share capital. DDL, Capital Securities which is owned by one of DDL's directors, the Kissoon family, PBS Investment Ltd and Mr. Yesu Persaud are the principal local shareholders while 34.98% of the shares are held by various overseas trusts and individuals. Shareholder rights advocate Winston Tyrell, who is a director of GBTI, is among the smaller shareholders in the Bank. The last return on file at the Deeds Registry is for March 1997 and there may have been subsequent changes to the shareholding.

The Board of the Bank includes DDL's Chairman Yesu Persaud CCH and DDL's Director Mr. Komal Samaroo AA. Other directors include Dr.Leslie Chin, Mrs. Sheila George, Mr. Hemraj Kissoon and Mr. Oliver Valz, S.C.

While dividends are lower this year than last year, shareholders still receive an 8% return on the issued share capital, with a total payout of $36Mn. representing 40.9% of the distributable profits for the year. Since the Bank is a private company, the market value of the investment cannot be determined and it is therefore not possible to determine the real returns to shareholders.

The year ended September 2001 was particularly bad year for the Bank with all the income indicators being the lowest in five years even before taking inflation into account. Pre- and -post tax profits were $201Mn. and $107Mn respectively compared with $232Mn. and $117Mn. respectively in 1997. Chairman Yesu Persaud described the results as satisfactory " in spite of the protracted, difficult and unstable political environment and sluggish economy"

Interest income for the year was $1,064Mn representing an increase of 4.2% over the preceding year. Interest income on loans and advances averaged 13.88 % (2000 - 16.63%) while income from investments averaged 9.58%. The fall in the average interest received on loans and advances may be due not to the charging of lower rates of interest to customers but the operations of the Financial Institutions Act (FIA) which impose strict rules on recognition of income on non-accrual loans. Interest expenses amounted to $709.9Mn. or 8.28% on average total deposits. While the net interest spread has fallen slightly, it still is too wide particularly given sharply declining rates of inflation.

Staff costs increased by 3.2% to $121.8Mn.while other costs which include premises and administrative expenses increased by 3.6% $299.8Mn. The provision for loan losses increased during the year by $179.7Mn. The loan portfolio of this Bank must be a cause of concern to the directors as the non-accrual portion has increased from 1% of its total loan portfolio in 1999 to 31% in 2001! Even if one makes an allowance for the possibility of a mistake in the 1999 financial statements, and that some competitor banks are experiencing similar difficulties, the deterioration must be a cause of concern for an institution that achieved impressive results in its first few years of operations. The loan provision made for the year was $180Mn. with no write-off during the year. As a result, the cumulative provision as a percentage of total loans and advances has increased from 5% in 2000 to 7% in 2001

The Report reflects an extremely liquid Bank which in practice means that it can meet its liabilities as they fall due. Deposits with the Bank of Guyana and cash and bank balances were in excess of $2.1Bn. while the Bank held in excess of $1.5Bn. in Treasury Bills, all maturing within one year. The loans to deposit ratio, a measure of liquidity, while still high at 70.6%, was lower than the previous year. Any rumours of the Bank being in trouble would therefore seem totally unfounded.

Commentary

Last year BP commented that it was unclear from the Report whether the Bank follows FIA guidelines on provisioning in respect of specific provisions since the Report set out that specific provisions ….. reflect an amount which in management's judgement provides adequately for potential losses" There is no management over-ride under FIA except that management may choose to make higher provisions as it sees fit.

Last year BP was also critical of the inadequate disclosure of Related Party Transactions (professional term for those who can exercise significant influence or control or over whom you have control or significant influence over and dealings with) but instead of improving in this area by expanding on the note, it has been excised completely this year! One of the features of the DDL Group is the pervasiveness of common directors in a number of entities and there is no doubt that the Bank benefits from substantial business with them, on occasions incurring risks with financial consequences as in the case of GA 2000. Neither the Chairman nor the CEO referred to the implications of the GA collapse on the Bank, information that would surely have been helpful to readers.

Citizens Bank

This Bank is now part of the Banks DIH group following their 51% acquisition of the shares in the company which had been established in Guyana by Jamaica Citizens Bank. The other principal shareholders are Hand in Hand, Continental Agencies and the National Insurance Scheme. Like Demerara Bank, Citizens also seems be in breach of the requirement for filing annual returns as required by law.

In an almost mirror image of Demerara Bank, the Board of Citizens is headed by Mr. Clifford Reis CCH and includes Mr. Azam A.Khan, Mr.Richard Fields S.C. and Mr. Joseph Vieira A.A. of the Banks DIH Board.

Citizens Bank had an excellent year, with deposits growing by some 20% and loans and advances 16%. It was by far their best year ever, with after tax profit amounting to G$111.1Mn, representing a 37.6% increase on an annualised basis over the previous period( nine months).

Despite the significant increase in after tax profits dividend payments amounted to G$29.7Mn, which is less on an annualised basis over theperiod and represents 31.5% of the distributable profits for the year. Like Demerara Bank, Citizens is also a private company, hence the market value of the shares cannot be determined and it is therefore not possible to evaluate the real returns to shareholders.

Interest income for the year was $784.4Mn representing an annualised increase of 18.3% over the comparative period. Interest income on average loans and advances was 16.7% (2000 -16.3%) while income from investments averaged 12.9% compared with the annualised previous year of 13.9%. Interest expenses amounted to $420Mn or 7.0% of average total deposits. These figures indicate that in the context of the falling rate of inflation, the real cost to borrowers is actually increasing, a matter which has serious implications for their capacity to service their debts.

Non-accrual loans represent a mere 7.7% of loans and advances, the lowest among the principal banks in Guyana. As noted above, the % is 31% for Demerara Bank, 39% for GBTI and 23% for NBIC. Loan loss provision relative to the total portfolio is also the lowest in the industry at 3.4% compared with NBIC 5.2% and GBTI of 12%. Clearly Citizens Bank's loan portfolio appears unaffected by the prevailing economic condition which is indeed surprising and which has drawn comments from industry sources.

Citizens Bank has always invested heavily in Jamaica, where inflation and interest rates are still high by Caribbean standards and but which also carry some exchange risk for the Bank and foreign exchange implications for the country. Such investments also offer attractive tax prospects and help to explain why the Bank had such a significant tax credit in its accounts.

Citizens too appears very liquid with G$1.5Bn in cash resources and close to G$2Bn in investments of which approximately 45% matures within one year. The loans to deposit ratio was 55.5%, which is similar to NBIC, slightly higher than GBTI 51%, but considerably less than Demerara Bank.

This Bank's Annual Report has a very comprehensive note on related parties as well as risk management policies, but like Demerara Bank it can certainly be clearer in its policy on provisioning.

Conclusion

It appears that the Central Bank places considerable reliance on the financial institutions and their auditors in respect of compliance with the general body of laws and accounting policies, practices and disclosure. The inconsistency of reporting, which can stem from an innocent misunderstanding, is not good for the accounting profession or the banking sector as comparisons are rendered meaningless. Bank regulators have an obligation to be robust in their supervisory functions particularly in the absence of deposit insurance. Enron will have taught us that the accounting profession is far from what its practitioners and their clients would like the public to believe.

The Bank of Guyana must be aware that the accounting profession in Guyana is extremely weak and the BoG must question the extent to which the profession can be relied on to ensure compliance by financial institutions with the law. Its inspectors need to ensure that the standards are uniformly applied and that anomalies are properly investigated. They need to monitor the policies and procedures applied by licensed financial institutions and to pay careful attention to some clearly misleading publications by some financial institutions which appear in the press from time to time.